As filed with the Securities and Exchange Commission on October 23, 2002
An Exhibit List can be found on page II-5.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN AMMUNITION, INC.
(Name of small business issuer in its charter)
------------------------------- ---------------------------- -------------------
California 3990 91-2021594
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
------------------------------- ---------------------------- -------------------
3545 NW 71st Street
Miami, Florida 33147
(305) 835-7400
------------------------------------------------
(Address and telephone number of principal executive offices
and principal place of business)
Andres Fernandez, President
AMERICAN AMMUNITION, INC.
3545 NW 71st Street
Miami, Florida 33147
(305) 835-7400
---------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia
Thomas A. Rose
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. 9 ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. 9 ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. 9 ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. 9
CALCULATION OF REGISTRATION FEE
======================================= =============== ================== ================== ==============
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Registration
to be Registered Registered (1) Security(2) Price Fee
--------------------------------------- --------------- ------------------ ------------------ --------------
Shares of common stock, $.001 par value $0.43 $ 725,000.21 $66.70
1,686,047(3)
Shares of common stock, $.001 par value 16,860,470(4) $0.43 $7,250,002.10 $667.00
Total 18,546,517 $7,975,002.31 $733.70
======================================= =============== ================== ================== ==============
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are
issuable upon conversion of convertible debentures and the exercise of
warrants by the selling stockholder. We are also registering such
additional shares of common stock as may be issued as a result of the
anti-dilution provisions contained in such securities. The number of shares
of common stock registered hereunder represents a good faith estimate by us
of the number of shares of common stock issuable upon conversion of the
debentures and upon exercise of the warrants. For purposes of estimating
the number of shares of common stock to be included in this registration
statement, we calculated 200% of the number of shares of our common stock
issuable upon conversion of the debentures. Should the conversion ratio
result in our having insufficient shares, we will not rely upon Rule 416,
but will file a new registration statement to cover the resale of such
additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on October 18, 2002.
(3) Includes 200% of the shares underlying convertible debentures.
(4) Includes shares underlying warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PRELIMINARY PROSPECTUS Subject To Completion, Dated October __, 2002
The information in this prospectus is not complete and may be changed.
American Ammunition, Inc.
18,546,517 Shares of
Common Stock
This prospectus relates to the resale by the selling stockholder of
18,546,517 shares of our common stock, based on current market prices. The
selling stockholder may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. The selling stockholder is deemed an underwriter of the
shares of common stock, which it is offering.
We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "AAMI." The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on October 18, 2002, was
$.43.
-------------------------------------
Investing in these securities involves significant risks.
See "Risk Factors" beginning on page 3.
-------------------------------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is October _, 2002.
The information in this prospectus is not complete and may be changed. This
prospectus is included in the registration statement that was filed by American
Ammunition, Inc., with the Securities and Exchange Commission. The Selling
Stockholders may not sell these securities until the registration statement
becomes effective. This prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "Risk
Factors" section, the financial statements and the notes to the financial
statements.
American Ammunition, Inc.
We acquired American Ammunition Inc. in September 2001 and since such
acquisition are engaged principally in the manufacture and sale of ammunition
for wholesale sales. American Ammunition is an established small arms munitions
manufacturer with an existing distribution network. The ammunition market is
dominated by three major manufacturers, however, we believe we are poised to
enter and impact the growing ammunition market with our manufacturing equipment
and techniques. We are an approved Department of Defense contractor.
We began in 1983 as an assembler and re-loader of ammunition in several
calibers. As we grew, management realized that the only way to break into the
industry was to become a vertically integrated manufacturer. Our founders
invested heavily in research and development, equipment, and technology and
focused on increasing our market share. As a result, we continued manufacturing
our initial calibers along with special order ammunition for the Department of
Defense. Further streamlining of the operations resulted in the manufacture of
the current ammunition product line: 9 millimeter, .45 automatic, .380
automatic, .32 automatic, .40 Smith and Wesson, 38 Special, 30 carbine, and 223
Remington. We have identified these products as having the largest share of the
market for the next several years.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400. We are incorporated in
the State of California.
The Offering
Common stock offered by selling stockholders ........................... Up to 18,546,517 shares, based on current
(includes 200% of the shares underlying market prices and assuming full conversion of
convertible debentures and 100% of the convertible notes, with interest for
the shares underlying the warrants) two years and the full exercise of the
warrants. This number represents 25.52% of
our current outstanding stock.
Common stock to be outstanding after the offering....................... Up to 72,661,077 shares
Use of proceeds......................................................... We will not receive any proceeds from the
sale of the common stock.
Over-The-Counter Bulletin Board Symbol.................................. AAMI
The above information regarding common stock to be outstanding after the
offering is based on 54,114,560 shares of common stock outstanding as of October
14, 2002 and assumes the subsequent conversion of our issued convertible
debentures, with interest, and exercise of warrants by our selling stockholder.
2
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Business:
We have had losses since our inception. We expect losses to continue in the
future and there is a risk we may never become profitable.
We have incurred losses and experienced negative operating cash flow since
our formation. For our fiscal years ended December 31, 2001 and 2000, we had a
net loss of ($2,211,887) and ($1,215,869), respectively. For the nine month
period ended September 30, 2002, we had a loss from operations of ($1,026,840).
We expect to continue to incur significant operating expenses as we maintain our
current line of ammunitions and continue research and development toward
improving projectile quality and performance. Our operating expenses have been
and are expected to continue to outpace revenues and result in significant
losses in the near term. We may never be able to reduce these losses, which will
require us to seek additional debt or equity financing. If such financing is
available, of which there can be no assurance, you may experience significant
additional dilution.
Our failure to respond to rapid change in the market for small arms ammunition
could cause us to lose revenue and harm our competitive position.
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.
Fires or explosive incidents may result in production delays, which can decrease
our revenues.
Our ammunition products, involve the manufacture and/or handling of a
variety of explosive and flammable materials. This manufacturing and/or handling
has resulted in incidents that have temporarily shut down or otherwise disrupted
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 decrease 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.
3
Ellet Brothers, Inc. accounted for 51% of our sales in 2001. If we lose this
customer, our revenue could decline significantly.
American Ammunition currently has agreements with 16 national distributors
throughout the United States to diversify its sales base. Ellett Brothers, Inc.
accounted for 32% and 51% of our total sales for fiscal year 2000 and 2001,
respectively. There were no other customers responsible for more than 10% of our
sales during 2001 and 2000, respectively. Although, we plan to continue to
aggressively pursue new customers through promotions, advertising and trade
shows, we cannot give any assurances that we will be successful. If we lose this
customer, we will experience a significant reduction in our revenue and may have
to curtail or cease our operations.
If we are unable to renew our federal licenses we would have to cease our
operations.
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. In the event such licenses are not renewed for any reason, we would
have to cease our operations
If we are unable to obtain additional funding our business operations will be
harmed.
We believe that our available short-term assets and investment income will
be sufficient to meet our operating expenses and capital expenditures through
the end of fiscal year 2002. 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.
There are risks associated with forward-looking statements made by us and actual
results may differ.
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
-- discuss our future expectations;
-- contain projections of our future results of operations or of our
financial condition; and
-- state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. The risk factors listed in this section, as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should
be aware that the occurrence of the events described in these risk factors could
have an adverse effect on our business, results of operations and financial
condition.
4
We have a few proprietary rights, the lack of which may make it easier for
our competitors to compete against us.
We attempt to protect our limited proprietary property through copyright,
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 trademarks, which we attempt to protect with a
combination of patent, copyright, trademark and trade secret laws, as well as
with our 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 Agreement:
There are a large number of shares underlying our convertible debentures, and
warrants that may be available for future sale and the sale of these shares may
depress the market price of our common stock.
As of October 14, 2002, we had 54,114,560 shares of common stock issued and
outstanding and convertible debentures outstanding that may be converted into an
estimated 843,023 shares of common stock at current market prices, and
outstanding options and warrants to purchase up to 30,000,000 shares of common
stock. In addition, the number of shares of common stock issuable upon
conversion of the outstanding convertible debentures may increase if the market
price of our stock declines. All of the shares included in this prospectus may
be sold without restriction. The sale of these shares may adversely affect the
market price of our common stock.
The continuously adjustable conversion price feature of our convertible
debentures and warrants could require us to issue a substantially greater number
of shares to the selling stockholder, which will cause dilution to our existing
stockholders.
Our obligation to issue shares upon conversion of our convertible
securities is essentially limitless.
The following is an example of the amount of shares of our common stock
that is issuable to the selling stockholder, upon conversion of our convertible
debentures and subsequent exercise of warrants, based on market prices 25%, 50%
and 75% below the market price, as of October 18, 2002 of $0.43.
With Number of Shares Percentage of
% Below Market Price Per Share Discount of 20% Issuable Outstanding Stock
-------------- --------------- --------------- --------------- -----------------
25% $.3225 $.2580 12,364,341 (1) 18.98%
50% $.2150 $.1720 18,546,511 (2) 26.01%
75% $.1075 $.0860 33,372,093 (3) 38.74%
5
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholder may ultimately convert and sell
the full amount issuable on conversion. Although the selling stockholder may not
convert their convertible note and/or exercise their warrants if such conversion
or exercise would cause them to own more than 4.99% of our outstanding common
stock, this restriction does not prevent the selling stockholder from converting
and/or exercising some of their holdings and then converting the rest of their
holdings. In this way, the selling stockholder could sell more than this limit
while never holding more than this limit. There is no upper limit on the number
of shares that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
If we are required for any reason to repay our outstanding convertible
debentures, we would be required to deplete our working capital, if available,
or raise additional funds. Our failure to repay the convertible debentures, if
required, could result in legal action against us, which could require the sale
of substantial assets.
In October 2002, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $250,000 principal amount of convertible debentures. The
convertible debentures are due and payable, with 8% interest, two year from the
date of issuance, unless sooner converted into shares of our common stock. In
addition, any event of default as described in the convertible debentures could
require the early repayment of the convertible debentures at a price of 125% of
the amount due under the debenture. We anticipate that the full amount of the
convertible debentures, together with accrued interest, will be converted into
shares of our common stock, in accordance with the terms of the convertible
debentures. If we are required to repay the convertible debentures, we would be
required to use our limited working capital and raise additional funds. If we
were unable to repay the debentures when required, the debenture holder could
commence legal action against us to recover the amounts due. Any such action may
require us to curtail or cease operations.
Risks Relating To Our Common Stock:
Our directors and executive officers beneficially own approximately 59.60% 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 October 15, 2002, our executive officers, directors and affiliated
persons beneficially own approximately 59.60% of our common stock. The Fernandez
family, which operates our company, beneficially owns an aggregate of
approximately 58.36% of our common stock. As a result, our executive officers,
directors and affiliated persons 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 matter submitted to the
stockholders for vote.
6
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 "penny stock" rules.
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:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o 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:
o obtain financial information and investment experience objectives of
the person; and
o 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 prepared by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholder. We will not receive any
proceeds from the sale of shares of common stock in this offering.
7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol "AAMI." Our common stock has been quoted on the OTCBB since October 23,
2001.
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
Low($) High($)
------------------ ------- -------
2001
Fourth Quarter 0.53 1.75
2002
First Quarter .33 .81
Second Quarter .36 .625
Third Quarter .315 .579
Fourth Quarter* .42 .46
*(as of October 23, 2002)
Holders
As of October 7, 2002, we had approximately 106 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is Atlas
Stock Transfer Corporation, 5899 South State Street, Salt Lake City, Utah 84107.
Dividends
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our plan of operation should be
read in conjunction with the financial statements and the related Notes. This
prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 which are based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations and intentions. Our
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors," "Business" and
elsewhere in this prospectus. See "Risk Factors."
Overview
We were incorporated on February 1, 2000 in the State of California as
FirsTelevision.com. We subsequently changed our corporate name to FBI Fresh
Burgers International with a business plan of marketing the concept of a
national "fast food" restaurant chain to children and young adults, with a menu
of fresh burgers, fries and sandwiches.
On September 29, 2001, FBI Fresh Burgers, F&F Equipment, Inc. and the
individual shareholders of F&F entered into an "Agreement For The Exchange Of
Common Stock" whereby the shareholders of F&F exchanged 100% of the issued and
outstanding stock of F&F for 21,000,000 post-forward split shares of restricted,
unregistered common stock of FBI Fresh Burgers. F&F Equipment, Inc. then became
a wholly-owned subsidiary of FBI Fresh Burgers.
F&F Equipment, Inc. was incorporated on October 4, 1983 under the laws of
the State of Florida. The company 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."
The acquisition of F&F Equipment, Inc., on September 29, 2001, by us
effected a change in control and was accounted for as a "reverse acquisition"
whereby F&F Equipment, Inc. is the accounting acquiror for financial statement
purposes. Accordingly, for all periods subsequent to the September 29, 2001
change in control transaction, our financial statements reflect the historical
financial statements of F&F Equipment, Inc. from its inception on October 4,
1983 and the operations of FBI Fresh Burgers subsequent to September 29, 2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, we
amended our articles of incorporation to change our name to American Ammunition,
Inc. and modified our capital structure to allow for the issuance of up to
320,000,000 total equity shares consisting of 20,000,000 shares of preferred
stock and 300,000,000 shares of common stock. Both classes of stock have a par
value of $0.001 per share.
On October 9, 2001, we effected a three for one forward stock split. This
action caused the then issued and outstanding shares to increase from 2,990,400
to 8,971,200 on the effective date. The effect of this action is reflected in
the accompanying financial statements as of the first day of the first period
presented.
9
During the quarter ended March 31, 2002, management elected to focus its
efforts, capital resources and energies in streamlining production methods,
securing key sources of raw material and exploring the addition of equipment to
allow the Company to produce certain components of its manufacturing process
which are currently being outsourced to unrelated third parties.
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co., which started production on June 14, 2002.
Industrial Plating is a fully licensed and approved electrochemical
metallization facility with significant capacity for processing our line of
projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
During June 2002, the Company initiated production of plating operations
for projectiles utilized in the Company's small-arms ammunition manufacturing
process through it's newly formed wholly-owned subsidiary, Industrial Plating
Enterprise Co. Further, during the three months ended June 30, 2002, management
began to actively seek and process orders for products, resulting in an increase
in sales of approximately $374,000, or 112.3% over the same period of the
preceding year.
During the quarter ended September 30, 2002, the Company expanded its
production capability with the addition of a second production shift. Due to the
necessary lead times for hiring and training qualified personnel, the Company
experienced increases in direct labor of approximately $43,000, plus related
payroll burdens in the third quarter of 2002.
Management continues to anticipate events occurring in future quarters
including increased levels of expenditures for marketing, increased product
demand as a result of increased market exposure and the introduction of new
products under development.
Results of Operations
Discussion of the nine months ended September 30, 2002 compared with the nine
months ended September 30, 2001.
During the nine months ended September 30, 2002, we experienced aggregate
revenues of approximately $1,277,000 as compared to approximately $351,000 for
the first nine months ended September 30, 2001. For the three month period ended
September 30, 2002 and 2001, respectively, we realized revenues of approximately
$570,000 and $14,000.
We experienced costs of goods sold of approximately $1,719,000 and $730,000
for the nine months ended September 30, 2002 and 2001, respectively. We
experience variable costs in the area of material consumption and direct labor.
We have recognized depreciation expense on production equipment of approximately
$484,000 and $455,000, respectively, in the above cost of goods expense totals.
10
These depreciation levels are anticipated to remain fairly constant for future
periods as management anticipates that the acquisition of equipment for
Industrial Plating Enterprise Co. will allow us to produce certain components
which were previously outsourced to unrelated third parties.
For the nine months ended September 30, 2002 and 2001, respectively, we
have generated a negative gross profit of approximately $(442,000), or (34.64%),
and approximately $(379,000), or (108.0%). For the comparable three month period
ended September 30, 2002 and 2001, respectively, our gross margin was
approximately $(223,000), or (39.2%), and $(168,000), or (1,165.8%). We
anticipate that with continued demand for our product, anticipated lower
production costs from internally generated plating activities and adequate
liquidity, it will be able to generate a positive gross profit by the end of
Calendar 2002. Further, management has developed a new model for the pricing of
its products to its customers. It is anticipated that this model will allow
management to better manage expense levels, control labor costs and maximize
revenue opportunities.
We experienced nominal research and development expenses during the nine
months ended September 30, 2002 and 2001 related to the development of a new
patent-pending projectile for use in ammunition specifically for the public
safety and security marketplace, especially in the rapidly expanding U. S. Air
Marshall program and other product improvements.
Other general and administrative expenses decreased significantly from
approximately $505,000 for the first nine months of 2001 to approximately
$488,000 for the first nine months of 2002. The most significant reductions came
in interest expense as a result of settling all litigation with the Company's
former lending institution and lesser savings in the areas of legal and
professional fees and other general and administrative fees.
We recognized a net loss of approximately $(1,026,000) and $(419,000) for
the respective nine month periods ended September 30, 2002 and 2001,
respectively, or $(0.02) and $(0.01) per share.
Discussion of the year ended December 31, 2001 compared with the year ended
December 31, 2000.
Our operations were hampered during 2001 as a result of on-going litigation
between us and our financial lending institution. As we were unable to access
credit lines for working capital, we were unable to offer selling terms
comparable to our competitors and, accordingly, experienced a significant
reduction in sales from prior years. This litigation was settled during June
2001 and we negotiated a new working capital note with a different financial
institution which provided liquidity for the remainder of 2001.
During the year ended December 31, 2001, we experienced revenues of
approximately $428,000 as compared to approximately $1,716,000 for the year
ended December 31, 2000.
11
We experienced costs of goods sold of approximately $1,629,000 and
$2,026,000 for the years ended December 31, 2001 and 2000, respectively. We
experience variable costs in the area of material consumption and direct labor.
We recognized depreciation expense on production equipment of approximately
$629,000 and $617,000, respectively, in the above cost of goods expense totals.
These depreciation levels are anticipated to remain fairly constant for future
periods unless we are successful in our plans to expand production.
We have realized a gross profit of approximately ($1,201,000), or (280.97%)
for the year ended December 31, 2001 and approximately ($310,000), or (18.07%).
We anticipate that with adequate liquidity, we will be able to generate a
positive gross profit during Calendar 2002.
We incurred nominal research and development expenses of approximately
$3,800, during 2001 related to the development of a new patent-pending
projectile for use in ammunition specifically for the public safety and security
marketplace, especially in the rapidly expanding U. S. Air Marshall program and
Home Defense Market.
Other general and administrative expenses increased from approximately
$87,000 during Calendar 2000 to approximately $535,000 during Calendar 2001. The
majority of this increase was a result of professional and consulting fees
related to our reverse acquisition transaction in September 2001, and includes
approximately $415,000 for non-cash charges related to fees and services charged
to operations which were paid with common stock.
We also experienced non-cash income (charges) to operations resulting from
a one-time gain of approximately $755,000 for the settlement of the litigation
with our former lending institution and approximately ($392,000) in amortization
of a beneficial conversion feature discount on preferred stock with an
equivalent post-conversion common stock price at an amount less than the quoted
closing market price of our common stock as of the sale date of the underlying
convertible preferred stock.
We recognized a net loss of approximately $(2,212,000) and $(1,216,000) for
the years ended December 31, 2001 and 2000, respectively, or $(0.08) and $(0.05)
per share.
Liquidity And Capital Resources
As of September 30, 2002, December 31, 2001, and September 30, 2001,
respectively, we had working capital of approximately $623,000, $341,000, and
$(104,000). Our working capital position improved significantly in Calendar 2001
with the settlement of litigation involving its outstanding debt to its-then
financial institution and the concurrent restructuring of working capital debt
into a long-term instrument.
We have used cash in operating activities of approximately $832,000,
$1,100,000 and $93,000 during the nine months ended September 30, 2002, the year
ended December 31, 2001 and the nine months ended September 30, 2001. The most
12
significant use of cash during the nine months ended September 30, 2002 was the
buildup of inventory and the cost of sales related to the sale of merchandise on
"industry standard" credit terms causing an increase in accounts receivable and
an increase in inventory, particularly raw materials and work in process, to
fulfill existing and anticipated product orders.
We experience relatively consistent expenditure levels for executive and
administrative compensation, interest expense and depreciation expense. We
renegotiated our working capital note in the principal amount of $950,000,
payable in June 2001. This note bears interest at the Wall Street Journal
published prime rate plus 2.0%. In the months of July, August and September
2002, we reduced the outstanding principal. The note payment terms were also
modified as follows: payments of interest only through January 28, 2004.
Thereafter, starting on January 28, 2004, equal monthly payments of principal
and interest shall be due until June 28, 2007 which payments shall represent the
amount necessary to fully amortize the remaining principal balance of the note.
The monthly payments shall be recalculated at the time of any change in the
applicable interest rate. As of September 30, 2002, we owe $650,000 on this
note.
The note is secured by virtually all of our real and personal property. A
portion of the proceeds from the financing were used to pay the $550,000
required in the Settlement and Compromise Agreement. Accordingly, we anticipate
relatively stable interest expense, or declining levels, in future periods
depending on expansion and additional equipment financing requirements. We do
not anticipate the addition of significant additions to office and
administrative personnel.
We anticipate that our improved liquidity position will continue to improve
as management is of the opinion that the production capacity is in place to
support all existing orders and accept existing inquiries which have previously
been denied due to the lack of production capacity and liquidity.
During the nine months ended September 30, 2002, we added approximately
$225,000 in new equipment, principally in our new wholly-owned subsidiary,
Industrial Plating Enterprise Co. This equipment allows us to replace previously
outsourced portions of our manufacturing process with internally managed
processes which is anticipated to result in additional cost savings to us and
improve turnaround time on this process.
We continue to have plans to increase our production capability in the
foreseeable future by 50% to 100%, as influenced by market conditions,
availability of manufacturing equipment on the open market and product sales
demand. Accordingly, this expansion will require additional capital which is
13
anticipated to be raised in various combinations of capital leases, bank debt
and/or equity offerings. At this time, we have no definitive budgets or
timetables for such expansion and this expansion, if any, will be dependent upon
market demand for our products. Management is of the opinion that sufficient
demand will be present, as supported by new product development and increased
product marketing efforts, to justify this expansion. However, there can be no
assurance that we will be able to obtain additional funding or, that such
funding, if available, will be obtained on terms favorable to or affordable by
us.
Research and Development
We plan on spending approximately $50,000 this year. We believe that
research and development activities will allow for the development and
introduction of new products into the ammunition marketplace. Over the next 12
calendar months, we anticipate completing the design, development and
introduction of our new patent-pending projectile for use in ammunition
specifically for the public safety and security marketplace, especially in the
rapidly expanding U. S. Air Marshall program. Management also believes that this
projectile will have wide acceptance in the home security and sport hunting
markets.
Further, additional ammunition calibers and/or projectiles may be developed
by us depending upon market research, acceptance in the marketplace of existing
products and production capabilities. At this time, there are no definitive
plans for the further introduction of other new products into the marketplace.
Subsequent Events
In October 2002, we signed a Securities Purchase Agreement with La Jolla
Cove Investors, Inc. for the sale of a $250,000 8% convertible debenture and a
warrant to purchase up 30,000,000 shares of our common stock. The debenture
bears interest at 8%, mature in two years from the date of issuance, and is
convertible into our common stock, at the selling stockholder's option, at the
lesser of (i) $1.00 or (ii) 80% of the average of the five lowest volume
weighted average price days during the 20 trading days before but not including
the conversion date. The warrant may only be exercised concurrently with a
conversion of the debenture and then only for that number of shares of common
stock equal to 10 times the number of shares common stock issued to the denture
holder on that conversion date. The exercise price of the warrant is the lesser
of (i) $1.00; or (ii) 80% of the average of the five lowest volume weighted
average price during the 20 trading days prior to the holder's election to
convert. See the "Selling Stockholders" section for a description of the
convertible debenture and warrant issued to the La Jolla Cove Investors, Inc.
14
BUSINESS
General
We had minimal operations until September 2001, when we acquired American
Ammunition Inc. and since such acquisition are engaged principally in the
manufacture and sale of ammunition for retail and wholesale sales. American
Ammunition is an established small arms munitions manufacturer with an existing
distribution network. The ammunition market is dominated by three major
manufacturers, however, we believe we are poised to enter and impact the growing
ammunition market with our manufacturing equipment and techniques. In addition,
we are an approved Department of Defense contractor.
We began as an assembler and re-loader of ammunition in several calibers.
As we grew, management realized that the only way to break into the industry was
to become a vertically integrated manufacturer. Our founders invested heavily in
research and development, equipment, and technology and focused on increasing
our market share. As a result, we continued manufacturing our initial calibers
along with special order ammunition for the Department of Defense. Further
streamlining of the operations resulted in the manufacture of the current
ammunition product line: 9 millimeter, .45 automatic, .380 automatic, .32
automatic, .40 Smith and Wesson, 38 Special, and 30 carbine. We have identified
these products as having the largest share of the market for the next several
years.
Equipment and Production Line Capabilities
American Ammunition owns all the equipment necessary to take the raw
material from cup, lead, primer and powder, to the finished product, a loaded
round of ammunition. The process of manufacturing diverse calibers of ammunition
is extremely complex and requires tolerances of +/- .0005" to be maintained
throughout the process.
Our technology and equipment enable us to produce a large variety of
handgun and rifle ammunition. We have a machine shop and maintains our own
testing and quality assurance equipment and program. Ammunition is a
performance-based product. Therefore, after the manufacturing process is
complete, the ammunition must comply with specific protocols such as velocity,
accuracy, and pressure. We purchases raw materials in bulk and strive to take
advantage of prepayment discounts to produce significant savings in the
manufacturing process. There are and have been instances when discounts have
been and may be missed due to cash flow restrictions.
We are evaluating 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.
Business Strategy
American Ammunition is an autonomous manufacturer of ammunition, with the
technology and equipment to take advantage of the growing market.
15
The barrier to entry into the ammunition market is extremely high, however,
American Ammunition is an established small arms munitions manufacturer, with an
existing distribution network. We manufacture our ammunition by creating most of
the components ourselves.
In management's opinion, the 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
distributors in commercial markets and in addition sales to government agencies,
the military and exports. American Ammunition has been seeking additional
capital to allow it to enlarge its operations to take advantage of its
technological capacities, equipment and the existing marketplace.
Marketing and Sales Distribution
American Ammunition currently has agreements with 16 national distributors
throughout the United States to diversify its sales base. Ellett Brothers, Inc.
accounts for 32% and 51% of our total sales for fiscal year 2000 and 2001,
respectively. 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 manufacturers; seek
additional means of commercial distribution; seek further Department of Defense
and Law Enforcement contracts; solicit further Export sales; and increase our
dealings with Mass Merchandisers/Chain stores.
American Ammunition has been certified by the United States Small Business
Administration as a "qualified HUBZone small business concern." Under this
program , small businesses can qualify for special set-aside contracts, get up
to a 10% edge in competitive contract bidding or even be the sole-source bidder
in some cases. The program's name signifies the effort to promote businesses in
"historically under-utilized business zones," generally blighted areas and its
purpose is to create jobs for those who live in such areas as well.
We are aggressively marketing our manufacturing flexibility to numerous
Department of Defense and commercial munitions manufacturers as subcontractors
allowing prime contractors to reap the benefits of our "HUBZone certification",
thereby allowing such prime contractors to comply with Federal Acquisition
Requirements for the use of "small and under-utilized minority business" in
fulfilling government contracts.
The Small Business Reauthorization Act of 1997 increased the overall
government agencies' procurement goals for small business to 23% and calls for
HUBZone contracts to increase from 1.5% of these procurements to 3% by 2003.
Pricing and Value
We strive to price our products competitively at a price lower than any of
the "big three" manufacturers, Remington, Federal, and Winchester. We capitalize
on the fact that the "big three" have very large corporate infrastructures and,
16
in management's opinion, have to pay much higher labor costs to their plant
personnel. This pricing strategy permits the distributor to purchase our
product, add significant profit and sell such product at a retail price that is
lower than that at which the distributor can purchase the competitors' product.
Advertising & Promotion
American Ammunition intends to gear its 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
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 bullet 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, it has additional applications for use
in nuclear power plants, at hazardous materials storage facilities, and for home
defense.
We departed completely from standard ballistics for the design of this
projectile to meet what American Ammunition perceives as a growing and unfilled
need. Two of the basic design criteria in ballistics are penetration and
expansion of the projectile. In this design, these two factors have been
controlled to meet the specific requirements of weapons discharged inside an
aircraft cabin, while insuring fuselage integrity. 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. 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. Testing has been successful using test sections of various
commercial airliner fuselages as well as 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.
17
Competition
The market for small arms ammunition is becoming increasingly 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.
The U.S. Market for Firearms and Ammunition, Economic Analysis of Markets,
Manufacturers and Importers states that, "In 1999 sales for small arms and
handgun ammunition exceeded $10 billion. Only five companies in the United
States shared 90% of the market. They include Olin Corporation's Winchester
Ammunition Division, Remington Arms and Federal Cartridge Company, Blount and
American Ammunition."
We believe it is feasible to increase our production capacity by 50% to
100% over the next 3 years utilizing existing equipment by increasing only
labor, material and other incidental costs. Management bases this prediction on
the fact that we had reduced sales in fiscal 2001 due to a lack of funding. We
have already received significant bank and private placement funding in fiscal
2002 to ramp up operations thereby significantly increasing our presence in the
market.
The U.S. Market for Firearms and Ammunition, Economic Analysis of Markets,
Manufacturers and Importers states that, "Domestic consumption of commercial
ammunition exhibited strong growth rates between 1991 and 1996, much in the same
manner as the products in which they are used. In 1998 the United States Federal
Government purchased $1,687,658,000; U.S. Exports of small arms ammunition were
$1,618,000,000 and U.S. commercial consumption totaled $758,000,000."
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. No shortage of materials is expected in the
foreseeable future.
Research and Development
Although we spent approximately $3,800 on research and development last
year, we believe that it is an important factor in our future growth. We plan on
spending approximately $50,000 this year. 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 we will have sufficient funds to purchase
technological advances as they become available.
18
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.
Governmental Regulation
In accordance with the provisions of Title 1, Gun Control Act of 1968, we
are required to be licensed to import firearms and manufacture ammunition for
firearms. Such licensing is subject to limitations in Chapter 44, Title 18,
United States Code. In the event such licenses are not renewed for any reason,
we would have to cease our operations
In accordance with these requirements, we carry two licenses issued by the
Department of Treasury, Bureau of Alcohol, Tobacco and Firearms:
License No. 1-59-025-06-3D 69152 for "06 - Manufacturer of Ammunition for
Firearms", which license expires on April 1, 2003; and
License No. 1-59-025-08-3D-69454 for "08-Importer of Firearm other than
Destructive Devices", which license expires on April 1, 2003.
In the event such licenses were not renewed for any reason, we would be
precluded from continuing our operations.
We are not aware of any other license requirements or government regulation
at a state or federal level specific to their business and believes that it in
full compliance with its existing licenses.
Effect of Probable Governmental Regulation on the Business
We are not aware of any pending legislation at either the state or federal
level that would change the requirements under which it is licensed and is not
aware of any reason why the existing licenses cannot be renewed at their
expiration dates. There can be no assurance that legislation will not be
proposed and enacted at some time in the future that would preclude us from
continuing our operations. Should such legislation be enacted, and should the we
be precluded from continuing our operations, it would have a materially adverse
effect upon our business and future.
19
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 facility.
Employees
At September 30, 2002, we employed 52 persons. None of these employees are
represented by a labor union for purposes of collective bargaining. We consider
our relations with our employees to be excellent. We may employ additional
personnel, as necessary, to accommodate future sales and production
requirements.
DESCRIPTION OF PROPERTIES
We lease 24,000 square feet of warehouse space, owned by the family of one
of our officers and directors, Andres Fernandez, at a rate of $3,931 per month
plus applicable sales taxes. This equates to a rate per square foot of $2.71 per
year. We believe comparable rentals in the area average about $4.50 per square
foot. We are operating under a five-year lease agreement expiring on October 31,
2003 that contains a clause that the lease may be renewed for an additional 10
year period upon written notification to the lessor no later than 120 days prior
to the scheduled expiration date at a rental rate based upon the fair market
value for similar space in a similar location at the time of renewal. This
facility is used as our production facility and headquarters.
We believe that our facilities are adequate for our needs for the
foreseeable future.
LEGAL PROCEEDINGS
We are not a party to any pending litigation at this time nor is any of our
properties are subject to any pending legal proceedings.
20
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
------ --- ---------
J.A. Fernandez, Sr. 65 Chairman of the Board and Director of Sales
Andres F. Fernandez 36 President, Chief Executive Officer and Chief
Financial Officer
Emilio D. Jara 37 Vice-President of Operations, Secretary and
Director
Amelia Fernandez 65 Vice President and Director
Maria A. Fernandez 42 Director
Len Hale 57 Director
Directors serve until the next annual meeting and until their successors
are elected and qualified. Officers are appointed to serve for one year until
the meeting of the board of directors following the annual meeting of
stockholders and until their successors have been elected and qualified.
Family Relationships
J.A. Fernandez, Sr. and Amelia Fernandez are the father and mother of
Andres and Maria Fernandez. There are no other family relationships between or
among the executive officers and directors of American Ammunition.
Business Experience
J. A. Fernandez, Sr., age 65, currently serves as the Chairman of the Board
and Director of Sales. He has been employed by us since our inception in 1983.
Mr. Fernandez is the patriarch of what began as a family business and is
responsible for our sales activities. Mr. Fernandez has over 40 years experience
in diverse industries including aerospace, advanced polymer manufacturing,
munitions, mining and processing of gemstones and metal ores and has utilized
such experience for our growth and development. Mr. Fernandez is fluent in
Spanish.
Andres Fernandez, age 36, 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 American Ammunition for over a decade. Mr.
Fernandez is responsible for day to day operations and has been a driving force
behind us and our success in becoming a vertically integrated manufacturer. He
studied physics and calculus at St. Thomas University, FL and at the University
of Miami, FL. He is a licensed pilot, having graduated from the American
Institute of Aeronautics, FL, and received his certificate as a private pilot
(fixed wing) as well as private helicopter (rotary)in 1989. In 1989, Mr.
Fernandez graduated from the Institute of Public Service (Pan Am), GA as a
tactical rappel instructor. In 1990, he graduated from Omni Explosives, TN with
a specialty in tactical explosives. Mr. Fernandez was certified by the Florida
Department of Law Enforcement Academy in special operations/entry techniques in
1990. He has served as a tactical advisor to U.S. Treasury Department, Bureau of
Alcohol, Tobacco, and Firearms, U.S. Customs Service, and the Florida Department
of Law Enforcement. He has received numerous commendations and letters of
appreciation. He also served on the Board of Veterans Affairs (Hialeah , FL)
from 1990 to 1991. He is fluent in Spanish.
21
Emilio Jara, age 37, currently serves as Vice President of Operations,
Secretary and a Director. Mr. Jara has served in each of these capacities since
September 2001. He has been employed by us 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.
Amelia Fernandez, age 65, currently serves as Vice President and Director.
Mrs. Fernandez has served in each of these capacities since September 2001. She
graduated from Conservatorio Falcon (1950), and the National Conservatory of
Music in Havana, Cuba in 1952. Mrs. Fernandez holds the degrees of Professor of
Piano and Professor of Solmization Theory. She is an accomplished classical
pianist, opera singer and artist. As a diamond importer and wholesaler, she
completed and graduated from numerous Gemological Institute of America courses,
including the diamond and colored stone courses. She achieved success as a
jewelry designer for a select group of buyers, both corporate and individual.
She has managed, owned and operated several business enterprises in the
competitive world of wholesale and retail diamonds and precious stones. She has
been employed by us since 1986 as its Office Manager and Human Resources
Coordinator, including the research and development of training manuals and
procedures for the selection of personnel. Mrs. Fernandez is fluent in Spanish.
Maria A. Fernandez, age 42, currently serves as Director. Mrs. Fernandez
has served as a Director since September 2001. She is the managing partner at
Fernandez Friedman Grossman & Kohn PLLC. since May 1998. Prior to that date, she
was a partner at Taustine Post Sotsky Berman Fineman & Kohn. She concentrates
her legal practice in the areas of estate planning, probate and administration.
She also practices in the areas of Medicaid and disability planning, corporate
and individual taxation and Corporate law, with an emphasis in closely held
corporations. She is a graduate of the University of Miami, FL (Bachelor of
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.
Len Hale, age 57, currently serves as a Director. Mr. Hale has served as a
Director since September 2001. He is the President of Hale Consulting, LLC in
Montgomery, AL, a management consulting firm focusing on sales, marketing and
management systems. Mr. Hale has more than 20 years experience as a proven
leader in the firearms industry. From 1995-1998, he served as group president of
Blount International, Inc. (AL). As president of this public manufacturing
company consisting of 10 sporting goods brands, he oversaw a $300 million plus
operation with three division Presidents and increased sales from $84M to in
excess of $300M through internal growth and acquisitions, improved operating
income and return on capital employed. From 1990-1995, Mr. Hale served as
Executive Vice-President and Chief Operating Officer of Ellett Brothers,
Inc.(SC) Under his leadership, sales improved from $69M to $160 M and profits
grew from a negative profit to in excess of $6M. He also installed a marine
division, archery division and manufacturing divisions. He has served on
numerous boards and industry organizations, including the Board of Governors of
SAAMI (Sporting Arms and Ammunition Manufacturers Association) and the Board of
Governors of the National Shooting Sports Foundation.
22
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our President
and each of our most highly-compensated executive officers whose total annual
salary and bonus for the fiscal year ending December 31, 2001, 2000 and 1999
exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards ($) (#)(1) ($) Compensation
-------------------- ------- --------- ------- ------------ ------------- ----------- ------------ --------------
Artem Gotov (1) 2001 0 0 0 805 0 0 0
2000 0 0 0 0 0 0 0
Andres F.
Fernadez 2001 89,823.59 0 0 0 0 0 0
2000 88,438.48 0 0 0 0 0 0
1999 74,610.24 0 0 0 0 0 0
(1) Mr. Gotov resigned as our president in September 2001.
No options were granted or exercised during our fiscal year ended December
31, 2001 or for the nine months ended September 30, 2002.
Directors and Committee Members did not receive compensation from us during
the fiscal year ending December 31, 2001.
During the fiscal year ending December 31, 2001, the Board of Directors
served as the Compensation Committee with regard to executive compensation, in
the absence of a formal committee.
Other than base salaries, there were no additional compensation plans or
policies in place for any executive officer as of December 31, 2001. No cash
bonuses were granted during fiscal year 2001. Restricted stock compensation to
officers was issued in lieu of salary and approved by the Board of Directors.
All stock compensation was issued in the form of restricted shares and, for
accounting purposes, were valued at the prevailing closing market price on the
day of issuance.
23
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September and October 2001, we issued 222,600 shares of $5.00 Series A
Convertible Preferred Stock valued at $1,113,000 through an ongoing private
placement. The Series A Convertible Preferred Stock provides for cumulative
dividends at a rate of 8% per year, payable quarterly, in cash or shares of our
common stock at our election. Each share of Series A Convertible Preferred Stock
is convertible into 11 shares of our common stock at any time after six months
after the date of issuance and prior to notice of redemption at the option of
the holder, subject to adjustments for customary anti-dilution events. Of such
shares, the Robert I. Escobio Family Trust acquired 2,000 shares. Mr. Escobio is
a former director American Ammunition. As of September 30, 2002, except for
46,000 shares, all of the above-referenced shares of Series A Convertible
Preferred Stock have been converted in shares of common stock pursuant to its
terms.
As of December 31, 2001, a principal shareholder, Andres Fernandez,
converted $7,553,600 of unsecured debt due to him by us into 1,510,720 shares of
Series A Convertible Preferred Stock. Mr. Fernandez is a current officer and
director of American Ammunition. As of date, Mr. Fernandez has converted all of
his Series A Convertible Preferred Stock into 16,617,920 shares of common stock.
We lease 24,000 square feet of warehouse space, owned by the family of one
of our officers and directors, Andres Fernandez, at a rate of $3,931 per month
plus applicable sales taxes. This equates to a rate per square for of $2.71 per
year. We believe comparable rentals in the area average about $4.50 per square
foot. We are operating under a five-year lease agreement expiring on October 31,
2003 that contains a clause that the lease may be renewed for an additional ten
year period upon written notification to the lessor no later than 120 days prior
to the scheduled expiration date at a rental rate based upon the fair market
value for similar space in a similar location at the time of renewal. This
facility is used as our production facility and headquarters.
24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of October 14, 2002 by
o each person who is known by us to beneficially own more than 5% of our
common stock;
o each of our officers and directors;
o all of our officers and directors as a group.
Except as otherwise noted, each person's address is c/o American Ammunition,
Inc., 3545 NW 71st Street, Miami, FL 33147.
Shares Beneficially Owned
---------------------------
Percent Before Percent After
Name and Address of Beneficial Owner Number the Offering the Offering
------------------------------------------------ -------------- --------------- ------------------
Andres F. Fernandez, President, CEO and CFO 31,580,920 58.36% 40.86%
J. A. Fernandez, Sr., Chairman of the Board
and Director of Sales 31,580,920 58.36% 40.86%
Amelia C. Fernandez, Vice President and Director 31,580,920 58.36% 40.86%
Maria A. Fernandez, Director 31,580,920 58.36% 40.86%
Emilio D. Jara, Director 504,000 * *
Len C. Hale, Director 168,000 * *
Total securities held by officers 32,252,920 59.60% 41.73%
and directors as a group (6 people):
* Less than 1%
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 October 14, 2002 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
J.A. Fernandez, Sr. and Amelia Fernandez are the father and mother of
Andres and Maria Fernandez.
The number of shares beneficially owned by the Fernandez family is as
includes the following:
a. 20,889,820 shares of common stock owned by Andres F. Fernandez
b. 5,569,200 shares of common stock owned by J.A. Fernandez, Sr.
c. 4,281,900 shares of common stock owned by Amelia C. Fernandez
d. 840,000 shares of common stock owned by Maria A. Fernandez. This
number does not include the 945,000 shares Maria Fernandez holds as a
Trustee for an entity in which neither she nor any of the other
Officer or Director is the beneficial owner.
25
DESCRIPTION OF SECURITIES TO BE REGISTERED
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
Our authorized capital stock consists of 300,000,000 shares of Common
Stock, $.001 par value and 20,000,000 shares of Preferred Stock, $.001 par
value.
The following description is a summary and is qualified in its entirety by
the provisions of our Articles of Incorporation and Bylaws, copies of which have
been filed as exhibits to documents filed with the Securities and Exchange
Commission under the Exchange Act of 1934.
Common Stock
The holders of the issued and outstanding shares of common stock are
entitled to receive dividends when, as and if declared by our Board of Directors
out of any funds lawfully available therefore. The Board of Directors intends to
retain future earnings to finance the development and expansion of our business
and does not expect to declare any dividends in the foreseeable future. The
holders of the common stock have the right, in the event of liquidation, to
receive pro rata all assets remaining after payment of debts and expenses. The
common stock does not have any preemptive rights and does not have cumulative
voting rights. The issued and outstanding shares of common stock are fully paid
and nonassessable.
Holders of shares of common stock are entitled to vote at all meetings of
such shareholders for the election of directors and for other purposes. Such
holders have one vote for each share of common stock held by them.
Transfer Agent
Atlas Stock Transfer Corporation, 5899 South State Street, Salt Lake City,
Utah 84107 has been appointed the transfer agent of our common stock and
preferred stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
CERTAIN PROVISIONS OF CALIFORNIA LAW AND OF THE
COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The California Corporations Code provides for the indemnification of
directors, officers, employees and agents under the circumstances as set forth
in Section 317 thereof. Section 317 permits a corporation to indemnify its
27
agents, typically directors and officers, for expenses incurred or settlements
or judgments paid in connection with certain legal proceedings. Only those legal
proceedings arising out of such persons' actions as agents of the corporation
may be grounds for indemnification.
Whether indemnification may be paid in a particular case depends on whether
the agent wins, loses or settles the suit and upon whether a third party or the
corporation itself is the plaintiff. Section 317 provides for mandatory
indemnification, no matter who the plaintiff is, when an agent is successful on
the merits of a suit. In all other cases, indemnification is permissive and
sometimes requires approval of the court in which the suit is or was pending.
If the agent loses or settles a suit with a plaintiff other than the
Company or someone who did not threaten or bring suit on our behalf, the agent
may be indemnified for expenses incurred and settlements or judgments paid. That
indemnification may be authorized upon a finding that the agent acted in good
faith and in a manner he or she reasonably believed to be in our best interests,
and, in a criminal proceeding, only where the agent had no reasonable cause to
believe his or her conduct was unlawful. If the agent loses or settles a suit
with us or a plaintiff who threatened or brought suit on our behalf, the agent
may be indemnified for expenses actually and reasonably incurred in connection
with the defense or settlement of the action. Such indemnification may be
authorized upon a finding that the agent acted in good faith and in a manner he
or she believed to be in our best interests and the best interests of our
shareholders. No indemnification is permitted where the agent breached his or
her duty to us, however, unless the court in which the proceeding is or was
pending determines that the agent is fairly and reasonably entitled to indemnity
for certain expenses. No indemnification is permitted where a settlement is
reached without court approval.
Where permissive indemnification provisions control, indemnification may be
authorized by a majority vote of the disinterested directors, by an independent
legal counsel's written opinion, by our shareholders (the person to be
indemnified is excluded from voting his or her shares) or by the court in which
the proceeding is or was pending.
Any provision in a California corporation's articles of incorporation,
bylaws or shareholder or director resolution that indemnifies its officers or
directors may prohibit permissive, but not mandatory, indemnification as
described above. Such a provision must otherwise be consistent with Section 317.
Nonetheless, a corporation has the power to purchase indemnity insurance for its
agents even for situations in which it could not indemnify them.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable
28
PLAN OF DISTRIBUTION
The selling stockholder and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholder may use any one or
more of the following methods when selling shares:
-- ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
-- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
-- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
-- an exchange distribution in accordance with the rules of the
applicable exchange;
-- privately-negotiated transactions;
-- short sales;
-- broker-dealers may agree with the selling stockholder to sell a
specified number of such shares at a stipulated price per share;
-- through the writing of options on the shares
-- a combination of any such methods of sale; and
-- any other method permitted pursuant to applicable law.
The selling stockholder may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholder shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholder may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholder may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholder or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholder
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
30
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholder cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholder. The selling
stockholder and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed an "underwriter" as that
term is defined under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, or the rules and regulations under such acts.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholder, but excluding brokerage commissions or underwriter discounts.
The selling stockholder, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholder and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholder or any other such person.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited form simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholder, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholder or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
The selling stockholder have agreed to indemnify us against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
31
Penny Stock
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o 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
o obtain financial information and investment experience objectives of
the person; and
o 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 prepared by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks
32
SELLING STOCKHOLDER
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholder. We will not receive any proceeds
from the resale of the common stock by the selling stockholder. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholder, none of the selling stockholder will
continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Owner-ship Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Debentures Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering Offering (4) (4)
---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
Up to
18,546,517
La Jolla Cove (2) 17,703,493(3) 24.63% shares of 2,842,139 4.99% -- --
common stock
---------------------- ------------------ ------------- -------------- ------------ --------------- ------------ --------------
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares, which the selling stockholder has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible preferred stock is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes 200% of the shares issuable upon conversion of the convertible
debentures and shares issuable upon exercise of warrants, based on current
market prices. Because the number of shares of common stock issuable upon
conversion of the convertible note is dependent in part upon the market
price of the common stock prior to a conversion, the actual number of
shares of common stock that will be issued upon conversion will fluctuate
daily and cannot be determined at this time. However the selling
stockholder have contractually agreed to restrict their ability to convert
or exercise their warrants and receive shares of our common stock such that
the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.99% of the then issued
and outstanding shares of common stock.
(2) The selling stockholder is an unaffiliated broker/dealer. In accordance
with rule 13d-3 under the securities exchange act of 1934, Norman Lizt may
be deemed a control person of the shares owned by such entities.
(3) Includes 16,870,470 shares of common stock underlying warrants.
(4) Assumes that all securities registered will be sold.
33
Terms of Convertible Debenture and Warrant
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with the selling stockholder on October 4, 2002 for the sale
of (i) a $250,000 convertible debenture and (ii) a warrant to buy up to
30,000,000 shares of our common stock.
Convertible Debentures
The debenture bears interest at 8%, mature on two years from the date of
issuance, and is convertible into our common stock, at the selling stockholder'
option, at the lesser of (i) $1.00; or (ii) 80% of the average of the five
lowest volume weighted average price days during the 20 trading days before but
not including the conversion date. The full principal amount of the convertible
debentures are due upon default under the terms of convertible debentures. The
selling stockholders has agreed to convert at least 5% but no more than 10% of
the face value of the debenture each month after this prospectus is declared
effective by the Securities Exchange Commission.
The conversion price of the debentures and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholder's position.
The selling stockholder has contractually agreed to restrict its ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by it and its affiliates after
such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock.
A complete copy of the Securities Purchase Agreement and related documents
was filed with the SEC as exhibits to our Form SB-2 relating to this prospectus.
Sample Debenture Conversion Calculation
The number of shares of common stock issuable upon conversion of a
debenture is determined by dividing that portion of the principal of the
debenture to be converted and interest, if any, by the conversion price. For
example, assuming conversion of a $250,000 debenture on October 10, 2002, a
conversion price of $0.344 per share, and the payment of accrued interest in the
approximate amount of $2,152 in additional shares rather than in cash, the
number of shares issuable upon conversion would be:
$250,000 + $2,152 = 733,000 shares of common stock
----------------
$0.344
Warrant
A five-year warrant to purchase up to 30,000,000 shares of our common stock
was issued to the selling stockholder. The warrant was issued in connection with
the Securities Purchase Agreement, dated as of October 4, 2002. The warrant may
only be exercised concurrently with a conversion of the debenture and then only
34
for that number of shares of common stock equal to ten (10) times the number of
shares of common stock issued to the debenture holder on that conversion date.
The exercise price of the warrant is the lesser of (i) $1.00; or (ii) 80% of the
average of the five lowest volume weighted average price during the twenty (20)
trading days prior to the holder's election to convert.
Sample Warrant Exercise Calculation
The number of shares of common stock issuable upon exercise of the warrant
is determined by multiplying by 10 the number of shares issued to the selling
stockholder upon conversion of the debenture. Based on the above Sample
Debenture Conversion Calculation, the selling stockholder was issued 733,000
shares of common stock upon conversion of the debenture. Accordingly, the number
of shares issuable upon exercise of the warrant would be:
733,000 X 10 = 7,330,000 shares of common stock
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Our financial statements at December 31, 2001 and 2000 and for the years
then ended, appearing in this prospectus and registration statement have been
audited by S. W. Hatfield, CPA, independent auditors, as set forth on their
report thereon appearing elsewhere in this prospectus, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 29, 2002, we notified our accountants, Roger G. Castro, CPA that
they were being dismissed as our independent auditors. The stated reasons were
that we wanted to retain the auditor of our wholly-owned subsidiary, needed to
consolidate the audits of the parent and subsidiary to comply with SEC
requirements and did not want to engage the services of more than one (1)
auditor. Our Board of Directors made the decision to change accountants.
During our past two (2) fiscal years and during any subsequent interim
period preceding the date of dismissal, we had no disagreements with Roger G.
Castro, CPA on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
The report of Roger G. Castro, CPA on the financial statements for the past
two (2) fiscal years did not contain an adverse opinion nor a disclaimer of
opinion nor was the report qualified or modified as to uncertainty, audit scope
or accounting principles.
On January 29, 2002, we provided Roger G. Castro, CPA with a copy of this
disclosure and requested that it furnish a letter to us, addressed to the SEC,
stating that it agreed with the statements made herein or the reasons why it
disagreed. On January 29, 2002, we received a letter from Roger G. Castro, CPA
that it agreed with the statements contained herein.
On January 29, 2002, we engaged the firm of S.W. Hatfield, CPA, P.O. Box
820392, Dallas, TX 75382 as our independent auditors. Such appointment was
accepted by S.W. Hatfield, President of the firm. Prior to such engagement, we
had not consulted S.W. Hatfield, CPA on any prior matters, including any matters
relative to the application of accounting principles or any subject of
disagreement with Roger G. Castro, CPA.
35
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of American Ammunition, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549;
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
such material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. Because we file documents electronically with the SEC, you may also
obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
We furnish our stockholders with annual reports containing audited
financial statements.
36
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONTENTS
Page
Consolidated Annual Financial Statements
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets
as of December 31, 2001 and 2000 (post-acquisition)
and December 31, 2000 (pre-acquisition) F-3
Consolidated Statement of Operations and Comprehensive Loss for the years
ended December 31 2001 and 2000 (post-acquisition) and the period from
February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition) F-5
Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 2001 and 2000 (post-acquisition) and the period from
February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition) F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2001 and 2000 (post-acquisition) and
the period from February 1, 2000 (date of incorporation)
through December 31, 2000 (pre-acquisition) F-8
Notes to Consolidated Financial Statements F-9
Consolidated Quarterly Financial Statements
Consolidated Balance Sheets
as of September 30, 2002 and 2001 F-22
Consolidated Statements of Operations and Comprehensive Loss
for the nine and three months ended September 30, 2002 and 2001 F-24
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2002 and 2001 F-25
Notes to the Consolidated Financial Statements F-27
S. W. HATFIELD, CPA
certified public accountants
Member: Texas Society of Certified Public Accountants
Press Club of Dallas
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
American Ammunition, Inc.
(formerly FBI Fresh Burgers International)
We have audited the accompanying consolidated balance sheets of American
Ammunition, Inc. (formerly FBI Fresh Burgers International) (a California
corporation) as of December 31, 2001 and 2000 (post-acquisition) and December
31, 2000 (pre-acquisition) 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, 2001 and 2000 (post- acquisition) and the
period from February 1, 2000 (date of incorporation) through December 31, 2000
(pre- acquisition). 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 audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Ammunition,
Inc. (formerly FBI Fresh Burgers International, Inc) as of December 31, 2001 and
2000 (post-acquisition) and December 31, 2000 (pre-acquisition) and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 2001 and 2000
(post-acquisition) and for the period from February 1, 2000 (date of
incorporation) through December 31, 2000 (pre-acquisition), in conformity with
generally accepted accounting principles generally accepted in the United States
of America.
/s/S. W. HATFIELD, CPA
Dallas, Texas
March 12, 2002
(except for Note I and P to which the date is October 4, 2002)
Use our past to assist your future sm
(secure mailing address) (overnight delivery/shipping address)
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 SWHCPA@aol.com
F-2
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(post-acquisition) (post-acquisition) (pre-acquisition)
December 31, December 31, December 31,
2001 2000 2000
----------------------------------------------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 596,419 $ 858 $ -
Accounts receivable - trade, net of
factored accounts of approximately
$-0- and $10,070 and allowance for
doubtful accounts of $-0- and $-0-, respectively - 60,415 -
Inventory 314,741 333,410 -
Prepaid expenses 9,458 - -
------------ ------------ -----------
Total Current Assets 920,618 394,683 -
------------ ------------ -----------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,470,064 6,365,802 -
Office furniture and fixtures 50,856 49,699 -
Leasehold improvements 182,052 181,814 -
------------ ------------ -----------
6,702,972 6,597,315 -
Accumulated depreciation (2,737,717) (2,097,881) -
------------ ------------ -----------
Net Property and Equipment 3,965,255 4,499,434 -
------------ ------------ -----------
Other Assets
Loan costs, net of accumulated amortization of
approximately $69,334, $23,778 and $-0-, respectively - 45,556 -
Investment in acquisition candidate - - 21,000
Deposits and other 74,310 59,712 -
----------- ------------ -----------
Total Other Assets 74,310 105,268 21,000
----------- ------------ -----------
TOTAL ASSETS $ 4,960,183 $ 4,999,385 $ 21,000
=========== ============ ===========
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2001 and 2000
(post-acquisition) (post-acquisition) (pre-acquisition)
December 31, December 31, December 31,
2001 2000 2000
----------------------------------------------------------------
IABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Cash overdraft $ - $ 73,234 $ -
Notes payable to a bank - 1,143,381 -
Current maturities of leases payable 8,365 28,409 -
Accounts payable - trade 461,902 684,674 -
Accrued excise taxes payable 8,641 27,380 -
Accrued interest payable 1,000 3,308,038 -
Note payable to stockholder 100,000 4,007,327 -
------------ ------------ -----------
Total Current Liabilities 579,908 9,272,443 -
Long-Term Liabilities
Note payable to a bank 950,000 - -
Capital leases payable 17,348 79,875 -
------------ ------------ -----------
Total Liabilities 1,547,256 9,352,318 -
------------ ------------ -----------
Commitments and Contingencies
Mandatory Convertible Preferred Stock
45,600 shares issued and outstanding 228,000 - -
------------ ------------ -----------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
49,975,614, 26,850,000 and 26,850,000
shares issued and outstanding 49,976 26,850 26,850
Additional paid-in capital 14,700,771 4,974,150 (3,900)
Accumulated deficit (11,565,820) (9,353,933) (1,950)
------------ ------------ -----------
Total Stockholders' Equity 3,184,927 (4,352,933) 21,000
------------ ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,960,183 $ 4,999,385 $ 21,000
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS Years ended December 31, 2001
and 2000 (post-acquisition) and
Period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition)
(post-acquisition) (post-acquisition) (pre-acquisition)
Period from
February 1, 2000
Year ended Year ended through
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Revenues $ 427,529 $ 1,715,885 $ -
----------- ------------ ----------
Cost of Sales
Materials 357,399 1,158,662 -
Direct Labor 260,012 210,707 -
Other direct costs and expenses 382,407 39,633 -
Depreciation 628,925 616,982 -
----------- ------------ ----------
Total Cost of Sales 1,628,743 2,025,984 -
----------- ------------ ----------
Gross Profit (1,201,214) (310,099) -
----------- ------------ ----------
Operating Expenses
Research and development expenses 3,963 - -
Marketing and promotion expenses 4,043 4,609 -
Salaries, wages and related expenses 365,079 363,265 -
Other operating expenses 535,450 86,901 1,950
Interest expense 453,943 438,226
Depreciation expense 10,911 12,769 -
----------- ------------ ----------
Total Operating Expenses 1,373,389 905,770 1,950
----------- ------------ ----------
Loss from Operations (2,574,603) (1,215,869) (1,950)
Other Income (Expense)
Settlement of litigation 754,830 - -
Amortization of Beneficial Conversion
Feature Discount on Preferred Stock (392,114) - -
----------- ------------ ----------
Loss before Income Taxes (2,211,887) (1,215,869) (1,950)
Provision for Income Taxes - - -
----------- ------------ ----------
Net Loss (2,211,887) (1,215,869) (1,950)
Other Comprehensive Income - - -
----------- ------------ ----------
Comprehensive Loss $(2,211,887) $ (1,215,869) $ (1,950)
============ ============ ==========
Loss per weighted-average share of common stock
outstanding, computed on net loss - basic and
fully diluted $ (0.08) $ (0.05) nil
============ ============ ==========
Weighted-average number of
common shares outstanding 28,019,722 26,850,000 5,850,000
============ ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY Years ended December 31,
2001 and 2000 (post-acquisition) and
Period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition)
Mandatory Convertible
Preferred Stock Common Stock Additional
------------------- ------------------ paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
--------------------------------------------------------------------------------------
Stock issued to founders
at formation - $ - 1,810,000 $ 1,810 $ - $ - $ 1,810
Effect of 3 for 1 forward split - - 3,620,000 3,620 (3,620) - -
Stock issued for services - - 140,000 140 - - 140
Effect of 3 for 1 forward split - - 280,000 280 (280) - -
Issuance of common stock for acquisition
of subsidiary - - 21,000,000 21,000 - - 21,000
Net loss for the year (pre-acquisition) - - - - - (1,950) (1,950)
------ -------- ---------- --------- ---------- ------------ ---------
Balances at December 31, 2000
(pre-acquisition) - - 26,850,000 26,850 (3,900) (1,950) 21,000
Recapitalization due
to reverse merger with
F&F Equipment, Inc. - - - - 4,978,050 (8,136,114) (3,158,064)
Net loss for the year (post-acquisition) - - - - - (1,215,869) (1,215,869)
------ -------- ---------- --------- ---------- ------------ ---------
Balances at December 31, 2000
(post-acquisition) - $ - 26,850,000 $ 26,850 $4,974,150 $ (9,353,933) $(4,352,933)
====== ======== ========== ========= ========== ============ ===========
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY Years ended December 31,
2001 and 2000 (post-acquisition) and
Period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition)
Mandatory Convertible
Preferred Stock Common Stock Additional
------------------- ------------------ paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
-----------------------------------------------------------------------------------
Balances at December 31, 2000
(post-acquisition) - $ - 26,850,000 $ 26,850 $ 4,974,150 $ (9,353,933) $(4,352,933)
Issuance of common stock for
Consulting fees - pre-acquisition - - 124,400 125 124,275 - 124,400
Recapitalization due to reverse
merger with F&F Equipment, Inc. - - - - (124,400) - (124,400)
Consulting fees - post-acquisition - - 916,000 916 413,160 - 414,076
Effect of 3 for 1 forward split
on cumulative consulting fees - - 2,080,800 2,081 (2,081) - -
Cash - - 222,222 222 99,778 - 100,000
Settlement of accounts payable - - 535,272 535 240,337 - 240,872
Private placement of Preferred Stock 284,600 1,423,000 - - - - -
Less costs of raising capital - - - - (144,915) - (144,915)
Beneficial Conversion Feature
Discount on Preferred Stock - - - - 1,207,993 - 1,207,993
Conversion of shareholder debt and
accrued interest into Preferred Stock 1,510,720 7,553,600 - - - - -
Conversion of Preferred Stock to
Common Stock (1,749,720) (8,748,600) 19,246,920 19,247 8,729,353 - 8,748,600
Adjustment of the unamortized
balance of Beneficial Conversion
Feature Discount as a result
of the exercise of conversion - - - - (816,879) - (816,879)
Net loss for the year (post-acquisition) - - - - - (2,211,887) (2,211,887)
----------- ----------- ------------ --------- ----------- ------------ -----------
Balances at December 31, 2001
(post-acquisition) 45,600 $ 228,000 49,975,614 $ 49,976 $14,700,771 $(11,565,820) $ 3,184,927
=========== =========== ============ ========= =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000
(post-acquisition) and
Period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition)
(post-acquisition) (post-acquisition) (pre-acquisition)
Period from
February 1, 2000
Year ended Year ended through
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Cash flows from operating activities
Net loss for the year $(2,211,887) $(1,215,869) $ (1,950)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 639,836 638,398 -
Gain on litigation settlement (754,830) - -
Common stock issued for fees and services 540,534 - 1,950
Accrued interest converted to preferred stock 240,440 - -
Amortization of conversion discount
on preferred stock 392,114 - -
(Increase) Decrease in
Accounts receivable 60,415 86,488 -
Inventory 18,669 (49,725) -
Prepaid expenses, deposits and other (24,056) (50,457) -
Increase (Decrease) in
Accounts payable - trade 18,100 335,427 -
Interest payable (1,000) 320,586 -
Excise taxes payable (18,739) (47,240) -
----------- ------------ ---------
Net cash provided by (used in) operating activities (1,100,404) 17,608 -
----------- ------------ ---------
Cash flows from investing activities
Purchase of property and equipment (105,657) (265,268) -
----------- ------------ ---------
Net cash used in investing activities (105,657) (265,268) -
----------- ------------ ---------
Cash flows from financing activities
Increase in cash overdraft 7,760 73,234 -
Cash received (paid) on short term loans - net (451,652) (14,583) -
Cash received on long-term loans 950,000 - -
Principal paid on long-term loans - (42,841) -
Principal paid on long-term capital leases (82,571) (24,749) -
Cash received on sale of Mandatory
Convertible Preferred Stock 1,423,000 - -
Cash received on sale of common stock 100,000 - -
Cash paid to acquire capital (144,915) - -
----------- ------------ ---------
Net cash provided by financing activities 1,801,622 (8,939) -
----------- ------------ ---------
INCREASE (DECREASE) IN CASH 595,561 (256,599) -
Cash at beginning of year 858 256,457 -
----------- ------------ ---------
Cash at end of year $ 596,419 $ 858 $ -
=========== ============ =========
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
CONSOLIDATED STATEMENTS OF CASH FLOWS -
CONTINUED Years ended December 31, 2001 and 2000
(post-acquisition) and
Period from February 1, 2000 (date of incorporation) through
December 31, 2000 (pre-acquisition)
(post-acquisition) (post-acquisition) (pre-acquisition)
Period from
February 1, 2000
Year ended Year ended through
December 31, December 31, December 31,
2001 2000 2000
-------------------------------------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 214,503 $108,993 $ -
=========== ============ ==========
Income taxes paid for the period $ - $ - $ -
=========== ============ ==========
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt and accrued interest
payable to a shareholder into preferred stock $ 7,553,600 $ - $ -
=========== ============ ==========
Payment of accounts payable with
issuance of common stock $ 240,872 $ - $ -
=========== ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in the State of California as FirsTelevision.com. AAI subsequently changed its
corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches. However, there
was no assurance that this business concept would be successful.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the individual
shareholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the shareholders of F&F exchanged 100.0% of the
issued and outstanding stock of F&F for 21,000,000 post-forward split shares of
restricted, unregistered common stock of the Company. F&F Equipment, Inc. then
became a wholly-owned subsidiary of the Company.
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the Company
effected a change in control and was accounted for as a "reverse acquisition"
whereby F&F Equipment, Inc. is the accounting acquiror for financial statement
purposes. Accordingly, for all periods subsequent to the September 29, 2001
change in control transaction, the financial statements of the Company reflect
the historical financial statements of F&F Equipment, Inc. from its inception on
October 4, 1983 and the operations of the Company subsequent to September 29,
2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the laws
of the State of Florida. The Company 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." The
Company conducts its business operations under the assumed name of "American
Ammunition".
The Company and its subsidiary have a year-end of December 31 and use the
accrual method of accounting.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. (formerly FBI Fresh Burgers International) and its
wholly-owned subsidiary, F&F Equipment, Inc. All significant intercompany
transactions have been eliminated. The consolidated entities are collectively
referred to as "Company".
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
F-10
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - 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, including accounts in book overdraft positions,
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
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.
3. Inventory
Inventory consists of raw materials, work-in-process and finished goods
related to the production and sale of small arms ammunition. Inventory is
valued at the lower of cost or market using the first-in, first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5 Loan costs
Amounts paid for origination fees related to loans payable are amortized
over the scheduled maturity of the corresponding debt.
6. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At December 31, 2001 and 2000, 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, 2001 and 2000, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. If these
carryforwards are not utilized, they will begin to expire in 2005.
F-11
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Summary of Significant Accounting Policies - Continued
7. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and 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. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of December 31, 2001 and 2000, the Company
had no warrants and/or options outstanding.
8. Advertising
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published.
Note C - 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.
Note D - Inventory
As of December 31, 2001 and 2000, inventory consisted of the following
components:
(post-acquisition) (post-acquisition) (pre-acquisition)
December 31, December 31, December 31,
2001 2000 2000
---------------------------------------------------------
Raw materials $ 82,454 $ 109,467 $ -
Work in process 197,704 196,935 -
Finished goods 34,583 27,008 -
---------- ---------- -------
Totals $ 314,741 $ 333,410 $ -
========== ========== =======
(Remainder of this page left blank intentionally)
F-12
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - Property and Equipment
Property and equipment consist of the following components:
(post-acquisition) (post-acquisition)
December 31, December 31, Estimated
2001 2000 useful life
----------------------------------------------------
Manufacturing equipment $ 6,470,064 $ 6,365,802 10 years
Office furniture and fixtures 50,856 49,699 7 years
Leasehold improvements 182,052 181,814 20 years
------------ -----------
6,702,972 6,597,315
Accumulated depreciation (2,737,717) (2,097,881)
------------ -----------
Net property and equipment $ 3,965,255 $ 4,499,434
============ ===========
Total depreciation expense charged to operations for the years ended December
31, 2001 and 2000 was approximately $639,836 and $629,751, respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-----------------------------------
Manufacturing and processing equipment $ 153,400 $ 153,400
Less accumulated depreciation (39,179) (23,839)
---------- ----------
$ 114,221 $ 129,561
========== ==========
Note F - Notes payable to a Bank
Notes payable to a Bank consist of the following at December 31, 2001 and 2000,
respectively:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-----------------------------------
$200,000 line of credit payable to a bank. Interest at the
Bank's prime rate plus 1.50% or 2.00%, respectively. (11.00
% at December 31, 2000). Interest payable monthly. Advances
and accrued, but unpaid, interest mature on the 60th day
following funding. Agreement is renegotiable annually on the
anniversary date in November of each calendar year.
Collateralized by all accounts receivable, inventory and
fixed assets of the Company and the personal guaranty of the
Company's President. $ - $ 200,000
F-13
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Notes payable to a Bank - Continued
Notes payable to a Bank consist of the following at December 31, 2001 and 2000,
respectively:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-----------------------------------
$250,000 installment note payable to a bank. Interest at the
Wall Street Journal published prime rate plus 2.0% (11.00%
at December 31, 2000). Payable in monthly installments of
approximately $2,083, plus accrued interest. Final payment
due in December 2009. Collateralized by all accounts
receivable, inventory and fixed assets of the Company, the
personal guaranty of the Company's President and a mortgage
on the Company's corporate offices and manufacturing
facility owned by the Company's stockholder. - 235,417
$738,090 (originally $1,000,000) installment note payable to
a bank. Interest at the Wall Street Journal published prime
rate plus 2.50% (11.0% at December 31, 2000). Payable in
monthly installments of approximately $7,530, plus accrued
interest. Final payment due in March 2008. Collateralized by
all accounts receivable, inventory and fixed assets of the
Company and the personal guaranty of the Company's
President. - 707,964
----------- -------------
Total notes payable to a bank $ - $ 1,200,805
=========== =============
As of December 31, 2000, the Company was operating under a bank approved
moratorium on the payment of principal and interest on all of the above listed
notes payable. During 2001, the Company and its President commenced litigation
against the lending institution and , on June 29, 2001, the Company and the Bank
executed a Settlement and Compromise Agreement whereby all loans and debts of
the Company to the Bank were settled and cancelled for a one-time cash payment
of $550,000. Accordingly, due to the circumstances surrounding the final
settlement and retirement of these loans, they were classified as "current" on
December 31, 2000 in the accompanying consolidated balance sheets. The source of
funds for the $550,000 settlement came from a new $950,000 note payable to
another financial institution.
As a result of this settlement, the Company recognized a one-time gain on the
settlement of approximately $754,830.
F-14
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note G - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2001 and
2000, respectively:
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-----------------------------------
Three and six capital leases, respectively, payable to
various equipment financing companies. Interest, at December
31, 2001, ranging between 11.37% and 14.05%. Payable in
aggregate monthly installments of approximately $935,
including accrued interest, as of December 31, 2001. Final
maturities occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 25,713 $108,284
Less current maturities (8,365) (28,409)
--------- --------
Long-term portion $ 17,348 $ 79,875
========= ========
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
---------------------------
2002 $ 8,365
2003 9,507
2004 7,841
-------
Totals $25,713
=======
Note H - Loan payable to Stockholder
(post-acquisition) (post-acquisition)
December 31, December 31,
2001 2000
-------------------------------------
$4,007,327 note payable to the Company's stockholder.
Interest at 8.0%. Principal and accrued interest payable at
maturity. Maturity at December 31 annually and automatically
renews for an equivalent annual period unless called by the
Stockholder at least 90 days prior to maturity. Unsecured.
Converted to preferred stock during 2001. $ - $ 4,007,327
============= ==============
F-15
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Long-Term Debt Payable to a Bank
On June 28, 2001, in anticipation of the settlement of litigation with a
financial institution, the Company executed a new $950,000 note payable to
another financial institution. This new note bears interest at the Wall Street
Journal published prime rate plus 2.0%. The new note has payment terms as
follows: For the first year (through June 28, 2002), interest only, payable
monthly. Thereafter, starting on July 28, 2002, equal monthly payments of
principal and interest shall be due until June 28, 2007 which payments shall
represent the amount necessary to fully amortize the remaining principal balance
of the note. The monthly payments shall be recalculated at the time of any
change in the applicable interest rate. The note is secured by virtually all of
the Company's real and personal property. A portion of the proceeds from the
financing were used to pay the $550,000 required in the Settlement and
Compromise Agreement.
During July, August and September 30, 2002, the Company made three (3) lump-sum
principal reductions of $100,000 each (or an aggregate of $300,000) to the
outstanding balance on this note. As of September 30, 2002, the Company owes
$650,000 on this note. Upon each lump-sum payment, the Company executed a
modification to the payment terms on the note.
At September 30, 2002, the note payment terms are as follows: payments of
interest only beginning July 28, 2003 through January 28, 2004. Thereafter,
starting on January 28, 2004, equal monthly payments of principal and interest
shall be due until June 28, 2007 which payments shall represent the amount
necessary to fully amortize the remaining principal balance of the note. The
monthly payments shall be recalculated at the time of any change in the
applicable interest rate. The note is secured by virtually all of the Company's
real and personal property. A portion of the proceeds from the financing were
used to pay the $550,000 required in the Settlement and Compromise Agreement.
Note J - Preferred Stock Transactions
In September and October 2001, the Company issued 222,600 shares of $5.00 Series
A Convertible Preferred Stock (Series A Preferred Stock) for total proceeds of
approximately $1,113,000 through an ongoing private placement. 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 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 2001, the Company's principal shareholder 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 February 2002, certain holders of the Series A Preferred Stock 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. Due to the timing of the conversion in relation to the Company's
year-end and the first available date for such conversion, the effect of the
conversion exercise is reflected in the accompanying financial statements as if
the conversion had occurred on December 31, 2001.
F-16
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Preferred Stock Transactions - Continued
In conjunction with the issuance of certain shares of the Series A Preferred
Stock, certain shares were issued with an equivalent per share value of common
stock below the ending quoted market price of the Company's common stock on the
issue date. 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 initial
eligible conversion date. Approximately $392,114 was amortized to operations and
the unamortized balance was reclassified to additional paid-in capital on
December 31, 2001 as a result of the February 2002 conversion exercise.
Note K - Common Stock Transactions
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
In February 2000, the Company issued 5,430,000 post-forward split shares
(1,810,000 pre-forward split shares) of restricted, unregistered common stock to
its founders for administrative services and services related to the development
and implementation of the Company's business plan, in effect at the time. These
transactions were cumulatively valued at approximately $1,810, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In June 2000, the Company issued 420,000 post-forward split shares (140,000
pre-forward split shares) of restricted, unregistered common stock to two
unrelated individuals for services related to the implementation of the
Company's business plan, in effect at the time. These transactions were
cumulatively valued at approximately $140, which approximates the "fair value"
of the services provided. These amounts are charged to operations in the
accompanying pre-acquisition consolidated financial statements.
In March and May 2001, the Company issued an aggregate 496,200 post-reverse
split shares (165,400 pre-forward split shares) of common stock, pursuant to a
Registration Statement on Form SB-2, to various individuals providing
investment, financial and acquisition consulting services to the Company. These
transactions were cumulatively valued at approximately $165,400, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In September 2001, the Company issued 2,625,000 post-reverse split shares
(875,000 pre-forward split shares) of common stock, pursuant to a Registration
Statement on Form SB-2, to six individuals providing investment and financial
consulting services to the Company. These transactions were cumulatively valued
at approximately $875,000, which approximates the "fair value" of the services
provided. These amounts are charged to operations in the accompanying
pre-acquisition consolidated financial statements.
F-17
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
In September 2001, the Company issued an aggregate 21,000,000 post-forward split
shares of restricted, unregistered common stock to the shareholders of F&F
Equipment, Inc. in exchange for 100.0% of the issued and outstanding stock of
F&F Equipment, Inc. F&F Equipment, Inc. became a wholly-owned subsidiary of the
Company as a result of this transaction.
In December 2001, the Company issued 222,222 shares of post-forward split shares
of restricted, unregistered common stock to an unrelated entity in exchange for
the cancellation of $100,000 of short-term debt. In March 2002, the Company
issued an additional 277,777 shares of restricted, unregistered common stock in
payment for $100,000 in short-term debt payable and $25,000 in agreed-upon
interest payable to a shareholder, thereby satisfying all outstanding short-term
debt in full.
In December 2001, the Company issued 535,272 shares of restricted, unregistered
common stock to a creditor in settlement of approximately $242,872 in open trade
accounts payable.
Note L - Related Party Transactions
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 $3,931, plus applicable sales taxes.
Further, the Company is responsible for all utilities and maintenance expenses.
The lease expires on October 31, 2003 and contains a clause that the lease may
be renewed for an additional ten year period upon written notification to the
lessor no later than 120 days prior to the scheduled expiration date at a rental
rate based upon the fair value for similar space in a similar location.
On January 1, 1998, the Company's controlling stockholder contributed various
manufacturing equipment to the Company. This transaction was valued at an
agreed-upon value of approximately $5,000,000, which was substantially less than
original founders cost. As of October 25, 2000, in conjunction with a proposed
sale-leaseback transaction, the Company received an independent appraisal on its
manufacturing equipment with an appraised value of approximately $17,000,000 at
a utilization rate of 90,000,000 rounds of small-arms ammunition produced per
annual period.
(Remainder of this page left blank intentionally)
F-18
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2001 and 2000, respectively, are as follows:
(post-acquisition) (post-acquisition)
Year ended Year ended
December 31, December 31,
2001 2000
-----------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of December 31, 2001, the Company has a net operating loss carryforward of
approximately $5,800,000 to offset future taxable income. Subject to current
regulations, components of this carryforward will begin to expire in 2003. The
amount and availability of the net operating loss carryforwards may be subject
to limitations set forth by the Internal Revenue Code. Factors such as the
number of shares ultimately issued within a three year look-back period; whether
there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
The Company's income tax expense (benefit) for the years ended December 31, 2001
and 2000, respectively, differed from the statutory federal rate of 34 percent
as follows:
(post-acquisition) (post-acquisition)
Year ended Year ended
December 31, December 31,
2001 2000
------------------------------------
Statutory rate applied to loss before income taxes $ (752,000) $ (413,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 752,000 413,000
---------- -----------
Income tax expense $ - $ -
========== ===========
Temporary differences, consisting primarily of 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, 2001 and 2000, respectively:
F-19
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
(post-acquisition) (post-acquisition)
Year ended Year ended
December 31, December 31,
2001 2000
---------------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 1,980,000 $ 1,230,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (280,000)
------------ ------------
1,730,000 950,000
Less valuation allowance (1,730,000) (950,000)
------------ ------------
Net Deferred Tax Asset $ - $ -
============ ============
During the years ended December 31, 2001 and 2000, respectively, the valuation
allowance increased (decreased) by approximately $780,000 and $(70,000).
Note N - Contingencies
In May 1998, the Company entered into a $500,000 accounts receivable factoring
facility with its then financial institution. The facility provided for the
purchase of various trade accounts receivable by the bank from the Company at
80.0% of the face value of the underlying invoice. The Company paid a discount
fee of 1.5% for invoices settled between 1 and 30 days of invoice date, 3.0% for
invoices settled between 31 and 60 days of invoice date and an additional 1.5%
for each additional 30 days thereafter. All accounts receivable invoices were
factored with full recourse to the Company and the Company bears all credit risk
associated with the factored invoices. At December 31, 2000, the Company was at
risk for approximately $10,070 of factored invoices. The Company experienced no
losses related to the factoring agreement. This Agreement was terminated in
conjunction with the execution of the Settlement and Compromise Agreement on
June 29, 2001.
Note O - Significant Customers
During the years ended December 31, 2001 and 2000, respectively, the Company had
a single customer responsible for approximately 51% and 32% of total sales.
There were no other customers responsible for more than 10.0% of total net sales
during 2001 and 2000, respectively.
Note P - Subsequent Event
On October 4, 2002, the Company issued an 8.0% Convertible Debenture (Debenture)
in the face amount of $250,000 and a Warrant which requires the Holder to
purchase shares of common stock equal to ten (10) times the number of shares of
common stock issued to the Holder on conversion of the Debenture. In no event
shall the number of shares issued under the Warrant exceed 30,000,000.
F-20
AMERICAN AMMUNITION, INC.
(formerly FBI Fresh Burgers International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note P - Subsequent Event - Continued
The Debenture bears interest at 8.0% and matures two years from the date of
issuance. The Debenture is convertible into common stock, at the option of the
Holder, at the lesser of $1.00 per share or 80.0% of the average of the 5 lowest
volume weighted average price days during the 20 trading days before, but not
including the date of the Holder's election to convert. The Warrant is
exercisable at the same price.
The full principal amount of the Debenture is due upon default, as defined in
the Debenture agreement. The Debenture interest is payable monthly in arrears
commencing on November 15, 2002.
The Company is obligated to file a Registration Statement under the Securities
Act of 1933 to register the underlying conversion shares on either Form SB-2 or
S-3 and have said Registration Statement effective no later than 120 days after
October 4, 2002. Further, the Holder has agreed to convert not less than 5.0%
and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to exercise warrants and purchase shares of common stock
equal to ten (10) times the number of shares of common stock issued to the
Holder on conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to convert
the Debenture or exercise their warrants and receive shares of the Company's
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
The Holder may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, the
Company is also obligated to issue to the Holder 25,000 shares of common stock
and $10,000 cash for each 30 day period, or portion thereof, during which the
face amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
If the Holder does not elect to accelerate the Debenture, the Company shall
immediately issue and pay to the Holder 25,000 shares of common stock and
$10,000 cash for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
Concurrent with the execution of the Debenture agreement, the Company executed
an engagement letter with the Holder's counsel for legal representation with
regard to the preparation of the aforementioned Registration Statement under the
Securities Act of 1933.
F-21
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Balance Sheets
September 30, 2002 and 2001
(Unaudited)
September 30, September 30,
2002 2001
--------------- --------------
ASSETS
Current Assets
Cash on hand and in bank $ 238,695 $ 622,112
Accounts receivable - trade, net of
factored accounts of approximately
$-0- and $-0- and allowance for
doubtful accounts of $-0- and $-0-, respectively 232,821 -
Inventory 554,369 116,128
Prepaid expenses 19,647 7,323
------------- ------------
Total Current Assets 1,045,532 745,563
------------- ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,683,688 6,468,864
Office furniture and fixtures 50,907 49,699
Leasehold improvements 193,606 182,052
------------- ------------
6,928,201 6,700,615
Accumulated depreciation (3,224,315) (2,005,907)
------------- ------------
Net Property and Equipment 3,703,886 4,694,708
------------- ------------
Other Assets
Deposits and other 77,860 59,712
------------- ------------
Total Other Assets 77,860 59,712
------------- ------------
TOTAL ASSETS $ 4,827,278 $ 5,499,983
============= ============
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
F-22
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Balance Sheets - Continued
September 30, 2002 and 2001
(Unaudited)
September 30, September 30,
2002 2001
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to a bank $ - $ -
Current maturities of leases payable 8,365 31,260
Accounts payable - trade 383,777 618,471
Customer deposits 30,000 -
Note payable to stockholder - 200,000
------------- ------------
Total Current Liabilities 422,142 849,731
Long-Term Liabilities
Note payable to a bank 650,000 950,000
Capital leases payable 11,175 43,142
------------- ------------
Total Liabilities 1,083,317 1,842,873
------------- ------------
Commitments and Contingencies
Mandatory Convertible Preferred Stock
1,620,720 and 46,000 shares
issued and outstanding, respectively 230,000 8,135,350
------------- ------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
54,114,560 and 29,971,200 shares
issued and outstanding, respectively 54,115 29,971
Additional paid-in capital 16,052,506 4,971,029
Accumulated deficit (12,592,660) (9,479,240)
------------- ------------
Total Stockholders' Equity 3,513,961 (4,478,240)
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,827,278 $ 5,499,983
============= ============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
F-23
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------------------------------------------------------
Revenues $ 1,277,454 $ 350,969 $ 570,320 $ 14,438
--------------- -------------- ------------- -------------
Cost of Sales
Materials, Direct Labor
and other direct costs 1,236,388 275,048 630,484 31,125
Depreciation 483,537 454,906 163,238 151,635
--------------- -------------- ------------- -------------
Total Cost of Sales 1,719,925 729,954 793,722 182,760
--------------- -------------- ------------- -------------
Gross Profit (442,471) (378,985) (223,402) (168,322)
--------------- -------------- ------------- -------------
Operating Expenses
Research and development expenses 2,851 1,432 2,200 -
Marketing and promotion expenses 13,842 5,516 6,276 -
Other operating expenses 488,257 505,492 270,126 142,704
Interest expense 76,060 277,685 14,941 105,391
Depreciation expense 3,061 8,022 248 2,610
Compensation expense related to common
stock issuances at less than "fair value" 11,346 - 11,346 -
--------------- -------------- ------------- -------------
Total Operating Expenses 595,417 798,147 305,137 250,705
--------------- -------------- ------------- -------------
Loss from Operations (1,037,888) (1,177,132) (528,539) (419,027)
Other Income (Expense)
Settlement of litigation - 754,830 - -
Interest and other income 11,048 3,777 515 -
--------------- -------------- ------------- -------------
Income (Loss) before Income Taxes (1,026,840) (418,525) (528,024) (419,027)
Provision for Income Taxes - - - -
--------------- -------------- ------------- -------------
Net Income (Loss) (1,026,840) (418,525) (528,024) (419,027)
Other Comprehensive Income - - - -
--------------- -------------- ------------- -------------
Comprehensive Income (Loss) $ (1,026,840) $ (418,525) $ (528,024) $ (419,027)
=============== ============== ============= =============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.02) $ (0.01) $ (0.01) $ (0.01)
=============== ============== ============= =============
Weighted-average number of
common shares outstanding 51,885,746 29,971,200 53,395,558 29,971,200
=============== ============== ============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
F-24
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
-------------- -------------
Cash flows from operating activities
Net loss for the period $ (1,026,840) $ (418,525)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 486,598 573,994
Compensation expense related to common
stock issuances at less than "fair value" 11,346 -
Gain on litigation settlement - (754,830)
Common stock issued for fees and services 50,520 127,458
Accrued interest converted to common stock 240,440
(Increase) Decrease in
Accounts receivable (232,821) 60,415
Inventory (239,628) 217,282
Prepaid expenses, deposits and other (13,739) (7,323)
Increase (Decrease) in
Accounts payable - trade 110,730 (66,203)
Interest payable - (2,000)
Excise taxes payable (8,641) (27,380)
Customer deposits 30,000 -
-------------- -------------
Net cash used in operating activities (832,475) (92,672)
-------------- -------------
Cash flows from investing activities
Purchase of property and equipment (225,229) (103,300)
-------------- -------------
Net cash used in investing activities (225,229) (103,300)
-------------- -------------
Cash flows from financing activities
Decrease in cash overdraft - 7,760
Cash received (paid) on short term loans - net - (451,652)
Cash received on long-term loans - 950,000
Cash paid on long-term loans (300,000) -
Principal paid on long-term capital leases (6,173) (33,882)
Cash received on sale of Mandatory
Convertible Preferred Stock 345,000
Cash received on sale of common stock 1,006,153 -
-------------- -------------
Net cash provided by financing activities 699,980 817,226
-------------- -------------
Increase (Decrease) in Cash (357,724) 621,254
Cash at beginning of year 596,419 858
-------------- -------------
Cash at end of year $ 238,695 $ 622,112
============== =============
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
F-25
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 52,060 $ 39,245
============== =============
Income taxes paid for the period $ - $ -
============== =============
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt and accrued interest
payable to a shareholder into preferred stock $ - $ 7,553,600
============== =============
Conversion of debt and accrued interest
payable to a shareholder into common stock $ 125,000 $ -
============== =============
Common stock issued in payment of trade accounts payable $ 188,855 $ -
============== =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
F-26
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in the State of California as FirsTelevision.com. AAI subsequently changed its
corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches. However, there
was no assurance that this business concept would be successful.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the individual
shareholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the shareholders of F&F exchanged 100.0% of the
issued and outstanding stock of F&F for 21,000,000 post-forward split shares of
restricted, unregistered common stock of the Company. F&F Equipment, Inc. then
became a wholly-owned subsidiary of the Company.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the laws
of the State of Florida. The Company 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." The
Company 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 state of the art electrochemical
metallization facility with enormous capacity for processing the Company's line
of 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.
Note B - Preparation of Financial Statements
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the Company
effected a change in control and was accounted for as a "reverse acquisition"
whereby F&F Equipment, Inc. is the accounting acquiror for financial statement
purposes. Accordingly, for all periods subsequent to the September 29, 2001
change in control transaction, the financial statements of the Company reflect
the historical financial statements of F&F Equipment, Inc. from its inception on
October 4, 1983 and the operations of the Company subsequent to September 29,
2001.
F-27
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note B - Preparation of Financial Statements - Continued
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.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2001. The information presented within these interim financial
statements may not include all disclosures required by accounting principles
generally accepted in the United States of America and the users of financial
information provided for interim periods should refer to the annual financial
information and footnotes when reviewing the interim financial results presented
herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. (formerly FBI Fresh Burgers International) 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".
(Remainder of this page left blank intentionally)
F-28
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, including accounts in book overdraft positions,
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
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.
3. Inventory
Inventory consists of raw materials, work-in-process and finished goods
related to the production and sale of small arms ammunition. Inventory is
valued at the lower of cost or market using the first-in, first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At September 30, 2002 and 2001, the deferred tax asset and deferred
tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
As of September 30, 2002 and 2001, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. If these
carryforwards are not utilized, they will begin to expire in 2005.
F-29
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
6. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and 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. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of September 30, 2002 and 2001, and
subsequent thereto, the Company had no warrants and/or options outstanding.
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. Reclassifications
Certain amounts in the accompanying financial statements for the quarter
ended September 30, 2001 have been reclassified to conform to the Fiscal
2002 presentations.
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Inventory
As of September 30, 2002, inventory consisted of the following components:
September 30, 2002
Raw materials $207,574
Work in process 264,048
Finished goods 82,747
---------
Totals $554,369
=========
F-30
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note F - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2002 2001 useful life
------------------------------------------------
Manufacturing equipment $6,683,688 $6,468,864 10 years
Office furniture and fixtures 50,907 49,699 7 years
Leasehold improvements 193,606 182,052 20 years
---------- ----------
6,928,201 6,700,615
Accumulated depreciation (3,224,315) (2,005,907)
---------- ----------
Net property and equipment $3,703,866 $4,694,708
========== ==========
Total depreciation expense charged to operations for the nine months ended
September 30, 2002 and 2001, respectively, was approximately $486,598 and
$462,928, respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
September 30, September 30,
2002 2001
-------------------------------
Manufacturing and processing equipment $153,400 $153,400
Less accumulated depreciation (50,694) (35,344)
-------- --------
$106,551 $118,056
======== ========
Note G - Notes payable to a Bank
During 2001, the Company was operating under a bank approved moratorium on the
payment of principal and interest on all notes payable and the Company and its
President commenced litigation against the lending institution. On June 29,
2001, the Company and the Bank executed a Settlement and Compromise Agreement
whereby all loans and debts of the Company to the Bank were settled and
cancelled for a one-time cash payment of $550,000. The source of funds for the
$550,000 settlement came from a new $950,000 note payable to another financial
institution.
As a result of the June 29, 2001 transaction, the Company recognized a one-time
gain on the settlement of approximately $754,830 on the settlement date.
F-31
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note H - Capital Leases Payable
Capital leases payable consist of the following as of September 30, 2002 and
2001, respectively:
September 30, September 30,
2002 2001
----------------------------
Three and six capital leases, respectively, payable to
various equipment financing companies. Interest, at
September 30, 2002, ranging between 11.37% and 14.05%.
Payable in aggregate monthly installments of approximately
$935, including accrued interest, as of September 30, 2002.
Final maturities occur between September 2004 and December
2004. Collateralized the underlying leased manufacturing
equipment. $ 19,540 $ 74,402
Less current maturities (8,365) (31,260)
----------- ------------
Long-term portion $ 11,175 $ 43,142
=========== ============
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
------------------------
2002 $ 8,365
2003 9,507
2004 1,668
--------
Totals $ 19,540
========
Note I - Long-Term Debt Payable to a Bank
On June 28, 2001, in anticipation of the settlement of litigation with a
financial institution, the Company executed a $950,000 note payable to another
financial institution. This note bears interest at the Wall Street Journal
published prime rate plus 2.0%.
During July, August and September 30, 2002, the Company made three (3) lump-sum
principal reductions of $100,000 each (or an aggregate of $300,000) to the
outstanding balance on this note. As of September 30, 2002, the Company owes
$650,000 on this note. Upon each lump-sum payment, the Company executed a
modification to the payment terms on the note.
At September 30, 2002, the note payment terms are as follows: payments of
interest only beginning July 28, 2003 through January 28, 2004. Thereafter,
starting on January 28, 2004, equal monthly payments of principal and interest
shall be due until June 28, 2007 which payments shall represent the amount
necessary to fully amortize the remaining principal balance of the note. The
monthly payments shall be recalculated at the time of any change in the
applicable interest rate. The note is secured by virtually all of the Company's
real and personal property. A portion of the proceeds from the financing were
used to pay the $550,000 required in the Settlement and Compromise Agreement.
F-32
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note J - Preferred Stock Transactions
In September and October 2001, the Company issued 222,600 shares of $5.00 Series
A Convertible Preferred Stock (Series A Preferred Stock) for total proceeds of
approximately $1,113,000 through an ongoing private placement. 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 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 2001, the Company's principal shareholder 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 February 2002, certain holders of the Series A Preferred Stock notified the
Company of their intent to exercise the conversion features on 1,749,320 issued
and outstanding shares of Series A Preferred Stock into 19,242,520 shares of
common stock. Due to the timing of the conversion in relation to the Company's
year-end and the first available date for such conversion, the effect of the
conversion exercise is reflected in the accompanying financial statements as if
the conversion had occurred on December 31, 2001.
In conjunction with the issuance of certain shares of the Series A Preferred
Stock, certain shares were issued with an equivalent per share value of common
stock below the ending quoted market price of the Company's common stock on the
issue date. 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 initial
eligible conversion date. Approximately $392,114 was amortized to operations and
the unamortized balance was reclassified to additional paid-in capital on
December 31, 2001 as a result of the February 2002 conversion exercise.
Note K - Common Stock Transactions
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
F-33
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
In March and May 2001, the Company issued an aggregate 496,200 post-reverse
split shares (165,400 pre-forward split shares) of common stock, pursuant to a
Registration Statement on Form SB-2, to various individuals providing
investment, financial and acquisition consulting services to the Company. These
transactions were cumulatively valued at approximately $165,400, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In September 2001, the Company issued 2,625,000 post-reverse split shares
(875,000 pre-forward split shares) of common stock, pursuant to a Registration
Statement on Form SB-2, to six individuals providing investment and financial
consulting services to the Company. These transactions were cumulatively valued
at approximately $875,000, which approximates the "fair value" of the services
provided. These amounts are charged to operations in the accompanying
pre-acquisition consolidated financial statements.
In September 2001, the Company issued an aggregate 21,000,000 post-forward split
shares of restricted, unregistered common stock to the shareholders of F&F
Equipment, Inc. in exchange for 100.0% of the issued and outstanding stock of
F&F Equipment, Inc. F&F Equipment, Inc. became a wholly-owned subsidiary of the
Company as a result of this transaction.
In December 2001, the Company issued 222,222 shares of post-forward split shares
of restricted, unregistered common stock to an unrelated entity in exchange for
the cancellation of $100,000 of short-term debt. On February 27, 2002, the
Company issued an additional 277,777 shares of restricted, unregistered common
stock in payment for $100,000 in short-term debt payable and $25,000 in
agreed-upon interest payable to a shareholder, thereby satisfying all
outstanding short-term debt in full.
In December 2001, the Company issued 535,272 shares of restricted, unregistered
common stock to a creditor in settlement of approximately $242,872 in open trade
accounts payable.
In February 2002, the Company converted $125,000 in short-term debt payable to
an existing shareholder and accrued interest of approximately $24,000 into
277,778 shares of restricted, unregistered common stock. This transaction was
consummated at a price of $0.45 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of the respective transaction.
In March 2002, in two separate transactions, the Company sold an aggregate
1,388,890 shares of restricted, unregistered common stock to two separate
investors for aggregate proceeds of approximately $500,000. Each sale was made
at a price of $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of each respective transaction.
In March 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to a member of the Company's Board of Directors for consulting
services related to the Company's reverse merger transaction and for various
marketing services. This transaction was valued at approximately $11,520, or
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction.
F-34
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
In March 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $15,000, or $0.36 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to three creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction.
In June 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to an existing shareholder to reimburse said shareholder for the
payment of legal fees associated with the bank related litigation concluded in
June 2001 and related consulting services. This transaction was valued at
approximately $125,000, or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of the respective transaction.
In June 2002, the Company sold 277,778 shares of restricted, unregistered common
stock to an investor for aggregate proceeds of approximately $100,000. This sale
was made at a price of $0.36 per share, which approximates the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction.
In July 2002, the Company sold 384,615 shares of restricted, unregistered common
stock to an existing shareholder for cash proceeds of approximately $100,000.
This sale was made at a price of $0.26 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
In August 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of $100,000. This sale
was made at a price of $0.26 per share, which was below the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The
differential between the discounted "fair value" (approximately $0.29 per share)
and the selling price resulted in a charge to operations of approximately
$11,346 for compensation expense related to common stock issuances at less than
"fair value".
In August 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.36 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
F-35
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
Note L - Related Party Transactions
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 $5,410, inclusive of applicable
sales taxes. Further, the Company is responsible for all utilities and
maintenance expenses. The lease expires on October 31, 2003 and contains a
clause that the lease may be renewed for an additional ten year period upon
written notification to the lessor no later than 120 days prior to the scheduled
expiration date at a rental rate based upon the fair value for similar space in
a similar location.
Note M - Income Taxes
The components of income tax (benefit) expense for the nine months ended
September 30, 2002 and 2001, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
--------------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of September 30, 2002, the Company has a net operating loss carryforward of
approximately $3,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward will begin to expire in 2003. The
amount and availability of the net operating loss carryforwards may be subject
to limitations set forth by the Internal Revenue Code. Factors such as the
number of shares ultimately issued within a three year look-back period; whether
there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
F-36
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note M - Income Taxes - Continued
The Company's income tax expense (benefit) for the nine months ended September
30, 2002 and 2001, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
------------------------------
Statutory rate applied to income before income taxes $(350,000) $(142,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 350,000 142,000
--------- ---------
Income tax expense $ - $ -
========= =========
Temporary differences, consisting primarily of 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 September 30, 2002 and 2001, respectively:
September 30, September 30,
2002 2001
------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 2,150,000 $ 1,375,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (280,000)
------------- ------------
1,900,000 1,095,000
Less valuation allowance (1,900,000) (1,095,000)
------------- ------------
Net Deferred Tax Asset $ - $ -
============= ============
During the nine months ended September 30, 2002 and 2001, respectively, the
valuation allowance increased (decreased) by approximately $950,000 and
$145,000.
Note N - Significant Customers
During the years ended December 31, 2001 and 2000, respectively, the Company had
a single customer responsible for approximately 51% and 32% of total sales.
There were no other customers responsible for more than 10.0% of total net sales
during 2001 and 2000, respectively. These trends were also in place at September
30, 2002 and 2001, respectively, and are anticipated to continue for the
foreseeable future.
(Remainder of this page left blank intentionally)
F-37
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note O - Subsequent Event
On October 4, 2002, the Company issued an 8.0% Convertible Debenture (Debenture)
in the face amount of $250,000 and a Warrant which requires the Holder to
purchase shares of common stock equal to ten (10) times the number of shares of
common stock issued to the Holder on conversion of the Debenture. In no event
shall the number of shares issued under the Warrant exceed 30,000,000.
The Debenture bears interest at 8.0% and matures two years from the date of
issuance. The Debenture is convertible into common stock, at the option of the
Holder, at the lesser of $1.00 per share or 80.0% of the average of the 5 lowest
volume weighted average price days during the 20 trading days before, but not
including the date of the Holder's election to convert. The Warrant is
exercisable at the same price.
The full principal amount of the Debenture is due upon default, as defined in
the Debenture agreement. The Debenture interest is payable monthly in arrears
commencing on November 15, 2002.
The Company is obligated to file a Registration Statement under the Securities
Act of 1933 to register the underlying conversion shares on either Form SB-2 or
S-3 and have said Registration Statement effective no later than 120 days after
October 4, 2002. Further, the Holder has agreed to convert not less than 5.0%
and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to exercise warrants and purchase shares of common stock
equal to ten (10) times the number of shares of common stock issued to the
Holder on conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to convert
the Debenture or exercise their warrants and receive shares of the Company's
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
The Holder may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, the
Company is also obligated to issue to the Holder 25,000 shares of common stock
and $10,000 cash for each 30 day period, or portion thereof, during which the
face amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
If the Holder does not elect to accelerate the Debenture, the Company shall
immediately issue and pay to the Holder 25,000 shares of common stock and
$10,000 cash for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
Concurrent with the execution of the Debenture agreement, the Company executed
an engagement letter with the Holder's counsel for legal representation with
regard to the preparation of the aforementioned Registration Statement under the
Securities Act of 1933.
F-38
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you
with information different from the information contained in
this prospectus. This document may only be used where it is
legal to sell the securities. The information in this
document may only be accurate on the date of this document. UP TO 18,546,517 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 3
Use Of Proceeds 7 American Ammunition, Inc.
Market For Common Equity And
Related Stockholder Matters 8 3545 NW 71st
Management's Discussion And Miami, FL 33147
Analysis Or Plan Of Operation 9
Business 15
Management 21
Certain Relationships And
Related Transactions 24
Security Ownership
Of Certain Beneficial Owners
And Management 25 ________________
Description Of Securities 26
Plan Of Distribution 29 PROSPECTUS
Selling stockholders 33 ________________
Legal Matters 35
Experts 35
Available Information 36
Index To Financial Statements 37 October __, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
CERTAIN PROVISIONS OF CALIFORNIA LAW AND OF THE
COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
Under California law, a corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that the person is or was
an agent of the corporation, against expenses, judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with the
proceeding if that person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct of
the person was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in the best
interests of the corporation or that the person had reasonable cause to believe
that the person's conduct was unlawful.
Further under California law, corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that the person is or
was an agent of the corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action if the person acted in good faith, in a manner the person believed to be
in the best interests of the corporation and its shareholders.
However, no indemnification shall be made for any of the following:
(1) In respect of any claim, issue or matter as to which the person shall have
been adjudged to be liable to the corporation in the performance of that
person's duty to the corporation and its shareholders, unless and only to the
extent that the court in which the proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine;
(2) Of amounts paid in settling or otherwise disposing of a pending action
without court approval; or
(3) Of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
To the extent that an agent of a corporation has been successful on the
merits in defense of any proceeding referred to above or in defense of any
claim, issue, or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
However, any indemnification shall be made by the corporation only if
authorized in the specific case, upon a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set out in the statute by any of the following:
(1) A majority vote of a quorum consisting of directors who are not parties to
such proceeding;
(2) If such a quorum of directors is not obtainable, by independent legal
counsel in a written opinion;
(3) Approval of the shareholders (Section 153), with the shares owned by the
person to be indemnified not being entitled to vote thereon; or
II - 1
(4) The court in which the proceeding is or was pending upon application made by
the corporation or the agent or the attorney or other person rendering services
in connection with the defense, whether or not the application by the agent,
attorney or other person is opposed by the corporation.
Expenses incurred in defending any proceeding may be advanced by the
corporation prior to the final disposition of the proceeding upon receipt of an
undertaking by or on behalf of the agent to repay that amount if it shall be
determined ultimately that the agent is not entitled to be indemnified as
authorized in this section. The provisions of subdivision (a) of Section 315 do
not apply to advances made pursuant to this subdivision.
The indemnification authorized by this section is not exclusive of any
additional rights to indemnification for breach of duty to the corporation and
its shareholders while acting in the capacity of a director or officer of the
corporation to the extent the additional rights to indemnification are
authorized in an article provision adopted pursuant to paragraph (11) of
subdivision (a) of Section 204. The indemnification provided by this section for
acts, omissions, or transactions while acting in the capacity of, or while
serving as, a director or officer of the corporation but not involving breach of
duty to the corporation and its shareholders is not exclusive of any other
rights to which those seeking indemnification may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, to the
extent the additional rights to indemnification are authorized in the articles
of the corporation. An article provision authorizing indemnification "in excess
of that otherwise permitted by Section 317" or "to the fullest extent
permissible under California law" or the substantial equivalent thereof shall be
construed to be both a provision for additional indemnification for breach of
duty to the corporation and its shareholders as referred to in, and with the
limitations required by, paragraph (11) of subdivision (a) of Section 204 and a
provision for additional indemnification as referred to in the second sentence
of this subdivision. The rights to indemnity hereunder shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.
Nothing contained in this section shall affect any right to indemnification to
which persons other than the directors and officers may be entitled by contract
or otherwise.
No indemnification or advance shall be made under this section in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles, bylaws, a
resolution of the shareholders, or an agreement in effect at the time of the
accrual of the alleged cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid, which prohibits or otherwise
limits indemnification.
(2) That it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
II-2
A corporation shall have power to purchase and maintain insurance on behalf
of any agent of the corporation against any liability asserted against or
incurred by the agent in that capacity or arising out of the agent's status as
such whether or not the corporation would have the power to indemnify the agent
against that liability under this section. The fact that a corporation owns all
or a portion of the shares of the company issuing a policy of insurance shall
not render this subdivision inapplicable if either of the following conditions
are satisfied:
(1) if the articles authorize indemnification in excess of that authorized in
this section and the insurance provided by this subdivision is limited as
indemnification is required to be limited by paragraph (11) of subdivision (a)
of Section 204; or
(2) (A) the company issuing the insurance policy is organized, licensed, and
operated in a manner that complies with the insurance laws and regulations
applicable to its jurisdiction of organization,
(B) the company issuing the policy provides procedures for processing
claims that do not permit that company to be subject to the direct control of
the corporation that purchased that policy, and
(C) the policy issued provides for some manner of risk sharing between the
issuer and purchaser of the policy, on one hand, and some unaffiliated person or
persons, on the other, such as by providing for more than one unaffiliated owner
of the company issuing the policy or by providing that a portion of the coverage
furnished will be obtained from some unaffiliated insurer or reinsurer.
This section does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though the person may also be an agent as
defined in subdivision (a) of the employer corporation. A corporation shall have
power to indemnify such a trustee, investment manager, or other fiduciary to the
extent permitted by subdivision (f) of Section 207.
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify its directors to the fullest extent permitted by California law. The
specific provisions of the Articles of Incorporation of the Registrant with
respect to the indemnification of directors and officers are as follows:
"FOURTH: The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law."
The specific provisions of the Bylaws of the Registrant with respect to the
indemnification of directors and officers are as follows:
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ARTICLE XI INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify each of its directors and officers who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful.
Except as provided hereinbelow, any such indemnification shall be made by
the Corporation only as authorized in the specific case upon determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth above. Such
determination shall be made: (a) by the Board of Directors by a majority vote of
a quorum of directors; or (b) by the shareholders.
Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
the final disposition of such action or proceeding if authorized by the Board of
Directors and upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation.
To the extent that a director or officer has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to above, or
in defense of any claim issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith without any further determination that he has met the
applicable standard of conduct set forth above."
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers
or persons controlling American Ammunition pursuant to the foregoing provisions,
or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
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Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
Nature of Expense Amount
--------------
--------------
SEC Registration fee $1,270.18*
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
TOTAL $46,270.18*
===========
* Estimated.
Item 26. Recent Sales of Unregistered Securities.
Within the past three years, the Registrant sold securities without registration
under the Securities Act of 1933, as amended (the "Act") as follows:
SECURITIES NAMES OF CONSIDERATION EXEMPTION
SOLD INVESTORS RECEIVED FROM REGISTRATION
--------------- ----------------- ---------------------- ---------------------------
1,810,000 shares of Three (3) individuals $ 1,810 Section 4(2) of the Act
Common Stock (1)
140,000 shares of Two (2) individuals $ 140 Section 4(2) of the Act
Common Stock (2)
124,4000 (pre-acquisition) See footnote $ 125 Section 4(2) of the Act
916,000 (post acquisition) (3) $ 916 Section 4(2) of the Act
Common stock
21,000,000 Shares Nineteen (19) $ 3,998,650 Section 4(2) of the Act
of Common Stock individuals pursuant and Regulation D, Rule
to Share Exchange 506
(4)
222,600 Shares of Seven (7) individuals $ 1,113,000 Section 4(2) of the Act
$5.00 Series A (5) and Regulation D, Rule
Convertible Preferred 506
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2,000 Shares of One (1) individual $ 10,000 Section 4(2) of the Act
$5.00 Series A (6)
Convertible Preferred
1,510,720 Shares of One (1) individual $ 7,553,600 Section 4(2) of the Act and
$5.00 Series A (7) Regulation D, Rule 506
Convertible Preferred
10% Senior One (1) company $ 135,000 Section 4(2) of the Act and
Convertible (8) Regulation D, Rule 506
Promissory Note
for $135,000
Option to Purchase One (1) company $ 15,000 Section 4(2) of the Act and
10% Senior (8) Regulation D, Rule 506
Convertible Promissory
Notes for up to $3,354,000
-----------------------------
(1) On February 1, 2000, a total of 805,000 shares of Common Stock were issued
to Artem Gotov in exchange for services valued at $805 and as founders shares,
805,000 shares of Common Stock were issued to Agata Gotov, the sister of Artem
Gotov in exchange for services valued at $805 and as founder shares, and 200,000
shares of Common Stock were issued to Kenneth G. Eade in exchange for legal
services valued at $200. Each of Mr. Gotov, Ms. Gotov and Mr. Eade, as the
husband of Ms. Gotov, may be deemed a promoter of the Company. The Company
claimed an exemption under the Securities Act of 1933, pursuant to Section 4(2)
of the Act. Mr. Gotov and Ms. Gotov were both Officers and Directors of the
Company, while Mr. Eade is a sophisticated and accredited investor.
(2) In June 2001, a total of 70,000 shares of Common Stock were issued to
Jeffrey Volpe in exchange for clerical services rendered valued at $70 and
70,000 shares of Common Stock were issued to Richard Tearle in exchange for
Internet web services valued at $70.. The Company claimed an exemption under the
Securities Act of 1933, pursuant to Section 4(2) of the Act. Both Mr. Volpe and
Mr. Tearle had access to all corporate information and both were sophisticated
investors.
(3) In 2001, a total of 284,600 shares (pre-acquisition) and 916,000 shares
(pre-forward split and post acquisition) to various consultants in exchange for
services rendered to the Company. The Company claimed an exemption under Section
4(2) of the Act and Regulation D, Rule 506 promulgated thereunder.
(4) In September 2001 the Company issued 21,000,000 shares of its Common Stock
to nineteen (19) shareholders of F.&F. Equipment, Inc. d/b/a American
Ammunition, ("AA") pursuant to a Share Exchange Agreement. The shares were
valued at $3,998,650. The transaction resulted in AA becoming a wholly owned
subsidiary of the Company in a transaction that was treated as a reverse merger
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for accounting purposes. Of such shares, the current officers and directors of
the Company were issued a total of 15,750,000 shares and 1,050,000 were issued
to Donald F. Mintmire, sole owner of the firm of Mintmire & Associates. For such
offering the Company relied on Section 4(2) of the Act and Regulation D, Rule
506 promulgated thereunder.
(5) In September and October 2001 the Company issued 222,600 shares of $5.00
Series A Convertible Preferred Stock valued at $1,113,000 through an ongoing
private placement. For such offering, the Company relied on Section 4(2) of the
Act and Regulation D, Rule 506 promulgated thereunder. All such sales were to
accredited investors. Of such shares, the Robert I. Escobio Family Trust
acquired 2,000 shares. Mr. Escobio is a Director of the Company.
(6) In September 2001, a creditor, Key Packaging Company, agreed to converted
$10,000 of debt due from the Company into 2,000 shares of $5.00 Series A
Convertible Preferred stock. For such offering the Company relied on Section
4(2) of the Act and Regulation D, Rule 506 promulgated thereunder.
(7) In September 2001, a principal shareholder, Andres Fernandez, converted
$7,553,600 of unsecured debt due to him by the Company into 1,510,720 shares of
$5.00 Series A Convertible Preferred Stock. Mr. Fernandez is an Officer and
Director of the Company and is an accredited investor. The Company relied on
Section 4(2) of the Act and Regulation D, Rule 506 promulgated thereunder.
(8) On November 5, 2001, the Company entered into an agreement with the
Placement Agreements in connection with the offering of the Notes. In
conjunction with such agreement, the Company received a payment in the amount of
$15,000.00 from Argo for the Option, which provided Argo with the right to
purchase up to $3,500,000.00 of the Notes to be offered by the Company and
simultaneously, Argo purchased $135,000.00 of such Notes. For such transaction
the Company relied on Section 4(2) of the Act and Regulation D, Rule 506
promulgated thereunder. These notes have been redeemed and are not currently
outstanding.
On February 27, 2002, the Company issued an aggregate 277,777 shares of
restricted, unregistered common stock, at $0.45 per share, to Forus Investments,
Inc., an existing shareholder, in satisfaction of a $100,000 short-term working
capital loan payable and $25,000 in agreed-upon interest payable to a
shareholder, thereby satisfying all outstanding short-term debt in full. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction.
On March 25, 2002, the Company sold 611,110 shares of restricted, unregistered
common stock, at $0.36 per share, to Kissimmul, Inc., a Toronto, Ontario, Canada
corporation, for gross proceeds of approximately $220,000. The valuation of this
transaction was based on the discounted "fair value" of the Company's common
stock based upon the quoted closing price on the date of the transaction. The
Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for
an exemption from registration on these shares.
On March 28, 2002, the Company sold 777,775 shares of restricted, unregistered
common stock, at $0.36 per share, to Tomina Associates, Ltd., a Vancouver, B.
C., Canada corporation, for gross proceeds of approximately $280,000. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction. The Company relied upon Section 4(2) of The Securities Act of 1933,
as amended, for an exemption from registration on these shares.
On March 5, 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to Len Hale, amember of the Company's Board of Directors, for
II-7
consulting services related to the Company's reverse merger transaction and for
various marketing services. This transaction was valued at approximately
$11,520, or $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of the respective transaction.
On March 5, 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to D. P. Martin & Associates, an unrelated party for shareholder
and other public relation services. This transaction was valued at approximately
$15,000, or $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of the respective transaction.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to Ammunition Accessories, Inc., Saunders
Lead Co. and Airco Plating Co., three unrelated trade creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction.
On June 21, 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to Access Investments, Inc., an existing shareholder, to reimburse
said shareholder for the payment of legal fees associated with the bank related
litigation concluded in June 2001 and related consulting services. This
transaction was valued at approximately $125,000, or $0.36 per share, which
approximates the discounted "fair value" of the Company's common stock based on
the quoted closing price of the Company's common stock on the date of the
respective transaction.
On June 26, 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to Gala Investments, an unrelated investor, for aggregate proceeds
of approximately $100,000. This sale was made at a price of $0.36 per share,
which approximates the discounted "fair value" of the Company's common stock
based on the quoted closing price of the Company's common stock on the date of
the respective transaction.
On July 25, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of approximately $100,000. This sale was made at a price of $0.26 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank.
On August 14, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of $100,000. This sale was made at a price of $0.26 per share, which
was below the discounted "fair value" of the Company's common stock based on the
quoted closing price of the Company's common stock on the date of the respective
II-8
transaction. The differential between the discounted "fair value" (approximately
$0.29 per share) and the selling price resulted in a charge to operations of
approximately $11,346 for compensation expense related to common stock issuances
at less than "fair value". The proceeds were used to reduce the Company's
outstanding balance on a long-term note payable to a bank.
On August 21, 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds were used to retire trade accounts payable to a New
Mexico law firm for legal services rendered to the Company.
On September 20, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank.
On September 26, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.26 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to provide
working capital liquidity for future periods.
In October 2002, we signed a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. for the sale of a $250,000 8% convertible debenture and a
warrant to purchase up 30,000,000 shares of our common stock. The debenture
bears interest at 8%, mature on two years from the date of issuance, and is
convertible into our common stock, at the selling stockholder' option, at the
lesser of (i) $1.00 or (ii) 80% of the average of the five lowest volume
weighted average price days during the 20 trading days before but not including
the conversion date. The warrant may only be exercised concurrently with a
conversion of the debenture and then only for that number of shares of common
stock equal to ten (10) times the number of shares common stock issued to the
denture holder on that conversion date. The exercise price of the warrant is the
lesser of (i) $1.00; or (ii) 80% of the average of the five lowest volume
weighted average price during the twenty (20) trading days prior to the holder's
election to convert. See the "Selling Stockholders" section for a description of
the convertible debenture and warrant issued to the La Jolla Cove Investors,
Inc.
II-9
All of the above offerings and sales were deemed to be exempt under Rule
506 of Regulation D and Section 4(2) of the Securities Act. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors, business associates of American Ammunition or executive officers of
American Ammunition, and transfer was restricted by American Ammunition in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
Item 27. Exhibits.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean American Ammunition, Inc., a Nevada
corporation.
Exhibit No. Description
PLAN OF ACQUISITION, REORGANIZATION, OR SUCCESSION
2.1 Share Exchange Agreement Between FBI Fresh Burgers International and F&F
Equipment, Inc., dated September 29, 2001 (Incorporated by referenced to
our Form 8-K filed with the SEC on October 4, 2001).
ARTICLES OF INCORPORATION AND BYLAWS
3.1 Articles of Incorporation (Incorporated by reference to our registration
statement on Form SB-2 filed with the SEC on September 20, 2000, File No.
333-4660).
3.2 Certificate of Amendment of Articles of Incorporation
(Incorporated by referenced to our Form 8-K filed with the SEC on October 4, 2001).
3.4 Certificate of Amendment of Articles of Incorporation (Incorporated by
reference to our registration statement on Form SB-2 filed with the SEC on
September 20, 2000, File No. 333-4660).
3.5 Amended and Restated Bylaws (Incorporated by reference to our Form 10QSB for the
quarter ended September 30, 2001).
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
4.1 Common Stock Purchase Warrant with La Jolla Cove Investors, Inc., dated
October 4, 2002.
4.2 Convertible Debenture with La Jolla Cove Investors, Inc., dated October 4, 2002.
4.3 Addendum with La Jolla Cove Investors, Inc., dated October 4, 2002
4.4 Letter Agreement with La Jolla Cove Investors, dated October 4, 2002
4.5 Registration Rights Agreement with La Jolla Cove Investors, dated October 4, 2002
OPINION REGARDING LEGALITY
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed herewith).
CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of accountants (filed herewith).
23.2 Consent of legal counsel (see Exhibit 5).
II-11
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Miami,
State of Florida, on October 23, 2002.
AMERICAN AMMUNITION, INC.
By: /s/ Andres F. Fernandez
----------------------------
Andres F. Fernandez, President and CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
/s/ J.A. Fernandez, Sr.
------------------------------------ Chairman of the Board and Director of October 23, 2002
J.A. Fernandez, Sr. Sales
/s/ Andres F. Fernandez
------------------------------------ President, Chief Executive Officer and October 23, 2002
Andres F. Fernandez Chief Financial Officer
/s/ Emilio D. Jara
------------------------------------ Vice-President of Operations, Secretary October 23, 2002
Emilio D. Jara and Director
/s/ Amelia Fernandez
------------------------------------ Vice-President and Director October 23, 2002
Amelia Fernandez
/s/ Maria A. Fernandez
------------------------------------ Director October 23, 2002
Maria A. Fernandez
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