UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
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(Mark one)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: September 30, 2003
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
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Commission File Number: 0-32379
American Ammunition, Inc.
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(Exact name of small business issuer as specified in its charter)
California 91-2021594
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(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
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(Address of principal executive offices)
(305) 835-7400
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(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [_]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: October 21, 2003:
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
American Ammunition, Inc.
Form 10-QSB for the Quarter ended September 30, 2003
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 23
Item 3 Controls and Procedures 27
Part II - Other Information
Item 1 Legal Proceedings 28
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 29
Part I
Item 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2003 and 2002
(Unaudited)
September 30, September 30,
2003 2002
--------------- -------------
ASSETS
Current Assets
Cash on hand and in bank $ 1,347,532 $ 238,695
Accounts receivable - trade, net allowance for
doubtful accounts of $-0- and $-0-, respectively 288,503 232,821
Inventory 651,097 554,369
Prepaid expenses 36,421 19,647
------------- -------------
Total Current Assets 2,323,553 1,045,532
------------- -------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,895,850 6,683,688
Office furniture and fixtures 62,893 50,907
Leasehold improvements 190,028 193,606
------------- -------------
7,148,771 6,928,201
Accumulated depreciation (3,891,321) (3,224,315)
------------- -------------
Net Property and Equipment 3,257,450 3,703,886
------------- -------------
Other Assets
Deposits and other 77,860 77,860
------------- -------------
Total Other Assets 77,860 77,860
------------- -------------
TOTAL ASSETS $ 5,658,863 $ 4,827,278
============= =============
- Continued -
The financial information presented herein has been
prepared by management without audit
by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2003 and 2002
(Unaudited)
September 30, September 30,
2003 2002
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to a bank $ - $ -
Current maturities of leases payable 9,507 8,365
Customer deposits 4,100 30,000
Accounts payable - trade 471,085 383,777
Working capital advance 400,000 -
Accrued payroll payable 28,810 -
Accrued dividends payable 34,261 -
------------- -------------
Total Current Liabilities 947,763 422,142
Long-Term Liabilities
Note payable to a bank - 650,000
Capital leases payable 828 11,175
------------- -------------
Total Liabilities 948,591 1,083,317
------------- -------------
Commitments and Contingencies
Convertible Debenture 431,365 -
------------- -------------
Mandatory Convertible Preferred Stock
net of Beneficial Conversion Discount Feature
123,700 and 46,000 shares issued and outstanding 602,610 230,000
------------- -------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - -
1,000,000 shares allocated to Series B - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
62,718,137 and 54,114,560
shares issued and outstanding 62,718 54,115
Additional paid-in capital 19,961,671 16,052,506
Accumulated deficit (16,348,092) (12,592,660)
------------- -------------
Total Stockholders' Equity 3,676,297 3,513,961
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,658,863 $ 4,827,278
============= =============
The financial information presented herein has been
prepared by management without audit
by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2003 and 2002
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
--------------- ---------------- ---------------- -------------
Revenues $ 1,215,717 $ 1,277,454 $ 317,729 $ 570,320
--------------- ---------------- ---------------- -------------
Cost of Sales
Materials, Direct Labor
and other direct costs 1,713,888 1,236,388 614,748 630,484
Depreciation 494,633 483,537 165,464 163,238
--------------- ---------------- ---------------- -------------
Total Cost of Sales 2,208,521 1,719,925 780,212 793,722
--------------- ---------------- ---------------- -------------
Gross Profit (992,804) (442,471) (462,483) (223,402)
--------------- ---------------- ---------------- -------------
Operating Expenses
Research and development expenses 9,208 2,851 8,824 2,200
Marketing and promotion expenses 30,350 13,842 16,835 6,276
Other operating expenses 788,599 488,257 330,127 270,126
Interest expense 26,270 76,060 9,725 14,941
Depreciation expense 3,387 3,061 1,129 248
Compensation expense related to
common stock issuances at less
than "fair value" 736,102 11,346 371,798 11,346
--------------- ---------------- ---------------- -------------
Total Operating Expenses 1,593,916 595,417 738,498 305,137
--------------- ---------------- ---------------- -------------
Loss from Operations (2,586,720) (1,037,888) (1,200,981) (528,539)
Other Income (Expense)
Interest and other income 2,594 11,048 - 515
Amortization of Beneficial
Conversion Feature Discount
on Preferred Stock (77,787) - (46,839) -
--------------- ---------------- ---------------- -------------
Loss before Income Taxes (2,661,913) (1,026,840) (1,247,820) (528,024)
Provision for Income Taxes - - - -
--------------- ---------------- ---------------- -------------
Net Loss (2,661,913) (1,026,840) (1,247,820) (528,024)
Other Comprehensive Income - - - -
--------------- ---------------- ---------------- -------------
Comprehensive Loss $ (2,661,913) $ (1,026,840) $ (1,247,820) $ (528,024)
=============== ================ ================ =============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.04) $ (0.02) $ (0.02) $ (0.01)
=============== ================ ================ =============
Weighted-average number of
common shares outstanding 59,222,995 51,885,746 61,683,424 53,395,558
=============== ================ ================ =============
The financial information presented herein has been
prepared by management without audit
by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
-------------- -------------
Cash flows from operating activities
Net loss for the year $ (2,661,913)$ (1,026,840)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 498,020 486,598
Amortization of Beneficial Conversion Feature
Discount on Preferred Stock 77,787 -
Compensation expense related to common stock
issuances at less than "fair value" 736,102 11,346
Common stock issued for fees and services - 50,520
(Increase) Decrease in
Accounts receivable (257,215) (232,821)
Inventory (266,283) (239,628)
Prepaid expenses, deposits and other (17,030) (13,739)
Increase (Decrease) in
Accounts payable - trade 56,175 102,089
Other accrued expenses 10,101 -
Customer deposits (76,853) 30,000
-------------- -------------
Net cash used in operating activities (1,901,109) (832,475)
-------------- -------------
Cash flows from investing activities
Purchase of property and equipment (58,845) (225,229)
-------------- -------------
Net cash used in investing activities (58,845) (225,229)
-------------- -------------
Cash flows from financing activities
Funding of working capital advance 400,000 -
Principal paid on long-term debt (450,000) (300,000)
Principal paid on long-term capital leases (7,013) (6,173)
Cash paid to obtain capital (61,850) -
Cash received on convertible debenture 350,000 -
Cash received on sale of convertible preferred stock 458,500 -
Cash received on sale of common stock 2,460,533 1,006,153
-------------- -------------
Net cash provided by financing activities 3,150,170 699,980
-------------- -------------
Increase (Decrease) in Cash 1,190,216 (357,724)
Cash at beginning of year 157,316 596,419
-------------- -------------
Cash at end of year $ 1,347,532 $ 238,695
============== =============
- Continued -
The financial information presented herein has been
prepared by management without audit
by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
6
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 26,170 $ 52,060
============== =============
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 common stock $ - $ 125,000
============== =============
Common stock issued in payment of trade accounts payable $ - $ 188,855
============== =============
The financial information presented herein has been
prepared by management without audit
by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
7
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in 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
stockholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the stockholders 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.(F&F) 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".
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.
8
American Ammunition, Inc. and Subsidiaries
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.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2002. The information presented within these interim financial
statements may not include all disclosures required by accounting principles
generally accepted in the United States of America and the users of financial
information provided for interim periods should refer to the annual financial
information and footnotes when reviewing the interim financial results presented
herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2003.
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.
9
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
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 either an FOB-Plant or FOB-Destination
basis. Accordingly, revenue is recognized by the Company at the point at
which title to the product passes at a fixed price, collection is
reasonably assured, the Company has no remaining performance obligations
and no right of return by the purchaser exists.
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 (3) to twenty (20) years.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At September 30, 2003 and 2002, the deferred tax asset and deferred
tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
As of September 30, 2003 and 2002, 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, 2003 and 2002, and
subsequent thereto, the Company had no warrants and/or options outstanding.
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
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, 2002 have been reclassified to conform to the Fiscal
2003 presentations.
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Concentrations of Credit Risk
The Company maintains its cash accounts in a financial institution subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the separate companies are each entitled to aggregate coverage
of $100,000 per account type per separate legal entity per financial
institution. During each of the respective years ended December 31, 2002 and
2001 and each of the respective nine months ended September 30, 2003 and 2002,
the various operating companies had deposits in a financial institution with
credit risk exposures in excess of statutory FDIC coverage. The Company has
incurred no losses as a result of any of these unsecured situations.
(Remainder of this page left blank intentionally)
11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note F - Inventory
As of September 30, 2003 and 2002, inventory consisted of the following
components:
September 30, September 30,
2003 2002
------------- -------------
Raw materials $ 205,818 $ 207,574
Work in process 246,477 264,048
Finished goods 198,802 82,747
------------- -------------
Totals $ 651,097 $ 554,369
============= =============
Note G - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2003 2002 useful life
-------------- --------------- -------------
Manufacturing equipment $ 6,895,850 $ 6,683,688 5 - 10 years
Office furniture and fixtures 62,893 50,907 3 - 7 years
Leasehold improvements 190,028 193,606 8 - 20 years
-------------- ---------------
7,148,771 6,928,201
Accumulated depreciation (3,891,321) (3,224,315)
-------------- ---------------
Net property and equipment $ 3,257,450 $ 3,703,866
============== ===============
Total depreciation expense charged to operations for the nine months ended
September 30, 2003 and 2002 was approximately $498,020 and $486,598.
respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
September 30, September 30,
2003 2002
------------- -------------
Manufacturing and processing equipment $ 153,400 $ 153,400
Less accumulated depreciation (66,024) (50,694)
------------- -------------
$ 87,376 $ 106,551
============= =============
(Remainder of this page left blank intentionally)
12
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note H - Working Capital Advance
On March 13, 2003, La Jolla Cove Investors, Inc., the holder of the Company's
convertible debenture, advanced the Company an additional $200,000 for working
capital purposes. At La Jolla Cove's sole discretion, the $200,000 may be
allocated in any proportion to a) an increase in the principal amount of the
debenture and/or b) a prepayment for a future warrant exercise. During the
second quarter of 2003, La Jolla made an additional advance of $150,000 and
elected to allocate the entire $350,000 in additional funding to the principal
balance of the convertible debenture.
On August 5, 2003, La Jolla Cove Investors, Inc., the holder of the Company's
convertible debenture, advanced the Company an additional $400,000 for working
capital purposes as an advance against future exercise against the outstanding
warrant. On October 9, 2003, La Jolla Cove Investors, Inc. and the Company
negotiated an addendum to the Convertible Debenture and Warrant to Purchase
Common Stock whereby La Jolla would receive 2,200,000 shares of common stock in
satisfaction of the $400,000 working capital advance.
Note I- Capital Leases Payable
Capital leases payable consist of the following as of September 30, 2003 and
2002, respectively:
September 30, September 30,
2003 2002
------------- -------------
Three capital leases, respectively, payable to various
equipment financing companies. Interest, at March 31, 2002,
ranging between 11.37% and 14.05%. Payable in aggregate
monthly installments of approximately $935, including
accrued interest, as of December 31, 2002. Final maturities
occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 10,335 $ 19,540
Less current maturities (9,507) (8,365)
------------- -------------
Long-term portion $ 828 $ 11,175
============= =============
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
----------- --------
2003 $ 9,507
2004 828
--------
Totals $ 10,335
========
13
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note I - Long-Term Debt Payable to a Bank
On June 28, 2001, in anticipation of the settlement of litigation with a
financial institution, the Company executed a $950,000 note payable to another
financial institution. This note bears 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.
During the first quarter of Fiscal 2003, the Company made additional principal
reductions of $100,000 and $350,000 fully retiring the outstanding debt.
Note J - 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.
During the second quarter of Calendar 2003, the Holder made additional cash
advances to the Company totaling $350,000 which were applied to the outstanding
principal balance on the Debenture.
The Debenture bears interest at 8.0% and matures two years from the date of
issuance.
In December 2002, the Company and the Debenture Holder 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 conversion price is obtained by multiplying the
average of the five (5) lowest Volume Weighted Average Prices (VWAP) during
the 20 trading days prior to the date of conversion by the Discount
Multiplier of 80%.
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.
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 was 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. This Registration Statement was declared effective by the U. S. Securities
and Exchange Commission on May 14, 2003.
14
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J- Convertible Debenture - Continued
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.
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
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
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.
15
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J- Convertible Debenture - Continued
On various dates through September 30, 2003, the Debenture Holder elected to
convert an aggregate $168,635, through 21 separate transactions, in outstanding
Debenture principal into common stock. This election caused the Company to issue
3,301,906 shares of common stock to the Debenture Holder. Additionally, pursuant
to the contract terms, the Debenture Holder concurrently exercised a portion of
the outstanding Warrant to purchase 1,686,350 shares of the Company's common
stock for gross proceeds of $1,686,350.
Note K - Preferred Stock Transactions
Preferred stock consists of the following as of September 30, 2003 and 2002,
respectively:
September 30, 2003 September 30, 2002
------------------ ------------------
# shares value # shares value
-------- --------- -------- ---------
Series A Cumulative Convertible Stock 32,000 $ 160,000 46,000 $ 230,000
Series B Cumulative Convertible Stock 91,700 458,500 - -
-------- --------- -------- ---------
123,700 618,500 46,000 230,000
========= =========
Beneficial Conversion Feature Discount (15,890) -
--------- ---------
Totals $ 602,610 $ 230,000
========= =========
In September, October and November 2001, the Company sold an aggregate 222,600
shares of $5.00 Series A Convertible Preferred Stock (Series A Preferred Stock)
for total proceeds of approximately $1,113,000 through a Private Placement
Memorandum. The Series A Convertible Preferred Stock provides for cumulative
dividends at a rate of 8.0% per year, payable quarterly, in cash or shares of
the Company's common stock at the Company's election. Each share of Series A
Preferred Stock is convertible into 11 shares of the Company's common stock
initially at any time after 6 months of the date of issue and prior to the
notice of redemption at the option of the holder, subject to adjustments for
customary anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
In September 2001, the Company's principal stockholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
16
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions - Continued
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. This difference created
a Beneficial Conversion Feature Discount of approximately $1,207,993. This
discount was then amortized over the unexpired time period between the date of
issue of the eligible shares and the eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
In January 2003, three separate holders of an aggregate 9,000 shares of Series A
Preferred Stock exercised their conversion rights and converted these shares of
Series A Preferred stock into 99,000 shares of restricted, unregistered common
stock.
In May 2003, the Company sold an aggregate 91,700 shares of $5.00 Series B
Convertible Preferred Stock (Series B Preferred Stock) for total proceeds of
approximately $458,500 through a separate Private Placement Memorandum. The
Series B Convertible Preferred Stock provides for cumulative dividends at a rate
of 8.0% per year, payable quarterly, in cash or shares of the Company's common
stock at the Company's election. Each share of Series B Preferred Stock is
convertible into 11 shares of the Company's common stock initially at any time
after 6 months of the date of issue and prior to the notice of redemption at the
option of the holder, subject to adjustments for customary anti-dilution events.
Note L - Common Stock Transactions
In February 2002, the Company converted $100,000 in short-term debt payable and
accrued interest of approximately $25,000 to an existing stockholder 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. 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.
17
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In March 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to an unrelated party for stockholder 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 stockholder to reimburse said stockholder for his
cash payment on behalf of the Company of previously accrued legal fees
associated with the bank related litigation, which was concluded in June 2001,
and for other consulting services currently being provided by the stockholder.
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.
In July 2002, the Company sold 384,615 shares of restricted, unregistered common
stock to an existing stockholder 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 stockholder 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 stockholder 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 stockholder 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.
18
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholder 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.
19
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In January 2003, the Company issued an aggregate 937,568 shares of restricted,
unregistered common stock for cash proceeds of approximately $324,182. These
sales were made at a price of either $0.23 or $0.36 per share, which was in
excess of the discounted "fair value" of the Company's common stock based on the
quoted closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used for operating working
capital.
In February 2003, the Company issued 384,615 shares of restricted, unregistered
common stock for cash proceeds of approximately $100,000. These sales were made
at a price of $0.26 per share, which was in excess of the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to reduce the Company's outstanding long-term
debt.
In March 2003, the Company issued 972,222 shares of restricted, unregistered
common stock for cash proceeds of approximately $350,000. These sales were made
at a price of $0.36 per share, which was in excess of the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The proceeds
of this transaction were used to reduce the Company's outstanding long-term
debt.
In March 2003, the Company issued an aggregate 966,608 shares of restricted,
unregistered common stock to the Holder of the Company's 8.0% Convertible
Debenture upon notice of conversion of $35,000 of outstanding principal and
exercise of a portion of the outstanding warrant to purchase 350,000 shares of
common stock. This transaction was valued at $385,000, or approximately $0.40
per share, which was in excess of the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The cash proceeds of this transaction
were used to provide working capital and support operations.
In May 2003, the Company issued 1,967 shares of restricted, unregistered common
stock in payment of approximately $1,200 in accrued dividends payable on the
Company's outstanding Series A Preferred Stock for the quarter ended March 31,
2003.
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, in exchange for the redemption of approximately $93,500 in
outstanding debenture balance and approximately $935,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
Note M - 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.
20
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Income Taxes
The components of income tax (benefit) expense for the nine months ended
September 30, 2003 and 2002, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------- -------------
Federal:
Current $ - $ -
Deferred - -
------- -------
- -
------- -------
State:
Current - -
Deferred - -
------- -------
- -
------- -------
Total $ - $ -
======= =======
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 nine months ended September
30, 2003 and 2002, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------ -------------
Statutory rate applied to loss before income taxes $ (902,000) $ (350,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 902,000 350,000
----------- ------------
Income tax expense $ - $ -
=========== ============
21
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Income Taxes - Continued
Temporary differences, consisting primarily of statutory differences in the
depreciable lives for property and equipment, between the financial statement
carrying amounts and tax bases of assets and liabilities give rise to deferred
tax assets and liabilities as of September 30, 2003 and 2002, respectively:
September 30, September 30,
2003 2002
------------- -------------
Deferred tax assets - long-term - net $ 3,000,000 $ 2,150,000
Less valuation allowance (3,000,000) (2,150,000)
------------- -------------
Net Deferred Tax Asset $ - $ -
============= =============
During the nine months ended September 30, 2003 and 2002, respectively, the
valuation allowance increased by approximately $750,000 and $950,000.
Note O - Subsequent Events
On October 20, 2003, the Company issued an aggregate 38,366 shares of
restricted, unregistered common stock in payment of accrued dividends on the
issued and outstanding Series A and Series B Convertible Preferred Stock.
(Remainder of this page left blank intentionally)
22
Item 2 - Management's Discussion and Analysis or Plan of Operation
(1) Caution Regarding Forward-Looking Information
Certain statements contained in this Registration Statement including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this quarterly report on Form 10-QSB and
investors 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.
(2) Description of Business
We were incorporated on February 1, 2000 in the State of California. American
Ammunition, Inc. is a holding company with two operating subsidiaries: F&F
Equipment, Inc. and Industrial Plating Enterprise Co.
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.
In June 2002, we 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.
23
(3) Significant Developments
During the third quarter of 2003, the Company's operations experienced the
negative impact of a lower than anticipated or budgeted purchases by Elliot
Brothers, a significant customer.
However, during this same time period, the Company has entered into a strategic
alliance with Israel Military Industries (IMI), an entity owned by the State of
Israel, for the cross-production and sale of various small arms ammunition. This
alliance is anticipated to greatly expand the Company's catalog of products and
assist in utilizing existing production capacity.
The Company has executed a private labeling agreement with Century International
Arms, Inc. (Century). Under this agreement, the Company will produce it's
standard catalog of small arms ammunition plus one specialty small arms
cartridge to Century's specifications for packaging in Century's designated
labeling. This agreement will require no modifications to the Company's
production line and will not require the addition of supplemental personnel or
equipment. The initial shipment under this agreement is for an aggregate
2,010,000 rounds of ammunition at selling prices of $81.00 to $120.00 per 1,000
rounds, as defined in this agreement. The agreement is for an initial period of
nine (9) months and covers periodic orders/shipments of an aggregate 13,670,000
rounds of ammunition from the Company's standard catalog of products and
1,000,000 of the specialty rounds made to Century's specifications.
Additionally, the Company has been awarded three (3) separate contracts from
various departments of the U. S. Government. Each contract is for an initial
term of one year (commencing between April 24, 2003 and September 30, 2003) with
four (4) successive individual one-year extension options. The contracts are
summarized as follows:
Contract 1: U. S. Department of State. Minimum annual volume of approximately
100,000 rounds of military grade small arms ammunition. Maximum
annual volume of approximately 5,000,000 rounds. Maximum volume
may be increased at the discretion of the Contracting Officer and
respective utilization requirements. Through October 22, 2003,
the Company has received firm orders for 2,265,000 rounds of
ammunition under this contract and has approximately 1,265,000
rounds ready for shipment. The ammunition under this contract
will be subject to the strategic alliance with Israel Military
Industries (IWI).
Contract 2: U. S. Department of Energy. This contract covers seven (7)
separate products in the Company's standard catalog of products.
The U. S. Department of Energy is obligated to purchase an
aggregate of 4,549,000 rounds of ammunition under this contract.
Through October 22, 2003, the Company has not shipped any product
under this contract. Management anticipates that initial
shipments under this contract will commence on or before November
30, 2003.
24
Contract 3: U. S. Department of Homeland Security. This contract covers four
(4) separate products being introduced to the Company's catalog
through the strategic alliance with IMI and requires no
modifications to the Company's production facilities or additions
to the labor force. The minimum annual volume is 1,000 rounds of
each product and a maximum annual volume of 9,600,000 rounds of
two (2) products and 36,000,000 of the remaining two (2)
products. Management anticipates the first shipment of 4,000
rounds of first article samples, as defined in the contract, on
or before October 30, 2003 and shipments of production product to
commence on or before November 30, 2003.
(4) Results of Operations
Nine months ended September 30, 2003 compared to Nine months ended September 30,
2002
During the nine months ended September 30, 2003, the Company recognized net
revenues of approximately $1,216,000 as compared to net revenues of
approximately $1,277,000 for the same period ended September 30, 2002. The
Company continues to experience positive demand for the Company's products and
is taking all steps necessary to lower demand on significant customers from
prior years, expand the Company's customer base and consummate various short and
long-term contracts with various governmental and private sector entities. The
third quarter of Calendar 2003 experienced revenue declines over anticipated
levels as previously discussed due to lower than anticipated order quantities
from a significant customer and management's continued efforts towards
developing new distribution channels for the Company's products and efforts
associated with the development of foreign markets and strategic alliances with
foreign producers of products that are not in the Company's catalog and vice
versa. These efforts were fruitful in the third quarter of 2003 and should yield
positive impacts on the Company's operations in future periods.
The Company experienced costs of goods sold of approximately $2,209,000 and
$1,720,000 for the nine months ended September 30, 2003 and 2002, respectively.
The Company has recognized depreciation expense on production equipment of
approximately $495,000 and $484,000, 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 during 2002 allows us to produce certain components
which were previously outsourced to unrelated third parties.
For the nine months ended September 30, 2003 and 2002, respectively, we have
generated a negative gross profit of approximately $(993,000), or (81.66%), and
approximately $(442,000), or (34.64%). The increase in cost of sales
expenditures during the first nine months of Calendar 2003 are attributable to
increased labor costs in establishing a second shift , scheduled maintenance and
repairs on equipment and machinery to be able to support the anticipated
throughput of product through the Company's production facilities and general
25
inflationary increases in consumable supplies and other direct costs of the
manufacturing process. We anticipate that with continued demand for our product,
lower production costs being experienced from internally generated plating
activities and adequate liquidity, we should 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
pricing model coupled with the sales volumes to be generated from the new
contracts and strategic alliances previously discussed will allow management to
better manage expense levels, control labor costs and maximize revenue
opportunities.
The Company experienced research and development expenses of approximately
$9,200 and $2,900 during the respective nine month periods ended September 30,
2003 and 2002 related to the development of a new patent- pending reduced hazard
projectile for use in ammunition specifically for the public safety and security
marketplace, testing of various products related to the new strategic alliance
with IMI and the development of the specialty small arms cartridge for Century
International Arms, Inc.
Other general and administrative expenses increased from approximately $595,000
for the first nine months of 2002 to approximately $1,594,000 for the first nine
months of 2003 as a result of increased activity related to interest expense on
the Company's Convertible Debenture and Long-term Debt and increased rent and
operating expenses in the Company's IPE subsidiary. Included in the charges to
operations for the nine months ended September 30, 2003 and 2002, respectively,
is approximately $736,000 and $11,300 related to non-cash charges for the
economic effect of the issuance of common stock in redemption of the Convertible
Debenture at calculated prices below the "fair value" of the Company's stock at
the time of issuance. In terms of true direct general and administrative
expenses, the year-to-date expenses for Calendar 2003 of approximately $857,800
compare favorably to the 584,000 for the same period of Calendar 2002. The
primary increases are due to increases salaries and wages, group health
insurance, general liability insurance costs, engagement of an investor
relations firm and general increases in amounts paid for various goods and
services necessary to support the Company's operations.
The Company recognized a net loss of approximately $(2,662,000) and $(1,027,000)
for the respective nine month periods ended September 30, 2003 and 2002,
respectively, or $(0.04) and $(0.02) per share.
(5) Liquidity and Capital Resources
As of September 30, 2003, December 31, 2002, and September 30, 2002,
respectively, the Company had working capital of approximately $1,348,000,
$56,000, and $239,000.
The Company has generated (used) cash in operating activities of approximately
$(1,901,000), $(1,111,000) and $(832,000) during the nine months ended September
30, 2003, the year ended December 31, 2002 and the nine months ended September
30, 2002. The most significant use of cash during the nine months ended
September 30, 2003 was related to the support of the Company's operations in
light of sales volumes that have not reached the Company's break even point.
26
(6) Convertible Debenture
On October 4, 2002, we signed a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. (La Jolla) 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% and matures two years from the date of issuance.
In December 2002, the Company and La Jolla, the Debenture and/or Warrant Holder,
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 conversion price is obtained by multiplying the
average of the five (5) lowest Volume Weighted Average Prices (VWAP) during
the 20 trading days prior to the date of conversion by the Discount
Multiplier of 80%.
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.
We were 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. Our Registration Statement on Form SB-2 was deemed effective by the U.
S. Securities and Exchange Commission on May 14, 2003 at 1:00 pm EDT.
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 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 La Jolla 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 them or their 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 could have demanded 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 May 14, 2003, the date that underlying Registration Statement under the
Securities Act of 1933 was declared effective by the U. S. Securities and
Exchange Commission, within 3 business days of such demand. If the repayment was
accelerated, we were obligated to issue La Jolla 25,000 shares of common stock
27
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 "Stockholders'
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 stockholder's equity section for
the par value and excess amount over the par value of the respective shares
issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
Concurrent with the execution of the Debenture agreement, we executed an
engagement letter with La Jolla's counsel for legal representation with regard
to the preparation of the Registration Statement under the Securities Act of
1933 on Form SB-2.
On March 13, 2003 and May 6, 2003, La Jolla Cove Investors, Inc., the holder of
the Company's convertible debenture, advanced the Company an additional $200,000
and $150,000, respectively, for working capital purposes. During the second
quarter of 2003, La Jolla elected to allocate the entire $350,000 in additional
funding to the principal balance of the convertible debenture.
On various dates between May 7, 2003 and June 30, 2003, La Jolla elected to
convert an aggregate $75,135, through six (6) separate transactions, in
outstanding Debenture principal into restricted, unregistered common stock. This
election caused the Company to issue 1,334,777 shares of restricted,
unregistered common stock to the Debenture Holder. Additionally, pursuant to the
contract terms, the Debenture Holder concurrently exercised a portion of the
outstanding Warrant to purchase 751,350 shares of the Company's restricted,
unregistered common stock for gross proceeds of $751,350.
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, to La Jolla in exchange for the redemption of approximately
$93,500 in outstanding debenture balance and approximately $935,000 in cash from
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the exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
(7) Research and Development
We may significantly increase our spending on research and development
activities during the remainder of Calendar 2003 and into Calendar 2004 based
upon our estimation of consumer and governmental demand for new products into
the ammunition marketplace. Over the next 12 calendar months, we may complete
the design, development and introduction of our new patent-pending reduced
hazard projectile for use in ammunition specifically for the public safety and
security marketplace, or work with our strategic alliance partner for the
modification and integration of existing products in the marketplace to our
product catalog.
Further, additional ammunition calibers and/or projectiles may be developed by
us or in conjunction with our strategic alliance partners, depending upon market
research, acceptance in the marketplace of existing products and production
capabilities.
Item 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's President, Chief Executive and Chief
Financial Officer. Based upon that evaluation, the Company's President, Chief
Executive and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
29
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, to La Jolla Cove Investors, Inc. in exchange for the redemption of
approximately $93,500 in outstanding debenture balance and approximately
$935,000 in cash from the exercise of the affiliated warrant. Where the closing
price of the Company's common stock was in excess of the respective price per
share on the respective transaction date, the Company recognized a charge to
operations for "compensation expense related to common stock issuances at less
than "fair value". The cumulative effect of transactions where the transaction
price, as established in the Debenture Agreement, was less than the closing
price on the date of the respective transactions resulted in a cumulative charge
to operations of approximately $317,539 during this time period.
On October 20, 2003, the Company issued an aggregate 38,366 shares of
restricted, unregistered common stock in payment of accrued dividends on the
issued and outstanding Series A and Series B Convertible Preferred Stock.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has submitted no matters to a vote of the Shareholders during the
preceding three or twelve month periods.
Item 5 - Other Information
On May 14, 2003, the Company's Registration Statement under the Securities Act
of 1933 on Form SB-2 was deemed effective by the U. S. Securities and Exchange
Commission. This document registered an aggregate 14,687,500 shares of our
common stock which are issuable upon conversion of our 8.0% Convertible
Debenture, with an outstanding balance of approximately $215,000 at the
effective date, and the exercise of the attached warrants by the selling
stockholder, La Jolla Cove Investors, Inc. We also registered 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 represented 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 the 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 be required to file a new Registration Statement to cover the
resale of such additional shares should that become necessary.
30
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
Number Description
------ -------------------------------
31.1 * Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 * Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
* Filed Herewith
Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Dated: October 28, 2003 /s/ Andres F. Fernandez
----------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
31