As filed with the Securities and Exchange Commission on April 1, 2003 An Exhibit
List can be found on page II-5. Registration No. 333-102366
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
AMENDMENT NO. 1
TO THE
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 (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
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. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
======================================= =============== ================== ================== ==============
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 12,187,500(3) $0.40 $4,875,000.00 $448.50
Shares of common stock, $.001 par value 2,500,000(4) $0.40 $1,000,000.00 $ 92.00
Total 14,687,500 $5,875,000.00 $540.50*
======================================= =============== ================== ================== ==============
(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 December 27, 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.
ii
PRELIMINARY PROSPECTUS Subject To Completion, Dated Apri1 1, 2003
The information in this prospectus is not complete and may be changed.
American Ammunition, Inc.
14,687,500 Shares of
Common Stock
This prospectus relates to the resale by the selling stockholder of 14,687,500
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 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 March 28, 2003, was $.72.
Investing in these securities involves significant risks. Investors should not
buy these securities unless they can afford to lose their entire investment.
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 April 1, 2003.
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.
iii
PROSPECTUS SUMMARY
The following summary highlights material 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.
We have incurred losses and experienced negative operating cash flow since our
formation. For our fiscal years ended December 31, 2002 and 2001, we had a net
loss of ($1,883,087) and ($3,216,577), respectively. We expect to continue to
incur significant operating expenses as we maintain our current line of
ammunitions and continue research and development toward improving projectile
quality and performance. Our operating expenses have been and are expected to
continue to outpace revenues and result in significant losses in the near term.
We may never be able to reduce these losses, which will require us to seek
additional debt or equity financing.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400. We are incorporated in
the State of California.
The Offering
Common stock offered by selling stockholders ........................... Up to 14,687,500 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
the shares underlying the warrants) and the full exercise of the
warrants. This number represents 20.44% of
our current outstanding stock.
Common stock to be outstanding after the offering....................... Up to 71,859,858 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 57,172,358 shares of common stock outstanding as of March
28, 2003 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. We have summarized all of the
material risks in this section. 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 may never become profitable and continue as a going concern because we have
had losses since our inception.
We may never become profitable and continue as a going concern because we have
incurred losses and experienced negative operating cash flow since our
formation. For our fiscal years ended December 31, 2002 and 2001, we had a net
loss of ($1,883,087) and ($3,216,577), respectively. We expect to continue to
incur significant operating expenses as we maintain our current line of
ammunitions and continue research and development toward improving projectile
quality and performance. Our operating expenses have been and are expected to
continue to outpace revenues and result in significant losses in the near term.
We may never be able to reduce these losses, which will require us to seek
additional debt or equity financing. If such financing is available you may
experience significant additional dilution.
There may exist an uncertainty as to our continuation as a going concern.
Our audited financial statements for the fiscal year ended December 31, 2002
reflect an accumulated deficit of approximately ($13,660,718), since our
inception, working capital of approximately $56,130, and stockholders' equity of
$2,917,774.
Our auditor has not issued a going concern opinion on our financial statements;
however, our ultimate survivability is dependent upon our being able to generate
sufficient cash flows from operations to support its daily operations as well as
provide sufficient resources to retire existing liabilities and obligations on a
timely basis.
We anticipate needing approximately $2,500,000 to fund our operations through
2003. If we continue to incur operating losses, we may not be able to fund
continuing business operations, which could lead to the limitation or closure of
some or all of our operations."
We may have to curtail our business if we cannot find adequate funding.
We currently have no legally binding commitments with any third parties to
obtain any material amount of additional equity or debt financing. We need
immediate funds and may not be able to obtain any additional financing in the
amounts or at the times that we may require the financing or, if we do obtain
any financing, that it would be on acceptable terms because of the following:
- we have no assets to pledge as security for the loan
- we are in poor financial condition
- we maybe viewed as a high market risk
As a result, we may not have adequate capital to implement future expansions,
maintain our current levels of operation or to pursue strategic acquisitions.
Our failure to obtain sufficient additional financing could result in the delay
or abandonment of some or all of our development, expansion and expenditures,
which could harm our business and the value of our common stock.
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunitions.
3
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunitions. Our future success will depend
significantly on our ability to develop and market new products that keep pace
with technological developments and evolving industry standards for hand gun and
rifle ammunition. Our delay or failure to develop or acquire technological
improvements, adapt our products to technological changes or provide higher
quality product lines that appeals to our customers may cause us to lose
customers and may prevent us from generating revenue which could ultimately
cause us to cease operations.
Our revenues may decrease from production delays due to fire or explosive
incidents.
Our revenues may decrease from production delays due to fire or explosive
incidents. Our ammunition products, involve the manufacture and/or handling of a
variety of explosive and flammable materials. This manufacturing and/or handling
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.
Our revenue could decline significantly if we lose Ellet Brothers, Inc., a
customer, because it accounted for 42% of our sales in 2002.
Our revenue could decline significantly if we lose Ellet Brothers, Inc., a
customer, because it accounted for 42% of our sales in 2002. American Ammunition
currently has agreements with 19 national distributors throughout the United
States to diversify its sales base. Ellett Brothers, Inc. accounted for 42% and
51% of our total sales for fiscal year 2002 and 2001, respectively. One other
customer accounted for 22.8% of our sales in 2002. There were no other customers
responsible for more than 10% of our sales during 2002. Although, we plan to
continue to aggressively pursue new customers through promotions, advertising
and trade shows, we may not 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.
Our business operations will be harmed if we are unable to obtain additional
funding.
4
Our business operations will be harmed if we are unable to obtain additional
funding. 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 2003. 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.
Our competitors may misappropriate our intellectual property because we have
only one trademark and one patent pending.
We attempt to protect our limited proprietary property through trademark, trade
secret, nondisclosure and confidentiality measures. Such protections, however,
may not preclude competitors from developing similar technologies. Any inability
to adequately protect our proprietary technology could harm our ability to
compete.
Our future success and ability to compete depends in part upon our proprietary
technology and our trademark, which we attempt to protect with a combination of
trademark and confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and are time-consuming and expensive
to obtain and/or maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property.
Risks Relating To Our Current Financing Agreement:
The market price of our common stock may decline because 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.
5
The market price of our common stock may decline because 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. As of December 27, 2002, we had 54,114,560 shares of common stock issued
and outstanding and convertible debentures outstanding that may be converted
into an estimated 6,093,750 shares of common stock at current market prices, and
outstanding options and warrants to purchase up to 2,500,000 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 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, based on market prices 25%, 50% and 75% below the average high and
low market price on March 28, 2003 of $0.60.
With Number of Shares Percentage of
% Below Market Price Per Share Discount of 20% Issuable Outstanding Stock
-------------- --------------- --------------- --------------- -----------------
25% $.45 $.36 5,138,888 8.3%
50% $.30 $.24 8,958,333 13.6%
75% $.15 $.12 20,416,666 26.3%
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
6
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.
The continuously adjustable conversion price feature of our convertible
debentures may encourage investors to make short sales in our common stock,
which could have a depressive effect on the price of our common stock.
The convertible debentures are convertible into shares of our common stock at a
20% discount to the trading price of the common stock prior to the conversion.
The significant downward pressure on the price of the common stock as the
selling stockholder converts and sells material amounts of common stock could
encourage short sales by investors. This could place further downward pressure
on the price of the common stock. The selling stockholder could sell common
stock into the market in anticipation of covering the short sale by converting
their securities, which could cause the further downward pressure on the stock
price. In addition, not only the sale of shares issued upon conversion or
exercise of debentures, warrants and options, but also the mere perception that
these sales could occur, may lower the market price of the common stock.
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 54.21% 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 March 31, 2003, our executive officers, directors and affiliated persons
beneficially own approximately 54.21% of our common stock. The Fernandez family,
which operates our company, beneficially owns an aggregate of
7
approximately 53.77% 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.
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
8
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.
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 .39 .50
2003
First Quarter* .53 .78
*(as of March 28, 2003)
Holders
As of March 28, 2003, we had approximately 112 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Information
Certain statements contained in this Registration Statement including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Registration Statement and investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
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,
10
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.
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 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
significant increases in direct labor, payroll taxes and other related expenses
during 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
Year ended December 31, 2002 compared with the year ended December 31, 2001.
During the year ended December 31, 2002, we experienced aggregate net revenues
of approximately $1,409,000 as compared to approximately $428,000 for the year
ended December 31, 2001. The 2002 levels compare favorably to the 2000 revenue
levels of approximately $1,716,000.
We experienced costs of goods sold of approximately $2,457,000 for the year
ended December 31, 2002 as compared to approximately $1,385,000 for the year
ended December 31, 2001. We experience variable costs in the area of material
consumption and direct labor. We have recognized depreciation expense on
production equipment of approximately $653,000 and $629,000, respectively, in
the above cost of goods expense totals.
These depreciation levels are anticipated to remain fairly constant for future
periods as management does not anticipate any significant capital equipment
acquisitions in future periods. Further, the addition of the Industrial Plating
Enterprise Co. equipment allows us to produce certain components which were
previously outsourced to unrelated third parties.
11
For the year ended December 31, 2002 and 2001, respectively, we have generated a
negative gross profit of approximately $(1,047,000), or (74.31%), and
approximately $(957,000), or (223.84%). We anticipate that with continued demand
for our product, lower production costs being experienced from internally
generated plating activities and adequate liquidity, it will be able to generate
a positive gross profit in future periods. Further, based on production cost
information developed during the 4th quarter of 2002, management has developed a
new model for the pricing of its products to its customers. It is anticipated
that this model will allow management to better manage expense levels, control
labor costs and maximize revenue opportunities.
We experienced nominal research and development expenses of approximately $3,700
and $4,000, respectively, during the years ended December 31, 2002 and 2001,
principally related to the expansion of our product line to add a .223 caliber
round and the evolving 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 $845,000 for the year ended December 31, 2002 as compared to
approximately $1,806,433 for the year ended December 31, 2001. The most
significant reductions came in interest expense as a result of settling all
litigation with the Company's former lending institution, savings in the areas
of legal and professional fees and other general and administrative fees.
Included in our results of operations for both 2002 and 2001 are various
non-cash expenditure charges. During 2002, we experienced charges to operations
of approximately $11,500 for compensation expense related to common stock
issuances at less than "fair value". The calculation of these charges result
from our issuing common stock for either cash or services at valuations below
the closing quoted market price of our common stock (as discounted, as
applicable) and either the cash received or the value of the services provided
to us by third parties. During 2001, we experienced a charge of approximately
$1,208,000 for the amortization of the Beneficial Conversion Feature Discount on
our Preferred Stock. This charge results from the difference between the closing
quoted market price on our common stock and the equivalent converted price of
our Mandatory Convertible Preferred Stock which was sold and converted during
2001.
We recognized a net loss of approximately $(1,883,000) and $(3,216,577) for the
respective years ended December 31, 2002 and 2001, respectively, or $(0.04) and
$(0.11) per share.
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.
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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%) for
the year ended December 31, 2000. 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 December 31, 2002 and 2001, respectively, we had working capital of
approximately $56,000 and $152,000. 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 $1,236,000 and
$1,100,000 during the years ended December 31, 2002 and 2001, respectively.
The most significant use of cash in operations during the year ended December
31, 2002 was the rebuilding of our operations after the problems encountered
during 2001 while we were in litigation with our former primary lending
institution. We further used cash in building up our inventory in anticipation
of Calendar 2003 orders as communicated to us by our customer base.
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We experience relatively consistent expenditure levels for executive and
administrative compensation, interest expense and depreciation expense. During
the third quarter of 2001, we renegotiated our working capital note in the
principal amount of $950,000. This note bears interest at the Wall Street
Journal published prime rate plus 2.0%. During 2002, we reduced the outstanding
principal on five (5) separate occasions to a balance of approximately $450,000.
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
December 31, 2002, we owe $450,000 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.
On February 28 and March 20, 2003, we made additional principal reductions of
$100,000 and $350,000, respectively, fully retiring the outstanding debt.
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 year ended December 31, 2002, we added approximately $387,000 in new
equipment, of which approximately $225,000 was acquired 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 resulted in cost savings to us and improve
turnaround time on this process.
Depending on future demand for our products, we may develop plans to increase
our production capability in the foreseeable future by 50% to 100%, as
influenced by the availability of manufacturing equipment on the open market and
product sales demand. This expansion, when undertaken, will require additional
capital which is 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, we may
not be able to obtain additional funding or, that such funding, if available,
will not be obtained on terms favorable to or affordable by us.
Convertible Debenture
On October 4, 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
14
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.
We are obligated to file this 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.
La Jolla Cove Investors, Inc. (La Jolla) has contractually committed 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 concurrently exercise
warrants and purchase shares of common stock equal to ten (10) times the number
of shares of common stock issued to the Holder upon the respective mandatory
conversion of the Debenture.
La Jolla has further contractually agreed to restrict its ability to convert the
Debenture or exercise their warrants and receive shares of our 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 our common stock.
In the event an election to convert is made and the volume weighted average
price of our common stock is below $0.30 per share, we 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%.
La Jolla 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, we are
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 La Jolla does not elect to accelerate the Debenture, the Company shall
immediately issue and pay La Jolla 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.
Due to the contractually agreed mandatory conversion of this Debenture, we have
reflected this transaction in our balance sheet as a "mezzanine" level debt
obligation on its balance sheet, between "Total Liabilities" and "Shareholders'
Equity". Upon the respective mandatory conversion, we will relieve the
respective portion of the Debenture and the any related accrued, but unpaid
interest, and credit this amount to the respective "common stock" and
"additional paid-in capital" accounts in the shareholder's equity section for
the par value and excess amount over the par value of the respective shares
issued.
15
No value was assigned to the warrant issued to La Jolla. Upon exercise of the
warrant, we will record the issuance of the underlying shares as a new issuance
of common stock on the date of each respective exercise.
Research and Development
We plan on significantly increasing our spending on research and development
activities during Calendar 2003. 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.
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
16
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.
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 nineteen (19) national
distributors throughout the United States in order to diversify its customer
base. Ellet Brothers, Inc. accounted for 51% and 42% of the Company's total
sales for fiscal year 2001 and 2002 respectively. Exports accounted for 25% of
the Company's total sales for fiscal year 2002. The Company has exported its
products to South America, the Caribbean and the Middle East. The Company has
also entered into an "Assured Payment Program" with a National Buying Syndicate
which represents 200 members with 1200 retail locations, and has begun shipping
to them in the first quarter of 2003. The agreement with this National Buying
Syndicate guarantees payment to the Company from all of individual members of
the syndicate. The Company plans to continue to aggressively pursue new
customers through promotions, advertising and trade shows. It intends to solicit
original equipment manufacturer subcontract work from the three (3) major
manufacturers; seek additional means of commercial distribution; seek further
Department of Defense and law enforcement contracts; solicit further export
sales and increase its 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
17
"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 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 have been able to price our products competitively at a price lower than any
of the "big three" manufacturers, Remington, ATK, and Winchester. We capitalize
on the fact that the "big three" have very large corporate infrastructures and,
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
18
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.
Industrial Plating Enterprise Company
Industrial Plating Enterprise Company (IPE), a wholly owned subsidiary, is a
high volume "barrel plating" facility currently operating at approximately 30%
of its capacity. IPE is meeting all of the parent company's projectile plating
needs at this time. As the parent company's projectile plating requirement
grows, IPE will increase production to meet that need. IPE's innovative
hazardous materials and hazardous waste management and treatment system is fully
capable of meeting increased production requirements. IPE's management, intends
to explore adding additional metallization and coating processes to diversify
its services to the parent company as well as offering its services to other
industries with the eventual goal of generating revenue to the parent company.
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.
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.
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
The Company believes that research and development is an important factor in its
future growth. The small arms ammunition industry is closely linked to the
latest technological advances. Therefore, the Company must continually invest in
the technology to provide the best quality product to the public and to
effectively compete with other companies in the industry. No assurance can be
made that the Company will have sufficient funds to purchase technological
advances as they become available.
Patents, Copyrights and Trademarks
We intend to protect our original intellectual property with patents, copyrights
and/or trademarks as appropriate.
Our head stamp "A-MERC " was registered as a trademark on May 10,1994.
19
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.
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.
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Employees
At March 28, 2003, we employed 45 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.
The wholly owned subsidiary, Industrial Plating Enterprise Company (IPE), is
fully operational and filling the immediate needs of projectile plating for the
parent company. IPE is located in a 5,000 square foot facility operating under a
5 year lease agreement expiring in March 2007 that contains a clause that the
lease may be extended for an additional 5 years 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. The monthly cost varies between $1,700 and $1913.36
throughout the lease. IPE is in full compliance with all Local, State and
Federal regulations in its operations.
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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
------ --- ---------
J.A. Fernandez, Sr. 66 Chairman of the Board and Director of Sales
Andres F. Fernandez 37 President, Chief Executive Officer and Chief
Financial Officer
Emilio D. Jara 38 Vice-President of Operations, Secretary and
Director
Amelia Fernandez 66 Vice President and Director
Maria A. Fernandez 43 Director
Len Hale 58 Director
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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. He studied physics and
calculus at St. Thomas University, FL and at the University of Miami, FL. He is
a licensed pilot, having graduated from the American Institute of Aeronautics,
FL, and received his certificate as a private pilot (fixed wing) as well as
private helicopter (rotary)in 1989. In 1989, Mr. Fernandez graduated from the
Institute of Public Service (Pan Am), GA as a tactical rappel instructor. In
1990, he graduated from Omni Explosives, TN with a specialty in tactical
explosives. Mr. Fernandez was certified by the Florida Department of Law
Enforcement Academy in special operations/entry techniques in 1990. He has
served as a tactical advisor to U.S. Treasury Department, Bureau of Alcohol,
Tobacco, and Firearms, U.S. Customs Service, and the Florida Department of Law
Enforcement. He has received numerous commendations and letters of appreciation.
He also served on the Board of Veterans Affairs (Hialeah , FL) from 1990 to
1991. He is fluent in Spanish.
Emilio Jara, age 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. Mr. Jara is 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
22
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 our 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 has been the managing partner at
Fernandez Friedman Grossman & Kohn PLLC. since May 1998. Prior to that date, she
was a partner at Taustine Post Sotsky Berman Fineman & Kohn. She concentrates
her legal practice in the areas of estate planning, probate and administration.
She also practices in the areas of Medicaid and disability planning, corporate
and individual taxation and Corporate law, with an emphasis in closely held
corporations. She is a graduate of the University of Miami, FL (Bachelor of
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 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.
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, 2002, 2001, and 2000 exceeded
$100,000:
23
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards ($) (#)(1) ($) Compensation
-------------------- ------- --------- ------- ------------ ------------- ----------- ------------ --------------
Andres F.
Fernadez 2002 103,5080 0 0 0 0 0 0
2001 74,290 0 0 0 0 0 0
2000 88,438 0 0 0 0 0 0
No options were granted or exercised during our fiscal year ended December 31,
2002.
Directors and Committee Members did not receive compensation from us during the
fiscal year ending December 31, 2002.
During the fiscal year ending December 31, 2002, 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, 2002. No cash
bonuses were granted during fiscal year 2002. 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.
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 March 28, 2003 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 30,740,420 53.77% 42.78%
J. A. Fernandez, Sr., Chairman of the Board
and Director of Sales 30,740,420 53.77% 42.78%
Amelia C. Fernandez, Vice President and Director 30,740,420 53.77% 42.78%
Maria A. Fernandez, Director 30,740,420 53.77% 42.78%
Emilio D. Jara, Director 504,000 * *
Len C. Hale, Director 168,000 * *
Total securities held by officers
and directors as a group (6 people): 31,412,420 54.21% 54.21%
* 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 March 28, 2003 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 includes the
following:
a. 11,293,115 shares of common stock owned by Andres F. Fernandez
b. 14,905,905 shares of common stock owned by J.A. Fernandez, Sr.
c. 4,281,900 shares of common stock owned by Amelia C. Fernandez
d. 259,500 shares of common stock owned by Maria A. Fernandez. This number
does not include the 384,500 shares Maria Fernandez holds as a Trustee for
an Irrevocable Trust in which neither she nor any of the other Officers or
Directors is the beneficial owner.
25
DESCRIPTION OF SECURITIES TO BE REGISTERED
Our authorized capital stock consists of 300,000,000 shares of Common Stock,
$.001 par value and 20,000,000 shares of Preferred Stock, $.001 par value.
The following is a description of the material terms of our common stock.
Common Stock
The holders of the issued and outstanding shares of common stock are entitled to
receive dividends when, as and if declared by our Board of Directors out of any
funds lawfully available therefore. The Board of Directors intends to retain
future earnings to finance the development and expansion of our business and
does not expect to declare any dividends in the foreseeable future. The holders
of the common stock have the right, in the event of liquidation, to receive pro
rata all assets remaining after payment of debts and expenses. The common stock
does not have any preemptive rights and does not have cumulative voting rights.
The issued and outstanding shares of common stock are fully paid and
nonassessable.
Holders of shares of common stock are entitled to vote at all meetings of such
shareholders for the election of directors and for other purposes. Such holders
have one vote for each share of common stock held by them.
Transfer Agent
Atlas Stock Transfer Corporation, 5899 South State Street, Salt Lake City, Utah
84107 has been appointed the transfer agent of our common stock and preferred
stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
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 itsagents, 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.
26
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
27
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
28
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.
29
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
30
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
14,687,500
La Jolla Cove (2) 8,593,750(3) 13.70% 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 third party that does not hold
any short positions in our securities. 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 i) 6,093,750 shares underlying our $250,000 convertible debenture
and ii) 2,500,000 shares of common stock underlying warrants issued to La Jolla
Cove on October 4, 2002.
(4) Assumes that all securities registered will be sold.
31
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
2,500,000 shares of our common stock.
Convertible Debentures
The debenture bears interest at 8%, matures two years from the date of issuance
and is convertible into shares of our common stock. The number of common shares
into which this debenture may be converted is equal to the dollar amount of the
debenture being converted multiplied by eleven, minus the product of the
conversion price, multiplied by ten times the dollar amount of the debenture
being converted, divided by the conversion price. The conversion price is equal
to 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. See the Sample
Debenture Conversion Calculation below.
The warrants expire on October 4, 2004 and are exercisable at $1.00 per share.
The warrant holder is obligated to exercise the warrant concurrently with the
conversion of the debenture for a number of shares equal to ten times the dollar
amount of the debenture being converted. See the Sample Warrant Exercise
Calculation below.
The selling stockholders has agreed to convert at least 5% but no more than 10%
of the face value of the debenture and warrant each month after this prospectus
is declared effective by the Securities and 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 common shares into which this debenture may be converted is equal
to the dollar amount of the debenture being converted multiplied by eleven,
minus the product of the conversion price multiplied by ten times the dollar
amount of the debenture being converted, divided by the conversion price. For
example, assuming conversion of a $250,000 debenture on March 28, 2003, a
conversion price of $0.576 per share, the number of shares issuable upon
conversion would be:
($250,000 x 11) - ($.576 x (10 x $250,000)) = 2,274,305 shares of common stock
$.576
32
Sample Warrant Exercise Calculation
The warrant holder is obligated to exercise the warrant concurrently with the
conversion of the debenture for a number of shares equal to ten times the dollar
amount of the debenture being converted. Based on the above Sample Debenture
Conversion Calculation, the selling stockholder converted $250,000 of the
debenture. Accordingly, the selling stockholder is obligated to exercise the
warrant into the following number of common shares for an aggregate exercise
price equal to $2,500,000:
$250,000 x 10 = 2,500,000 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, 2002 and 2001 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.
33
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.
34
AMERICAN AMMUNITION, INC.
CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2002 and 2001 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2002 and 2001 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2002 and 2001 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-9
F-1
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.
We have audited the accompanying consolidated balance sheets of American
Ammunition, Inc. (a California corporation) and Subsidiaries (Florida
corporations) as of December 31, 2002 and 2001 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, 2002 and 2001,
respectively. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of
American Ammunition, Inc. as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 2002 and 2001, respectively,
in conformity with generally accepted accounting principles generally accepted
in the United States of America.
/s/ S.W. Hatfield, CPA
S. W. HATFIELD, CPA
Dallas, Texas
March 7, 2003 (except for Note J
as to which the date is March 20, 2003)
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.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
December 31, December 31,
2002 2001
------------------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 157,316 $ 596,419
Accounts receivable - trade, net of allowance for
doubtful accounts of $-0- and $-0-, respectively 31,288 -
Inventory 384,814 125,930
Prepaid expenses 19,391 9,458
------------ ------------
Total Current Assets 592,809 731,807
------------ ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,843,135 6,470,064
Office furniture and fixtures 58,528 50,856
Leasehold improvements 188,263 182,052
------------ ------------
7,089,926 6,702,972
Accumulated depreciation (3,393,301) (2,737,717)
------------ ------------
Net Property and Equipment 3,696,625 3,965,255
------------ ------------
Other Assets
Deposits and other 77,860 74,310
------------ ------------
TOTAL ASSETS $ 4,367,294 $ 4,771,372
============ ============
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2002 and 2001
December 31, December 31,
2002 2001
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 9,507 $ 8,365
Customer deposits 80,953 -
Accounts payable - trade 414,910 469,543
Accrued interest payable 18,709 1,000
Accrued dividends payable 12,600 -
Note payable to stockholder - 100,000
------------ ------------
Total Current Liabilities 536,679 579,908
Long-Term Liabilities
Note payable to a bank 450,000 950,000
Capital leases payable 7,841 17,348
------------ ------------
Total Liabilities 994,520 1,547,256
------------ ------------
Commitments and Contingencies
Mandatory Convertible Debenture 250,000 -
------------ ------------
Mandatory Convertible Preferred Stock
41,000 and 46,000 shares issued and outstanding 205,000 230,000
------------ ------------
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.
55,328,166 and 49,975,614 shares issued and outstanding 55,328 49,971
Additional paid-in capital 16,523,164 14,700,776
Accumulated deficit (13,660,718) (11,754,631)
------------ ------------
Total Stockholders' Equity 2,917,774 2,996,116
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,367,294 $ 4,771,372
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 2002 and 2000
Year ended Year ended
December 31, December 31,
2002 2001
-------------------------------------
Revenues $ 1,409,364 $ 427,529
------------ ------------
Cost of Sales
Materials 1,041,553 428,909
Direct Labor 633,787 260,012
Other direct costs and expenses 128,371 66,664
Depreciation 652,943 628,925
------------ ------------
Total Cost of Sales 2,456,654 1,384,510
------------ ------------
Gross Profit (1,047,290) (956,981)
------------ ------------
Operating Expenses
Research and development expenses 3,662 3,963
Marketing and promotion expenses 23,453 4,043
Salaries, wages and related expenses 341,532 365,079
Other operating expenses 389,732 968,494
Interest expense 72,444 453,943
Depreciation expense 2,642 0,911
Compensation expense related to common stock
issuances at less than "fair value" 11,538 -
------------ ------------
Total Operating Expenses 845,003 1,806,433
------------ ------------
Loss from Operations (1,892,293) (2,763,414)
Other Income (Expense)
Other income (expense) 9,206
Settlement of litigation - 754,830
Amortization of Beneficial Conversion
Feature Discount on Preferred Stock - (1,207,993)
------------ ------------
Loss before Income Taxes (1,883,087) (3,216,577)
Provision for Income Taxes - -
------------ ------------
Net Loss (1,883,087) (3,216,577)
Other Comprehensive Income - -
------------ ------------
Comprehensive Loss $ (1,883,087) $ (3,216,577)
============ ============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (0.04) $ (0.11)
============ ============
Weighted-average number of common shares outstanding 52,605,993 28,019,722
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Mandatory Convertible
Preferred Stock Common Stock Additional
------------------ ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
-----------------------------------------------------------------------------------
Balances at January 1, 2001 - - 22,000,000 $ 22,000 $ 4,142,121 $ (8,518,054) $ (4,353,933)
Recapitalization due to reverse
acquisition transaction with
FBI Fresh Burgers International - - 4,850,000 4,850 (4,850) - -
Issuance of common stock for
Cash - - 222,222 222 99,778 - 100,000
Settlement of accounts payable - - 535,272 535 240,337 - 240,872
Consulting fees - - 3,121,200 3,122 410,954 - 414,076
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 (1,749,320)(8,746,600) 19,242,520 19,242 8,727,358 - 8,746,600
Net loss for the year - - - - - (3,216,577) (3,216,577)
---------- ---------- ----------- --------- ----------- ----------- ----------
Balances at December 31, 2001 46,000 230,000 49,971,214 49,971 14,678,776 (11,734,631) 2,994,116
Issuance of common stock for
Cash - - 4,470,805 4,471 1,469,462 - 1,473,933
Conversion of debt and accrued interest - - 277,777 278 124,722 - 125,000
Conversion of trade accounts payable - - 432,721 433 181,584 - 182,017
Consulting fees - - 98,664 98 33,297 - 33,395
Payment of preferred stock dividends - - 21,985 22 10,378 - 10,400
Conversion of Preferred Stock (5,000) (25,000) 55,000 55 24,945 - 25,000
Costs of acquiring convertible debenture - - - - - (20,000) (20,000)
Dividends declared on Preferred Stock - - - - - (23,000) (23,000)
Net loss for the year - - - - - (1,883,087) (1,883,087)
---------- ---------- ----------- --------- ----------- ----------- ----------
Balances at December 31, 2002 41,000 $ 205,000 55,328,166 $ 55,328 $ 16,523,164 $(13,660,718) $ 2,917,774
========== ========= ========== ========= ========== =========== =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
Year ended Year ended
December 31, December 31,
2002 2001
-------------------------------------
Cash flows from operating activities
Net loss for the year $ (1,883,087) $ (3,216,577)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 655,585 639,836
Gain on litigation settlement - (754,830)
Common stock issued for fees and services 33,395 540,534
Accrued interest converted to preferred stock - 240,440
Amortization of conversion discount on preferred stock - 1,207,993
Accrued interest converted to common stock 24,000 -
Compensation expense related to common stock
issuances at less than "fair value" 11,538 -
(Increase) Decrease in
Accounts receivable (31,288) 60,415
Inventory (258,884) 207,480
Prepaid expenses, deposits and other (13,483) (24,056)
Increase (Decrease) in
Accounts payable and accrued liabilities 126,384 (639)
Interest payable 18,709 (1,000)
Customer deposits 80,953 -
------------- -------------
Net cash provided by (used in) operating activities (1,236,178) (1,100,404)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (386,955) (105,657)
------------- -------------
Net cash used in investing activities (386,955) (105,657)
------------- -------------
Cash flows from financing activities
Increase in cash overdraft - 7,760
Cash received (paid) on short term loans - net - (451,652)
Cash received on long-term loans - 950,000
Principal paid on long-term loans (500,000) -
Principal paid on long-term capital leases (8,365) (82,571)
Cash received on sale of Mandatory Convertible Preferred Stock - 1,423,000
Cash received on issuance of Mandatory Convertible Debenture 250,000 -
Cash received on sale of common stock 1,462,395 100,000
Cash paid to acquire capital (20,000) (144,915)
------------- -------------
Net cash provided by financing activities 1,184,030 1,801,622
------------- -------------
INCREASE (DECREASE) IN CASH (439,103) 595,561
Cash at beginning of year 596,419 858
------------- -------------
Cash at end of year $ 157,316 $ 596,419
============= =============
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 2001 and 2000
Year ended Year ended
December 31, December 31,
2002 2001
-----------------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 29,735 $ 214,503
============= =============
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 prior period accrued
interest into common stock $ 101,000 $ -
============= =============
Payment of accounts payable with
issuance of common stock $ 182,017 $ 240,872
============= =============
Payment of accrued dividends on preferred
stock with common stock $ 10,400 $ -
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
AMERICAN AMMUNITION, INC.
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. 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, the historical financial statements of the Company are
those of F&F Equipment, Inc. from it's inception and those of the consolidated
entity subsequent to the September 29, 2001 transaction date.
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.
F-9
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Preparation of Financial Statements - Continued
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".
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 and Revenue Recognition
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United
States. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
The Company ships all product on an FOB-Plant basis. Accordingly, revenue
is recognized by the Company at the point at which an order is shipped at a
fixed price, collection is reasonably assured, the Company has no remaining
performance obligations and no right of return by the purchaser exists.
F-10
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
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 December 31, 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 December 31, 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.
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.
F-11
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Correction of an Error
During Management's review of the Company's internal control structure, it was
noted that the Company continues to realize a negative gross profit and that the
inventory valuation calculations for the recorded carrying cost of inventory on
the balance sheet as of December 31, 2001 had not been properly calculated using
the "lower of cost or market" method by recognizing a targeted gross profit
percentage based on Management's best estimate. This error created an
overstatement in the inventory carrying value at December 31, 2001 and an
understatement in cost of goods sold for the year ended December 31, 2001.
The effect of any and all changes are reflected in the accompanying financial
statements as of the respective date of each transaction and the effect of the
corrections are summarized below by fiscal period and cumulatively.
Year ended Cumulative
December 31, effect of
2001 changes
------------ ----------
Net Loss, as previously reported $(3,028,766)
Effect of the correction of an error
Recalculation of the carrying value
of inventory at December 31, 2001 (187,811) $(187,811)
Total effect of changes on
Loss from Operations and Net Loss (187,811) (187,811)
Net Loss, as restated $(3,216,577) $(187,811)
=========== ===========
Earnings per share, as previously reported $(0.11)
Total effect of changes - $ -
=========== ===========
Earnings per share, as restated $(0.11)
===========
Note E - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
F-12
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Inventory
As of December 31, 2002 and 2001, inventory consisted of the following
components:
December 31, December 31,
2002 2001
----------- -----------
Raw materials $ 149,824 $ 82,454
Work in process 116,216 24,232
Finished goods 118,774 19,244
Totals $ 384,814 $ 125,930
======== ========
Note G - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2002 2001 useful life
----------- ----------- -----------
Manufacturing equipment $6,843,135 $6,470,064 10 years
Office furniture and fixtures 58,528 50,856 7 years
Leasehold improvements 188,263 182,052 20 years
7,089,926 6,702,972
Accumulated depreciation (3,393,301) (2,737,717)
Net property and equipment $3,696,625 $3,965,255
========= =========
Total depreciation expense charged to operations for the years ended December
31, 2002 and 2001 was approximately $655,585 and $639,836, respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
December 31, December 31,
2001 2000
----------- -----------
Manufacturing and processing equipment $ 153,400 $ 153,400
Less accumulated depreciation (54,519) (39,179)
$ 98,881 $ 114,221
======== ========
F-13
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - 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.
Note I - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2002 and
2001, respectively:
December 31, December 31,
2002 2001
----------- -----------
Three capital leases, respectively, payable to various
equipment financing companies. Interest, at December 31,
2002, ranging between 11.37% and 14.05%. Payable in
aggregate monthly installments of approximately $935,
including accrued interest, as of December 31, 2002. Final
maturities occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 17,348 $ 25,713
Less current maturities (9,507) (8,365)
Long-term portion $ 7,841 $ 17,348
======= ======
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
----------- --------
2003 $ 9,507
2004 7,841
Totals $ 17,348
======
(Remainder of this page left blank intentionally)
F-14
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - 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. The note bore interest at the Wall Street Journal
published prime rate plus 2.0%.
During Calendar 2002, the Company made five (5) lump-sum principal reductions of
$100,000 each (or an aggregate of $500,000) to the outstanding balance on this
note. As of December 31, 2002, the Company owed $450,000 on this note. Upon each
lump-sum payment, the Company executed a modification to the payment terms on
the note.
At December 31, 2002, the note payment terms were 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.
On February 28 and March 20, 2003, respectively, the Company made additional
principal reductions of $100,000 and $350,00 fully retiring the outstanding
debt.
Note K - Convertible Debenture
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.
The Debenture Holder has contractually committed 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 concurrently exercise warrants and purchase shares of
common stock equal to ten (10) times the number of shares of common stock issued
to the Holder upon the respective mandatory 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.
F-15
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Convertible Debenture - Continued
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.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Shareholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the shareholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
No value was assigned to the issued warrant. Upon exercise of the warrant, the
Company will record the issuance of the underlying shares as a new issuance of
common stock on the date of each respective exercise.
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.
Note L - Preferred Stock Transactions
In September, October and November 2001, the Company sold an aggregate 222,600
shares of $5.00 Series A Convertible Preferred Stock (Series A Preferred Stock)
for total proceeds of approximately $1,113,000 through 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
initially at any time after 6 months of the date of issue and prior to the
notice of redemption at the option of the holder, subject to adjustments for
customary anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
In September 2001, the Company's principal 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.
F-16
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Preferred Stock Transactions - Continued
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. This difference created
a Beneficial Conversion Feature Discount of approximately $1,207,993. This
discount was then amortized over the unexpired time period between the date of
issue of the eligible shares and the eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations. As the Company's
common stock did not have any trading activity prior to the October 2001
approval for trading and the first posted price for the Company's common stock
on October 23, 2001, and there was no available equivalent per share value for
the shares of Series A Preferred Stock, no Beneficial Conversion Feature
Discount was generated on Series A Preferred Stock sold prior to the initial
trading date.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
Note M - 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. The effect of this action is reflected in the accompanying financial
statements as of the first day of the first period presented.
In September 2001, the Company issued an aggregate 21,000,000 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 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.
F-17
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Common Stock Transactions
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 $100,000 in short-term debt payable and
accrued interest of approximately $25,000 to an existing shareholder 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. The
Company utilizes a discount of approximately 50.0% on the quoted closing price
to value all transactions settled with restricted, unregistered common stock
issued pursuant to Rule 144 of the U. S. Securities and Exchange Commission.
This transaction paid in full all outstanding short-term debt.
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. These proceeds were
used to supplement operational working capital.
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.
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 his
payment of previously accrued legal fees associated with the bank related
litigation, which was concluded in June 2001, on behalf of the Company and for
other consulting services currently being provided by the shareholder. 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. The proceeds
of this transaction were used to supplement operational working capital.
F-18
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Common Stock Transactions - Continued
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. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In 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". The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In 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. The proceeds of this transaction were used to directly retire a
trade account payable to a specific vendor.
In August 2002, the Company issued 24,999 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $6,875, or $0.28 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. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In 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. The proceeds from this transaction were used to support operational
working capital.
In September 2002, the Company sold 222,222 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 $0.45 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. The proceeds of this transaction were used to support operational
working capital.
In November 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
F-19
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Common Stock Transactions - Continued
In December 2002, the Company sold an aggregate 120,170 shares of restricted,
unregistered common stock to an existing shareholder in three separate
transactions valued at an aggregate of approximately $31,244. These sales were
made at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock on the date of each respective transaction.
The proceeds of this transaction were used to directly retire a trade account
payable to a specific vendor.
In December 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company issued 55,000 shares of restricted, unregistered
common stock upon the exercise of 5,000 shares of outstanding Series A Preferred
Stock upon the exercise of the conversion option by the Holder of the Series A
Preferred Stock.
During June, July and September 2002, the Company issued an aggregate 21,987
shares of restricted, unregistered common stock in payment of approximately
$10,400 in accrued dividends payable on the Company's outstanding Series A
Preferred Stock for the quarters ended December 31, 2001, March 31, 2002, June
30, 2002 and September 30, 2002.
Note N - 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.
Note O - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2002 and 2001, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2002 2001
----------- ------------
Federal:
Current $ - $ -
Deferred - -
- -
State:
Current - -
Deferred - -
- -
Total $ - $ -
====== ======
F-20
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note O - Income Taxes - Continued
As of December 31, 2002, the Company has a net operating loss carryforward of
approximately $6,600,000 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, 2002
and 2001, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2002 2001
----------- ------------
Statutory rate applied to loss before income taxes $ (640,000) $(1,094,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 640,000 1,094,000
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, 2002 and 2001, respectively:
Year ended Year ended
December 31, December 31,
2002 2001
----------- ------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 2,244,000 $ 1,615,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (250,000)
1,994,000 1,365,000
Less valuation allowance (1,994,000) (1,365,000)
Net Deferred Tax Asset $ - $ -
========== ===========
During the years ended December 31, 2002 and 2001, respectively, the valuation
allowance increased by approximately $629,000 and $815,000.
F-21
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note P - 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. This Agreement was terminated in
conjunction with the execution of the Settlement and Compromise Agreement on
June 29, 2001.
Note Q - Significant Customers
During the year ended December 31, 2002, the Company had two separate customers
responsible for an aggregate of approximately 66.0% (43.2% and 22.8%,
respectively) of total sales. There were no other customers responsible for more
than 10.0% of total net sales during 2002.
During the year ended December 31, 2001, the Company had a single customer
responsible for an aggregate of approximately 51.0% of total sales. There were
no other customers responsible for more than 10.0% of total net sales during
2001.
F-22
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 14,687,500 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 3
Use Of Proceeds 9 American Ammunition, Inc.
Market For Common Equity And
Related Stockholder Matters 9 3545 NW 71st
Management's Discussion And Miami, FL 33147
Analysis Or Plan Of Operation 10
Business 16
Management 21
Certain Relationships And
Related Transactions 24
Security Ownership
Of Certain Beneficial Owners
And Management 25 ________________
Description Of Securities 26
Plan Of Distribution 28 PROSPECTUS
Selling stockholders 00 ________________
Legal Matters 33
Experts 33
Available Information 34
Index To Financial Statements 35 March ___, 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.
II-1
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
(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.
II-2
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.
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:
II-3
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.
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.
II-4
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
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.
II-5
(2) In June 2001, a total of 70,000 shares of Common Stock were issued to
Jeffrey Volpe in exchange for clerical services rendered valued at $70 and
70,000 shares of Common Stock were issued to Richard Tearle in exchange for
Internet web services valued at $70.. The Company claimed an exemption under the
Securities Act of 1933, pursuant to Section 4(2) of the Act. Both Mr. Volpe and
Mr. Tearle had access to all corporate information and both were sophisticated
investors.
(3) In 2001, a total of 284,600 shares (pre-acquisition) and 916,000 shares
(pre-forward split and post acquisition) to various consultants in exchange for
services rendered to the Company. This offering and sale was deemed to be exempt
under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors and transfer was restricted by American Ammunition in
accordance with the requirements of the Securities Act of 1933.
(4) In September 2001 the Company issued 21,000,000 shares of its Common Stock
to nineteen (19) shareholders of F.&F. Equipment, Inc. d/b/a American
Ammunition, ("AA") pursuant to a Share Exchange Agreement. The shares were
valued at $3,998,650. The transaction resulted in AA becoming a wholly owned
subsidiary of the Company in a transaction that was treated as a reverse merger
for accounting purposes. Of such shares, the current officers and directors of
the Company were issued a total of 15,750,000 shares and 1,050,000 were issued
to Donald F. Mintmire, sole owner of the firm of Mintmire & Associates. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
(5) In September and October 2001 the Company issued 222,600 shares of $5.00
Series A Convertible Preferred Stock valued at $1,113,000 through an ongoing
private placement. For such offering, the Company relied on Section 4(2) of the
Act and Regulation D, Rule 506 promulgated thereunder. All such sales were to
accredited investors. Of such shares, the Robert I. Escobio Family Trust
acquired 2,000 shares. Mr. Escobio is a Director of the Company.
(6) In September 2001, a creditor, Key Packaging Company, agreed to converted
$10,000 of debt due from the Company into 2,000 shares of $5.00 Series A
Convertible Preferred stock. This offering and sale was deemed to be exempt
under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors and transfer was restricted by American Ammunition in
accordance with the requirements of the Securities Act of 1933.
II-6
(7) In September 2001, a principal shareholder, Andres Fernandez, converted
$7,553,600 of unsecured debt due to him by the Company into 1,510,720 shares of
$5.00 Series A Convertible Preferred Stock. Mr. Fernandez is an Officer and
Director of the Company and is an accredited investor. The Company relied on
Section 4(2) of the Act and Regulation D, Rule 506 promulgated thereunder.
(8) On November 5, 2001, the Company entered into an agreement with the
Placement Agreements in connection with the offering of the Notes. In
conjunction with such agreement, the Company received a payment in the amount of
$15,000.00 from Argo for the Option, which provided Argo with the right to
purchase up to $3,500,000.00 of the Notes to be offered by the Company and
simultaneously, Argo purchased $135,000.00 of such Notes. This offering and sale
was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933. These notes have been redeemed and are not currently outstanding.
On February 27, 2002, the Company issued an aggregate 277,777 shares of
restricted, unregistered common stock, at $0.45 per share, to Forus Investments,
Inc., an existing shareholder, in satisfaction of a $100,000 short-term working
capital loan payable and $25,000 in agreed-upon interest payable to a
shareholder, thereby satisfying all outstanding short-term debt in full. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction. This offering and sale was deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors
and transfer was restricted by American Ammunition in accordance with the
requirements of the Securities Act of 1933.
On March 25, 2002, the Company sold 611,110 shares of restricted, unregistered
common stock, at $0.36 per share, to Kissimmul, Inc., a Toronto, Ontario, Canada
corporation, for gross proceeds of approximately $220,000. The valuation of this
transaction was based on the discounted "fair value" of the Company's common
stock based upon the quoted closing price on the date of the transaction. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On March 28, 2002, the Company sold 777,775 shares of restricted, unregistered
common stock, at $0.36 per share, to Tomina Associates, Ltd., a Vancouver, B.
C., Canada corporation, for gross proceeds of approximately $280,000. The
valuation of this transaction was based on the discounted "fair value" of the
Company's common stock based upon the quoted closing price on the date of the
transaction. This offering and sale was deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors
and transfer was restricted by American Ammunition in accordance with the
requirements of the Securities Act of 1933.
On March 5, 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to Len Hale, amember of the Company's Board of Directors, for
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. This offering and sale
was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
On March 5, 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to D. P. Martin & Associates, an unrelated party for shareholder
and other public relation services. This transaction was valued at approximately
$15,000, or $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of the respective transaction. This offering and sale
was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the
Securities Act. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to Ammunition Accessories, Inc., Saunders
Lead Co. and Airco Plating Co., three unrelated trade creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On June 21, 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to Access Investments, Inc., an existing shareholder, to reimburse
said shareholder for the payment of legal fees associated with the bank related
litigation concluded in June 2001 and related consulting services. This
transaction was valued at approximately $125,000, or $0.36 per share, which
approximates the discounted "fair value" of the Company's common stock based on
the quoted closing price of the Company's common stock on the date of the
respective transaction. This offering and sale was deemed to be exempt under
II-8
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
On June 26, 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to Gala Investments, an unrelated investor, for aggregate proceeds
of approximately $100,000. This sale was made at a price of $0.36 per share,
which approximates the discounted "fair value" of the Company's common stock
based on the quoted closing price of the Company's common stock on the date of
the respective transaction. This offering and sale was deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors and transfer was restricted by American Ammunition in accordance with
the requirements of the Securities Act of 1933.
On July 25, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of approximately $100,000. This sale was made at a price of $0.26 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On August 14, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of $100,000. This sale was made at a price of $0.26 per share, which
was below the discounted "fair value" of the Company's common stock based on the
quoted closing price of the Company's common stock on the date of the respective
transaction. The differential between the discounted "fair value" (approximately
$0.29 per share) and the selling price resulted in a charge to operations of
approximately $11,346 for compensation expense related to common stock issuances
at less than "fair value". The proceeds were used to reduce the Company's
outstanding balance on a long-term note payable to a bank. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
II-9
On August 21, 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds were used to retire trade accounts payable to a New
Mexico law firm for legal services rendered to the Company. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors and transfer was restricted by
American Ammunition in accordance with the requirements of the Securities Act of
1933.
On September 20, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
On September 26, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.26 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to provide
working capital liquidity for future periods. This offering and sale was deemed
to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors and transfer was restricted by American
Ammunition in accordance with the requirements of the Securities Act of 1933.
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-10
In December 2002, we amended the above-referenced debenture and warrants as
follows: The number of common shares into which the debenture may be converted
is equal to the dollar amount of the debenture being converted multiplied by
eleven, minus the product of the conversion price, multiplied by ten times the
dollar amount of the debenture being converted, divided by the conversion price.
The warrants are exercisable at $1.00 per share for up to 2,500,000 shares. The
warrant holder is obligated to exercise the warrant concurrently with the
conversion of the debenture for a number of shares equal to ten times the dollar
amount of the debenture being converted.
In November 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company sold an aggregate 120,170 shares of restricted,
unregistered common stock to an existing shareholder in three separate
transactions valued at an aggregate of approximately $31,244. These sales were
made at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock on the date of each respective transaction.
The proceeds of this transaction were used to directly retire a trade account
payable to a specific vendor.
In December 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which was in excess
of the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to pay down an
equivalent portion of the Company's long-term note payable to a bank.
In December 2002, the Company issued 55,000 shares of restricted, unregistered
common stock upon the exercise of 5,000 shares of outstanding Series A Preferred
Stock upon the exercise of the conversion option by the Holder of the Series A
Preferred Stock.
This offering and sale was deemed to be exempt under Rule 506 of Regulation
D and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors and transfer
was restricted by American Ammunition in accordance with the requirements of the
Securities Act of 1933.
Except as expressly set forth above, the individuals and entities to whom we
issued securities as indicated in this section of the registration statement are
unaffiliated with us.
II-11
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.
4.6* Letter Agreement with La Jolla Cove, dated December 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 5.1).
* Previously filed
II-12
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) Intentionally omitted.
(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.
II-13
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 April 1, 2003.
AMERICAN AMMUNITION, INC.
(Registrant)
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 April 1, 2003
J.A. Fernandez, Sr. Sales
/s/ Andres F. Fernandez
---------------------------- President, Chief Executive Officer and April 1, 2003
Andres F. Fernandez Chief Financial Officer
/s/ Emilio D. Jara
---------------------------- Vice-President of Operations, Secretary April 1, 2003
Emilio D. Jara and Director
/s/ Amelia Fernandez
---------------------------- Vice-President and Director April 1, 2003
Amelia Fernandez
/s/ Maria A. Fernandez
---------------------------- Director April 1, 2003
Maria A. Fernandez