U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to ________________
Commission File No.: 000-32379
American Ammunition, Inc.
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(Name of small business registrant in its charter)
California 91-2021594
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 NW 71st Street
Miami, FL 33147
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 835-7400
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
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(Title of class)
Copies of Communications Sent to:
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
Tel: (561) 832-5696 - Fax: (561) 659-5371
Check whether the registrant (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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State registrant's revenues for its most recent fiscal year. $1,984,997
The aggregate market value of the voting common equity held by non-affiliates as
of December 31, 2003 was $10,786,078.24 based upon 66,893,628 shares outstanding
of which 38,521,708 was held by non-affiliates and a share price of $0.28. No
non-voting common equity is outstanding.
PART I
Item 1. Description of Business
Business Development
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward- looking statements
contained herein to reflect future events or developments.
American Ammunition, Inc. (the "Company") was incorporated on February 1, 2000
in the State of California as FirsTelevision.com. It 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.
On September 29, 2001, the Company, F&F Equipment, Inc. d/b/a American
Ammunition ("AA") and the individual shareholders of AA entered into a share
exchange agreement whereby the shareholders of AA exchanged 100% of the issued
and outstanding stock of AA for 21,000,000 post- forward split shares of
restricted common stock of the Company. AA then became a wholly-owned subsidiary
of the Company.
The acquisition of AA, on September 29, 2001, by the Company effected a change
in control and was accounted for as a "reverse acquisition" whereby AA is the
accounting acquiror for financial statement purposes. Accordingly, for all
periods subsequent to the September 29, 2001 change in control transaction, the
financial statements of the Company reflect the historical financial statements
of AA from its inception on October 4, 1983 and the operations of the Company
subsequent to September 29, 2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
AA 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."
3
The Company relied upon Section 4(2) of the Securities Act of 1933, as amended
(the "Act") and Rule 506 of Regulation D promulgated thereunder ("Rule 506") for
recent issuances of its unregistered securities. In each instance, such reliance
was based upon the fact that (i) the issuance of the shares did not involve a
public offering, (ii) there were no more than thirty-five (35) investors
(excluding "accredited investors"), (iii) each investor who was not an
accredited investor either alone or with his purchaser representative(s) has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the prospective investment, or the
issuer reasonably believes immediately prior to making any sale that such
purchaser comes within this description, (iv) the offers and sales were made in
compliance with Rules 501 and 502, (v) the securities were subject to Rule 144
limitations on resale and (vi) each of the parties was a sophisticated purchaser
and had full access to the information on the Company necessary to make an
informed investment decision by virtue of the due diligence conducted by the
purchaser or available to the purchaser prior to the transaction (the "506
Exemption").
La Jolla Cove Investors
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 then
outstanding principal balance on the Debenture.
The Debenture bears interest at 8.0% and matures on October 4, 2004. 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.
At December 31, 2003 and 2002, respectively, the outstanding balance on the
Debenture was approximately $391,365 and $250,000.
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 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.
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.
4
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%.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
On various dates through December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 shares of restricted, unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
As of December 31, 2003, pursuant to the conversion terms of the Debenture, the
Debenture Holder was approximately $77,500 in arrears in the contractually
obligated conversions, and accordingly, the related mandatory warrant exercise
of approximately $775,000.
Preferred Stock Transactions
Preferred stock consists of the following as of December 31, 2003 and 2002,
respectively:
December 31, 2003 December 31, 2002
----------------- -----------------
# shares value # shares value
-------- ----- -------- -----
Series A Cumulative Convertible Stock 12,000 $ 60,000 41,000 $ 205,000
Series B Cumulative Convertible Stock 91,700 458,500 - -
------- --------- -------- ---------
103,700 $ 518,500 41,000 $ 205,000
======= ========= ======== =========
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
5
Memorandum. The Series A Convertible Preferred Stock provides for cumulative
dividends at a rate of 8.0% per year, payable quarterly, in cash or shares of
the Company's common stock at the Company's election. Each share of Series A
Preferred Stock is convertible into 11 shares of the Company's common stock
initially at any time after 6 months of the date of issue and prior to the
notice of redemption at the option of the holder, subject to adjustments for
customary anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
In September 2001, the Company's principal stockholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. This difference created
a Beneficial Conversion Feature Discount of approximately $1,207,993. This
discount was then amortized over the unexpired time period between the date of
issue of the eligible shares and the eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
In January 2003, three separate holders of 9,000 shares of Series A Preferred
Stock exercised their conversion rights and converted these shares of Series A
Preferred stock into 99,000 shares of restricted, unregistered common stock.
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.
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.
6
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 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.
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.
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.
7
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.
In October 2003, in a separate transaction, the Company sold 2,200,000 shares of
restricted, unregistered common stock to the Debenture Holder for cash proceeds
of approximately $400,000, or approximately $0.18 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 October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 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 $146,189 during this time period.
In October 2003, the Company issued an aggregate 37,866 shares of restricted,
unregistered common stock in payment of approximately $16,710 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarters ended June 30, 2003 and September 30, 2003, collectively.
8
Long-Term Debt Payable to a Bank
On June 28, 2001, the Company executed a $950,000 note payable to a financial
institution. This 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
aggregating $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 Calendar 2003, the Company made two (2) lump-sum principal reductions
aggregating $450,000 to the outstanding balance on this note. As of March 31,
2003, this note was retired in full.
See (b) "Business of Registrant" immediately below for a description of the
Company's business.
Business of Registrant
General
The Company changed its name to American Ammunition, Inc. on September 26, 2001
and currently is quoted on the OTC-BB under the symbol "AAMI".
On September 29, 2001, the Company entered into a Share Exchange Agreement with
AA whereby 100% of the shares of AA were acquired by the Company in exchange for
shares of the Company's common stock. A new Board of Directors consisting of AA
directors took control of the Company.
The Company's principal executive offices are located at 3545 NW 71st Street,
Miami, Florida 33147; and its telephone number is (305) 835-7400.
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, 30 carbine, 223 Remington, 38
Super, .44 Special and 32 Smith and Wesson Long . We have also added .44 Magnum,
..308, .50 AE and .50 caliber manufacture in Israel and shipped to the Company
for distribution under the Company's brand name. We have identified these
products as having the largest share of the market for the next several years.
We sell our products into both domestic and foreign markets. At this time, our
domestic sales are made to both private sector entities and governmental
agencies, principally Federal. Our international sales are, at this time, made
solely to foreign governments, principally for military use. During Calendar
2003 and 2002, our sales were approximately 93.8% and 100.0% domestic and
approximately 6.2% and 0.0% international. We anticipate the international
governmental portion of our business to grow in future periods; however, we do
not anticipate our international business to outgrow our domestic sales.
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.
9
Our technology and equipment enable us to produce a large variety of handgun and
rifle ammunition. We have a machine shop and maintains our own testing and
quality assurance equipment and program. Ammunition is a performance-based
product. Therefore, after the manufacturing process is complete, the ammunition
must comply with specific protocols such as velocity, accuracy, and pressure. We
purchase 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.
In 2003 and 2004 we acquired equipment which will allow us to expand our
production capacity in areas which they have traditionally been slower than
other areas of our manufacturing process. The acquisition of additional presses,
for example, has helped us to balance out our assembly line process so that all
portions of our projectiles are manufactured in time with each other. We hope
this will cut our manufacturing and labor costs and as a result, make us more
efficient at producing small arms ammunition.
We also recently acquired laser gauging computer equipment for the purpose of
improving and automating quality control processes. This newly acquired
equipment, when added to the production line, will automatically eject bad
projectiles from the assembly line. This should further improve the final
products we produce and cut labor costs associated with manual inspection of
product.
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
Traditionally, American Ammunition has had a domestic sales network of
distributors and sales representatives. In the past, Ellett Brothers, Inc.
accounted for large portions of the Company's total sales for fiscal year 2001,
2002 and even 2003. However, in first quarter 2004, the Company launched its
Dealer Direct Program and hired Paul Goebel as its National Sales Manager. In
doing so, the Company has completely revamped the way it distributes and sells
its products domestically.
In essence, the Company cut out the "middle man" distributor by offering its
products directly to and soliciting orders directly from the 66,000 licensed
dealers in the United States. In doing this, the Company may offer its products
to dealers cheaper than dealers would otherwise obtain them from distributors,
while increasing the Company's profit margins as well. It also eliminates a
second freight charge from the distributor to the dealer, as product is shipped
directly from the manufacturer to the dealer.
10
The Company's marketing strategy consists of several new key features to attract
dealers directly to the Company, rather than to a distributor. First, the
Company is offering "net 60" day credit terms to smaller dealers, who would
ordinarily be forced to pay for product up front. The Company has developed a
screening process for qualifying these smaller dealers on an individual basis.
Although offering net 60 credit terms to dealers results in increased risk to
the Company in its account receivables as compared to payment in advance, the
Company has exponentially diversified its receivables (and therefore its credit
risk) from thirteen (13) main distributors to potentially thousands of
individual dealers.
Secondly, the Company now offers free freight (shipping) to dealers on certain
orders which exceed a specified amount. Shipping of small arms ammunition has
always been a large portion of the cost passed to consumers as the product is
heavy and requires extra care in shipping. The Company has determined that it
can ship its products at a reduced rate in quantity and offers free shipping as
an incentive on qualified orders. As previously, explained, a second freight
charge has also been avoided by eliminating the distributor from the
transaction.
Additionally, the Company's increasing automation and dealer direct program have
considerably sped up the time it takes to provide a dealer with demanded
product. Company management has become aware of an unfulfilled need of dealers
to be provided with almost instant gratification when demand at retail
establishments increases. Many dealers have communicated with the Company
complaining that it took their distributors too long to provide them with
additional product supply when demand dictated. The Company believes that its
new distribution strategy complimented with recent automation has cut the time
it takes a dealer to receive the Company's products by more than half.
The Company only recently upgraded its website to include e-commerce capacity,
wherein licensed dealers who are pre-registered with the Company can order
online direct from the Company. Sales in this manner are slow, but the Company
is hopeful that as it steers dealers who currently order from the Company to the
site, it will further automate the way in which dealers place product orders
from the Company.
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
"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 called 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.
11
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
Israeli Military Industries Ltd.
The Company has developed a relationship with Israeli Military Industries Ltd.
("IMI"), whereby the two (2) companies work together on individual projects. To
date, the companies have primarily focused their cooperation on federal
contracts and on the Company's dealer direct program. In such contracts,
projectiles manufactured by IMI have been assembled by the Company under IMI's
strict quality control requirements.
The joint venture has benefited the Company in several ways. First and foremost,
IMI has a distinct following as a result of offering very high quality products
of the course of many years. Associating the Company's name with IMI's history
has added value to the Company's brand and reputation in the small arms
ammunition industry. Second, IMI manufactures different calibers and products
than the Company, thereby increasing the catalogue of items the Company may
offer to its dealers. IMI produces commercial ammunition, similar to the
Company. However, it also specializes in the production of law enforcement and
military grade ammunition, which the Company currently does not have the
production capability to produce on its own. Lastly, on past and current
cooperation initiatives, IMI has shipped projectiles and materials for assembly
at no cost to the Company, thereby saving the Company the time value of such
costs were it to have produced such items or purchased such raw materials
itself.
Triton
On February 10, 2004, the Company executed a non-binding letter of intent to
acquire the assets of Triton Ammunition Corporation ("Triton"). Such assets
include machinery, raw materials and intellectual property rights. Triton will
convey patents and licenses for the Hi-Vel and Quik- Shok lines of ammunition.
For such assets, the Company is obligated to issue shares of the Company's
restricted common stock valued at $1,400,000 based upon the average closing
market price for the five (5) trading days ending on the third (3rd) trading day
immediately prior to closing on the definitive agreement. The letter of intent
is subject to further due diligence and expired if a definitive agreement was
not executed on or before February 21, 2004, however the LOI has since been
extended.
The Company believes that with the acquisition of certain Triton specialty
ammunition and its partnership with IMI on certain ventures, the Company will be
able to offer an increased product line to its dealers.
ECO-AMMO(TM)
The Company is now manufacturing and distributing ECO-AMMO(tm). It is a
lead-free projectile with reduced lead pollutants sometimes referred to as
"green" ammo. ECO-AMMO is ideal for indoor ranges since it disintegrates upon
impact and therefore does not ricochet. AAMI has been acquiring and developing
technology to market this environmentally friendly ammunition for some time. The
advent of the dealer direct program enables the product to be distributed at a
lower cost and should open up the market to more consumers.
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.
12
We departed completely from standard ballistics for the design of this
projectile to meet what American Ammunition perceives as a growing and unfilled
need. Two of the basic design criteria in ballistics are penetration and
expansion of the projectile. In this design, these two factors have been
controlled to meet the specific requirements of weapons discharged inside an
aircraft cabin, while insuring fuselage integrity. This design is a new concept
in close quarter ammunition: a bullet capable of incapacitating an assailant
without damaging surrounding structure.
Design and material selection allows for the inverted expansion and aft internal
collapse of the projectile mass. Upon impact with the aircraft fuselage, the
bullet internally collapses; therefore not allowing for the transfer of kinetic
energy forward or penetration above that required for soft tissue penetration.
Testing has been successful using test sections of various commercial airliner
fuselages as well as ballistic testing using both ordinance gelatin and bovine
tissue. This performance criterion is accomplished without sacrificing the
standard velocity and accuracy of the caliber being used. A video of those tests
can be viewed on our website at www.a-merc.com in the New Product Section. We
believe that these research and development efforts will provide a new product
to the public safety and security marketplace.
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.
13
Patents, Copyrights and Trademarks
We intend to protect our original intellectual property with patents, copyrights
and/or trademarks as appropriate.
Our head stamp "A-MERC " was registered as a trademark on May 10,1994. We were
assigned a serial number (60/325,046) from the U.S. Patent and Trademark Office
for our provisional patent application filed on September 26, 2001 for a bullet
that will not pierce an aircraft fuselage but will penetrate human soft tissue.
Governmental Regulation
In accordance with the provisions of Title 1, Gun Control Act of 1968, we are
required to be licensed to import firearms and manufacture ammunition for
firearms. Such licensing is subject to limitations in Chapter 44, Title 18,
United States Code. In the event such licenses are not renewed for any reason,
we would have to cease our operations
In accordance with these requirements, we carry two licenses issued by the
Department of Treasury, Bureau of Alcohol, Tobacco and Firearms:
License No. 1-59-025-06-3D 69152 for "06 - Manufacturer of Ammunition for
Firearms", which license expires on April 1, 2006; and
License No. 1-59-025-08-3D-69454 for "08-Importer of Firearm other than
Destructive Devices", which license expires on April 1, 2006.
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.
Employees
At March 1, 2004, we employed 61 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.
14
Item 2. Description Of Property
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on July 31, 2004 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount. Total rent expense under this lease was approximately $67,075 and
$54,100, respectively, for each of the years ended December 31, 2003 and 2002.
The Company's subsidiary, IPE, leases its manufacturing facility from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of approximately $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2003 and 2002.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------ ----------
2004 $ 60,754
2005 23,565
2006 24,276
2007 4,076
---------
Totals $ 112,671
=========
We believe that our facilities are adequate for our needs for the foreseeable
future.
Item 3. Legal Proceedings
The Company is not a party to any pending litigation at this time nor is any of
its property subject to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
a) Market Information.
The common stock of the Company currently is quoted on the Over the Counter
Bulletin Board under the symbol "AAMI" and has been since October 23, 2001.
Prior to that time, it was approved for trading under symbol "FBIB," although it
never traded under that symbol. The ask/high and bid/low information for each
quarter since October 23, 2001 are as follows:
15
Quarter Ask/High Bid/Low
--------------------- -------- --------
09/01/2001-12/31/2001 1.75 0.53
01/01/2002-03/31/2002 0.81 0.33
04/01/2002-06/31/2002 0.65 0.36
07/01/2002 - 09/30/2002 0.57 0.31
10/01/2002 - 12/31/2002 0.47 0.38
12/31/2002 - 03/31/2003 0.78 0.53
04/01/2003 - 06/30/2003 0.85 0.42
07/01/2003 - 09/30/2003 0.55 0.37
10/01/2003 - 12/31/2003 0.42 0.22
Please note that over-the-counter market quotations have been provided herein.
The quotations reflect inter-dealer prices, without retail markup, mark-down or
commission and may not represent actual transactions.
(b) Holders.
As of December 31, 2003 the Company had one hundred seventy-eight (178)
shareholders of record of its 66,893,628 outstanding shares of common stock,
32,077,324 of which were restricted Rule 144 shares and 34,816,304 of which were
free-trading. Of the Rule 144 shares, 24,067,705 shares have been held by
affiliates of the Company for more than one (1) year.
(c) Dividends.
The Company has never paid or declared any dividends on its common stock and
does not anticipate paying cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis
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.
16
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 which unsuccessfully marketed a business plan concept of a
national "fast food" restaurant chain.
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."
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 third quarter of 2003, the Company's operations experienced the
negative impact of a lower than anticipated or budgeted purchases by Ellett
Brothers, a significant customer.
However, during this same time period, the Company has entered into a strategic
alliance with 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 its
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. The Company
began shipments under this agreement during the fourth quarter of 2003.
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 (1) 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 IMI.
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 December 31, 2003, the Company has
not shipped any product under this contract.
17
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 shipments of production product to commence during the first quarter
of 2004.
Results of Operations
Year ended December 31, 2003 compared with the year ended December 31, 2002
During the year ended December 31, 2003, we experienced aggregate net revenues
of approximately $1,985,000, with approximately $769,000 being realized during
the 4th quarter, as compared to approximately $1,409,000 for the year ended
December 31, 2002.
We experienced costs of goods sold of approximately $3,232,000 for the year
ended December 31, 2003 as compared to approximately $2,457,000 for the year
ended December 31, 2002. During 2003, we experienced negative trends off of our
standard production costs for material and labor due to difficulties in training
new employees and adding new products to our catalog. Management is of the
opinion that the production labor force is stable and able to maintain a
constant standard of quality for future periods. We experience variable costs in
the area of material consumption and direct labor. We have recognized
depreciation expense on production equipment of approximately $669,000 and
$653,000, 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.
For the year ended December 31, 2003 and 2002, respectively, we have generated a
negative gross profit of approximately $(1,247,000), or (62.82%), and
approximately $(1,047,000), or (74.31%). We anticipate that with the fulfillment
of the various private labeling agreements and government contracts discussed
above, continued retail consumer demand for our product line, lower production
costs being experienced from internally generated plating activities and
adequate liquidity, we 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 and further refined during 2003, 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 $4,000
and $3,700, respectively, during the years ended December 31, 2003 and 2002,
principally related to the expansion of our product line.
Other general and administrative expenses increased by approximately $282,000
from approximately $845,000 for the year ended December 31, 2002 as compared to
approximately $1,127,000 for the year ended December 31, 2003. The most
significant increases relate to advertising and marketing expenses, office and
administrative wages and salaries and overall office overhead.
Included in our results of operations for both 2003 and 2002 2001 are non-cash
expenditure charges. During 2003 and 2002, respectively, we experienced charges
to operations of approximately $883,000 and $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
18
services provided to us by third parties. During 2003, we experienced a charge
of approximately $94,000 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 2003.
We recognized a net loss of approximately $(2,968,000) and $(1,883,000) for the
respective years ended December 31, 2003 and 2002, respectively, or $(0.05) and
$(0.04) per share.
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.
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
19
$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.
Liquidity And Capital Resources
As of December 31, 2003 and 2002, respectively, we had working capital of
approximately $2,000,000 and $56,000. Our working capital position improved
significantly at December 31, 2003 due to the volume of shipments during the 4th
quarter to our customers and increases in inventory to support the pending U. S.
Government contracts.
We have used cash in operating activities of approximately $2,918,000 and
$1,236,000 during the years ended December 31, 2003 and 2002, respectively.
The most significant use of cash in operations during the year ended December
31, 2003 was the production of inventory shipped on open account during the 4th
quarter and the increase in inventory levels to support the U. S. Government
contracts with shipments to commence during the 1st quarter of 2004.
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.
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 bore 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 were 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. At December 31, 2002, we
owed $450,000 on this note and retired the note in full during the first quarter
of 2003.
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 years ended December 31, 2003 and 2002, respectively, we added
approximately $289,000 and $387,000 in new equipment, of which approximately
$225,000 was acquired in 2002 for 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 an additional 50% to
100%, as influenced by the availability of manufacturing equipment on the open
market and product sales demand. 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 be
obtained on terms favorable to or affordable by us.
20
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
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.
21
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
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.
In October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 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 $146,189 during this time period.
Research and Development
Depending on the demand for new product lines and the refinement of our
production processes under our production agreement with IMI for the
cross-production and sale of various small arms ammunition, we may or may not
incur increased spending on research and development activities during Calendar
2004.
22
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.
Item 7. Financial Statements
The required consolidated financial statements begin on page F-1 of this
document.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 29, 2002 the Company notified its accountants, Roger G. Castro, CPA
that they were being dismissed as the Company's independent auditors. The stated
reasons were that the Registrant wanted to retain the auditor of its
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. The Company's Board of Directors made the
decision to change accountants.
During the Registrant's past two (2) fiscal years and during any subsequent
interim period preceding the date of dismissal, the Company has 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 the Company provided Roger G. Castro, CPA with a copy of
this disclosure and requested that it furnish a letter to the Company, addressed
to the SEC, stating that it agreed with the statements made herein or the
reasons why it disagreed. On January 29, 2002, the Company received a letter
from Roger G. Castro, CPA that it agreed with the statements contained herein.
On January 29, 2002, the Company engaged the firm of S.W. Hatfield, CPA, P.O.
Box 820392, Dallas, TX 75382 as the Company's independent auditors. Such
appointment was accepted by S.W. Hatfield, President of the firm. Prior to such
engagement, the Registrant 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.
Item 8A. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this Annual Report on Form 10- KSB, that the Company's disclosure
controls and procedures have functioned effectively so as to provide those
officers the information necessary whether:
(i) this Annual Report on Form 10-KSB contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report on Form 10-KSB, and
(ii) the financial statements, and other financial information included in this
Annual Report on Form 10-KSB, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as
of, and for, the periods presented in this Annual Report on Form 10-KSB.
There have been no significant changes in the Company's internal controls
or in other factors since the date of the Chief Executive Officer's and
Chief Financial Officer's evaluation that could significantly affect these
internal controls, including any corrective actions with regards to
significant deficiencies and material weaknesses.
23
Critical Accounting Policies and Procedures
The Company records the intrinsic value of the beneficial conversion feature of
the convertible debenture as additional paid-in capital and amortizes the
interest over the life of the debenture.
Research and development costs are charged to operations when incurred.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Set forth below are the names, ages, positions, with the Company and business
experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
--------------- --- -----------------------------------------
J.A. Fernandez, Sr. 67 Chairman of the Board and Director of Sales
Andres F. Fernandez 38 President and Chief Executive Officer
Emilio D. Jara 39 Vice-President of Operations, Secretary and Director
Maria A. Fernandez 44 Director
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualify. Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary to perform their responsibilities as executive officers and/or
directors of the Company.
Family Relationships
J.A. Fernandez, Sr. 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 the Company.
Business Experience
J. A. Fernandez, Sr., age 67, currently serves as the Chairman of the Board and
Director or Sales. He has been employed by AA since its inception in 1983. Mr.
Fernandez is the patriarch of what began as a family business and is responsible
for the sales activities of the Company. Mr. Fernandez has over 40 years
experience in diverse industries including aerospace, advanced polymer
manufacturing, munitions, mining and processing of gemstones and metal ores and
has utilized such experience for the growth and development of the Company. He
is fluent in Spanish.
Andres Fernandez, age 38, 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 AA for over a decade. Mr. Fernandez is responsible
for day to day operations and has been a driving force behind the Company and
its success in becoming a vertically integrated manufacturer. He studied physics
and calculus at St. Thomas University, FL and at the University of Miami, FL. He
is a licensed pilot, having graduated from the American Institute of
Aeronautics, FL, and received his certificate as a private pilot (fixed wing) as
well as private helicopter (rotary)in 1989. In 1989, Mr. Fernandez graduated
from the Institute of Public Service (Pan Am), GA as a tactical rappel
instructor. In 1990, he graduated from Omni Explosives, TN with a specialty in
tactical explosives. Mr. Fernandez was certified by the Florida Department of
Law Enforcement Academy in special operations/entry techniques in 1990. He has
served as a tactical advisor to U.S. Treasury Department, Bureau of Alcohol,
24
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 39, 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 with AA since 1988. He has been an integral part of
the Company's technological growth. His abilities have contributed to the
Company's research and development and subsequent increase in the number of
production lines. Mr. Jara is extremely well versed in metallurgical and
ballistic issues. He studied business administration at Miami-Dade Community
College (1984/1985). In 1989, he graduated from the Institute of Public Service
(Pan Am), GA as a Tactical Rappel Instructor. In 1990, Mr. Jara graduated from
Omni Explosives, TN with a specialty in Tactical Explosives. He is fluent in
Spanish.
Maria A. Fernandez, age 44, currently serves as a Director. Mrs. Fernandez has
served as a Director since September 2001. She has been the managing partner at
Fernandez Friedman Grossman & Kohn PLLC since May 1998. Prior to that date, she
was a partner at Taustine Post Sotsky Berman Fineman & Kohn. She concentrates
her legal practice in the areas of estate planning, probate and administration.
She also practices in the areas of Medicaid and disability planning, corporate
and individual taxation and Corporate law, with an emphasis in closely held
corporations. She is a graduate of the University of Miami, FL (Bachelor of
Business Administration and Master of Professional Accounting) and the Brandeis
School of Law at the University of Louisville, KY. Ms. Fernandez is licensed to
practice in Kentucky and Florida. She has lectured in the areas of estate
planning and probate, Medicaid planning and elder law. She is a member of the
Louisville, Florida, Kentucky and American Bar Associations and is fluent in
Spanish. Ms. Fernandez is the past President of the Women Lawyers Association of
Jefferson County, Kentucky and current Board Member of the Louisville Bar
Association. A Graduate of the Kentucky Women's Leadership Network, she is
active in various civic organizations and is on the board of several non-profit
corporations.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
No Director, Officer, Beneficial Owner of more than ten percent (10%) of any
class of equity securities of the Company failed to file reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year or prior
fiscal years.
Item 10. Executive Compensation
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued by the Company to each of the Company's executive
officers and key employees for services rendered to the Company during the
Company's fiscal year ended 2002, 2001 and 2000 and all plan and non-plan
compensation awarded to, earned by or paid to certain designated executive
officers.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
25
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities LTIP All
Name and Annual Stock Underlying Pay- Other
Principal Year Salary Bonus Compen- Award(s) Options/ outs Compen-
Position (1) ($) ($) sation ($) ($) SARs (f) sation ($)
----------------- ------ -------- -------- ------------ ---------- ------------ -------- ----------
J.A. 2000 $ 59,202 $0 $0 $0 $0 $0 $0
Fernandez, Sr., 2001 $ 50,859 $0 $0 $0 $0 $0 $0
Chairman, 2002 $ 77,770 $0 $0 $0 $0 $0 $0
Director of 2003 $104,000 $0 $0 $0 $0 $0 $0
Sales
Andres F. 2000 $ 88,438 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $ 74,290 $0 $0 $0 $0 $0 $0
President and 2002 $103,508 $0 $0 $0 $0 $0 $0
Chief Executive 2003 $132,600 $0 $0 $0 $0 $0 $0
Officer
Emilio D. 2000 $ 36,400 $0 $0 $0 $0 $0 $0
Jara, Vice- 2001 $ 42,500 $0 $0 $0 $0 $0 $0
President 2002 $ 43,000 $0 $0 $0 $0 $0 $0
Of 2003 $ 52,000 $0 $0 $0 $0 $0 $0
Operations,
Secretary
and
Director
Amelia 2000 $ 59,202 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $ 59,923 $0 $0 $0 $0 $0 $0
Former Vice 2002 $ 64,598 $0 $0 $0 $0 $0 $0
President 2003 $ 78,702 $50,000 $0 $0 $0 $0 $0
And former
Director
Maria A. 2000 $0 $0 $0 $0 $0 $0 $0
Fernandez, 2001 $0 $0 $0 $0 $0 $0 $0
Director 2002 $0 $0 $0 $0 $0 $0 $0
2003 $0 $0 $0 $0 $0 $0 $0
26
Compensation of Directors
The Company has no standard arrangements for compensating the directors of the
Company for their attendance at meetings of the Board of Directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 2003 by:
* each person who is known by us to beneficially own more than 5% of our
common stock;
* each of our officers and directors;
* 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
---------------------------
Name and Address of Beneficial Owner Number Percent
------------------------------------------------ ----------- ------------
Andres F. Fernandez, President, CEO and CFO 8,485,365 12.7%
J. A. Fernandez, Sr., Chairman of the Board
and Director of Sales 14,905,905 22.3%
Amelia C. Fernandez, Vice President and Director 4,281,900 6.4%
Maria A. Fernandez, Director 260,000 0.4%
Emilio D. Jara, Director 54,250 *
Total securities held by officers
and directors as a group (5 people): 27,987,420 41.8%
* 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 December 31, 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 table above 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. However, the table does include
the shares owned by Amelia Fernandez, who was an officer and director during
2003.
Item 12. Certain Relationships and Related Transactions
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on July 31, 2004 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount. Total rent expense under this lease was approximately $67,075 and
$54,100, respectively, for each of the years ended December 31, 2003 and 2002.
27
Item 13. Exhibits and Reports on Form 8-K.
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits, are incorporated herein by
reference, as follows:
Exhibit No. Description
---------- -------------------------------------
31.1 * Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.1 * Certification by Chief Financial Officer pursuant to 18 U.S.C. 1350.
* Filed herewith
(b) A report on Form 8-K was filed on October 4, 2001 reporting the Share
Exchange conducted between the Company, F&F Equipment, Inc. and the shareholders
of F&F Equipment, Inc. on September 29, 2001.
A report on Form 8-K was filed on January 29, 2002 reporting a change in the
Registrant's Certifying Accountant.
A report on Form 8-K was filed on October 21, 2002 reporting a Convertible
Debenture and a Warrant to La Jolla Cove Investors, Inc.
A report on Form 8-K was filed on February 11, 2004 in connection with a press
release describing both fourth quarter and year end results for 2003.
Another report on Form 8-K was filed on February 11, 2004 stating that the
Company had executed a non-binding letter of intent to acquire the assets of
Triton Ammunition Corporation.
Item 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal
years to its principal accountant, S. W. Hatfield, CPA of Dallas, Texas.
Year ended Year ended
December 31, December 31,
2003 2002
-------------------------------
(1) Audit fees $ 28,193 $ 30,205
(2) Audit-related fees - -
(3) Tax fees 1,208 -
(4) All other fees - -
--------- ---------
Totals $ 29,401 $ 30,205
========= =========
We have considered whether the provision of such non-audit services is
compatible with S. W. Hatfield, CPA maintaining its independence and determined
that these services do not compromise their independence.
Financial Information System Design and Implementation. S. W. Hatfield, CPA did
not charge the Company any fees for financial information system design and
implementation fees.
The Company has no formal audit committee. However, the entire Board of
Directors (the "Board") is the Company's defacto audit committee. In discharging
its oversight responsibility as to the audit process, the Board obtained from
the independent auditors a formal written statement describing all relationships
between the auditors and the Company that might bear on the auditors'
independence as required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." The Board discussed with the
auditors any relationships that may impact their objectivity and independence,
including fees for non-audit services, and satisfied itself as to the auditors'
independence. The Board also discussed with management, the internal auditors
and the independent auditors the quality and adequacy of the Company's internal
controls. The Board reviewed with the independent auditors their management
letter on internal controls.
28
The Board discussed and reviewed with the independent auditors all matters
required to be discussed by auditing standards generally accepted in the United
States of America, including those described in Statement on Auditing Standards
No. 61, as amended, "Communication with Audit Committees". The Board reviewed
the audited consolidated financial statements of the Company as of and for the
year ended December 31, 2003, with management and the independent auditors.
Management has the responsibility for the preparation of the Company's financial
statements and the independent auditors have the responsibility for the
examination of those statements. Based on the above-mentioned review and
discussions with the independent auditors and management, the Board of Directors
approved the Company's audited consolidated financial statements and recommended
that they be included in its Annual Report on Form 10-KSB for the year ended
December 31, 2003, for filing with the Securities and Exchange Commission. The
Board also approved the reappointment of S. W. Hatfield, CPA as independent
auditors.
The Company's principal accountant, S. W. Hatfield, CPA, did not engage any
other persons or firms other than the principal accountant's full-time,
permanent employees.
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29
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
(Registrant)
Date: March 29, 2004 By: /s/ J.A. Fernandez, Sr.
------------------------------------------------------
J.A. Fernandez, Sr., Chairman and Director of Sales
By: /s/ Andres F. Fernandez
------------------------------------------------------
Andres F. Fernandez, President and CEO
By: /s/ Emilio D. Jara
------------------------------------------------------
Emilio D. Jara, V.P. of Operations, Secretary and
Director
By: /s/ Maria A. Fernandez
------------------------------------------------------
Maria A. Fernandez, Director
Pursuant to the requirements of the Exchange Act, this report has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ J.A. Fernandez, Sr.
---------------------- Chairman of the Board March 29, 2004
J.A. Fernandez, Sr. and Director of Sales
/s/ Andres F. Fernandez
---------------------- President and Chief March 29, 2004
Andres F. Fernandez Executive Officer
/s/ Emilio D. Jara
---------------------- Vice-President of Operations, March 29, 2004
Emilio D. Jara Secretary and Director
/s/ Maria A. Fernandez
---------------------- Director March 29, 2004
Maria A. Fernandez
30
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2003 and 2002 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2003 and 2002 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2003 and 2002 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-9
F-1
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, 2003 and 2002 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, 2003 and 2002,
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. and Subsidiaries as of December 31, 2003 and 2002 and
the results of their consolidated operations and consolidated cash flows for
each of the two years ended December 31, 2003 and 2002, respectively, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ S. W. Hatfield, CPA
--------------------------
S. W. HATFIELD, CPA
Dallas, Texas
January 23, 2004
F-2
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
December 31, December 31,
2003 2002
-------------------------------
ASSETS
Current Assets
Cash on hand and in bank $ 505,671 $ 157,316
Accounts receivable - trade,
net of allowance for doubtful accounts
of $-0- and $-0-, respectively 520,835 31,288
Inventory 1,112,756 384,814
Prepaid expenses 40,388 19,391
------------- -------------
Total Current Assets 2,179,650 592,809
------------- -------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 7,131,233 6,843,135
Office furniture and fixtures 62,893 58,528
Leasehold improvements 184,690 188,263
------------- -------------
7,378,816 7,089,926
Accumulated depreciation (4,066,390) (3,393,301)
------------- -------------
Net Property and Equipment 3,312,426 3,696,625
------------- -------------
Other Assets
Deposits and other 77,860 77,860
------------- -------------
TOTAL ASSETS $ 5,569,936 $ 4,367,294
============= =============
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
AMERICAN AMMUNITION, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2003 and 2002
December 31, December 31,
2003 2002
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 7,841 $ 9,507
Customer deposits 4,100 80,953
Accounts payable - trade 128,865 414,910
Accrued interest payable - 18,709
Accrued dividends payable 1,020 12,600
------------- -------------
Total Current Liabilities 151,826 536,679
Long-Term Liabilities
Note payable to a bank - 450,000
Capital leases payable - 7,841
------------- -------------
Total Liabilities 151,826 994,520
------------- -------------
Commitments and Contingencies
Mandatory Convertible Debenture 391,365 250,000
------------- -------------
Mandatory Convertible Preferred Stock
103,700 and 41,000 shares issued and outstanding 518,500 205,000
------------- -------------
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.
66,893,628 and 55,328,166 shares issued and outstanding 66,894 55,328
Additional paid-in capital 21,070,395 16,523,164
Accumulated deficit (16,629,044) (13,660,718)
------------- -------------
Total Stockholders' Equity 4,508,245 2,917,774
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,569,936 $ 4,367,294
============= =============
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, 2003 and 2002
Year ended Year ended
December 31, December 31,
2003 2002
-------------------------------
Revenues $ 1,984,997 $ 1,409,364
------------- -------------
Cost of Sales
Materials 1,255,098 1,041,553
Direct Labor 868,004 663,787
Other direct costs and expenses 340,346 128,371
Depreciation 668,574 652,943
------------- -------------
Total Cost of Sales 3,232,022 2,456,654
------------- -------------
Gross Profit (1,247,025) (1,047,290)
------------- -------------
Operating Expenses
Research and development expenses 4,038 3,662
Marketing and promotion expenses 115,767 23,453
Salaries, wages and related expenses 399,710 341,532
Other operating expenses 567,700 389,732
Interest expense 35,154 72,444
Depreciation expense 4,516 2,642
Compensation expense related to common stock
issuances at less than "fair value" 882,291 11,538
------------- -------------
Total Operating Expenses 2,009,176 845,003
------------- -------------
Loss from Operations (3,256,201) (1,892,293)
Other Income (Expense)
Other income (expense) 63,382 9,206
Gain on forgiveness of accounts payable 339,202 -
Gain on sale of equipment 7,900 -
Amortization of Beneficial Conversion
Feature Discount on Preferred Stock (93,678) -
------------- -------------
Loss before Income Taxes (2,939,395) (1,883,087)
Provision for Income Taxes - -
------------- -------------
Net Loss (2,939,395) (1,883,087)
Other Comprehensive Income - -
------------- -------------
Comprehensive Loss (2,939,395) (1,883,087)
Preferred Stock Dividends (28,931) (23,000)
------------- -------------
Net Loss available to Common Shareholders $ (2,968,326) $ (1,883,087)
============= =============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (0.05) $ (0.04)
============= =============
Weighted-average number of common shares outstanding 61,202,839 52,605,993
============= =============
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, 2003 and 2002
Mandatory Convertible
Preferred Stock Common Stock Additional
----------------- ----------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------------------------------------------------------------------------------------
Balances at January 1, 2002 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
Issuance of preferred stock for Cash 91,700 458,500 - - - - 458,500
Less costs of raising capital - - - - (45,850) - (45,850)
Issuance of common stock for
Cash - - 4,552,183 4,552 1,179,630 - 1,184,182
Conversion of debenture - - 4,561,753 4,562 1,086,364 - 1,090,926
Exercise of warrant for cash - - 2,086,350 2,086 2,084,264 - 2,086,350
Payment of preferred stock dividends - - 46,176 46 20,464 - 20,510
Conversion of preferred stock (29,000) (145,000) 319,000 319 144,681 - -
Costs of acquiring convertible debenture - - - - (16,000) - -
Beneficial Conversion Discount
Feature on preferred stock - - - - 93,678 - 93,678
Dividends declared on Preferred Stock - - - - - (28,931) (28,931)
Net loss for the year - - - - - (2,939,395) (2,939,395)
------ --------- ---------- -------- ----------- ------------- -----------
Balances at December 31, 2003 62,700 $ 518,500 66,893,628 $ 66,894 $21,070,395 $ (16,629,044) $ 4,508,245
====== ========= ========== ======== =========== ============= ===========
The accompanying notes are an integral part of these nsolidated financial
statements.
F-6
AMERICAN AMMUNITION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003 and 2002
Year ended Year ended
December 31, December 31,
2003 2002
-------------------------------
Cash flows from operating activities
Net loss for the year $ (2,939,395) $ (1,883,087)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 673,090 655,585
Bad debt expense 2,522 -
Gain on forgiveness of accounts payable (339,202) -
Gain on sale of equipment (7,900) -
Amortization of conversion discount on preferred stock 93,678 -
Compensation expense related to common stock
issuances at less than "fair value" 882,291 11,538
Common stock issued for fees and services - 33,395
Accrued interest converted to common stock - 24,000
(Increase) Decrease in
Accounts receivable (492,069) (31,288)
Inventory (727,942) (258,884)
Prepaid expenses, deposits and other (20,997) (13,483)
Increase (Decrease) in
Accounts payable and accrued liabilities 53,157 126,384
Interest payable 18,709 18,709
Customer deposits 80,953 80,953
------------- -------------
Net cash provided by (used in) operating activities (2,918,329) (1,236,178)
------------- -------------
Cash flows from investing activities
Cash received on sale of equipment 7,900 -
Purchase of property and equipment (288,891) (386,955)
------------- -------------
Net cash used in investing activities (280,991) (386,955)
------------- -------------
Cash flows from financing activities
Increase in cash overdraft - -
Cash received (paid) on short term loans - net - -
Cash received on long-term loans - -
Principal paid on long-term loans (450,000) (500,000)
Principal paid on long-term capital leases (9,507) (8,365)
Cash received on sale of Mandatory Convertible Preferred Stock 458,500 -
Cash received on issuance of Mandatory Convertible Debenture 350,000 250,000
Cash received on sale of common stock 3,260,532 1,462,395
Cash paid to acquire capital (61,850) (20,000)
------------- -------------
Net cash provided by financing activities 3,547,675 1,184,030
------------- -------------
INCREASE (DECREASE) IN CASH 348,355 (439,103)
Cash at beginning of year 157,316 596,419
------------- -------------
Cash at end of year $ 505,671 $ 157,316
============= =============
- 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, 2003 and 2002
Year ended Year ended
December 31, December 31,
2003 2002
-------------------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 26,170 $ 29,735
============= =============
Income taxes paid for the period $ - $ -
============= =============
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt into common stock $ 208,635 $ 101,000
============= =============
Payment of accounts payable with
issuance of common stock $ - $ 182,017
============= =============
Payment of accrued dividends on preferred
stock with common stock $ 30,511 $ 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 which unsuccessfully marketed
a business plan concept of a national "fast food" restaurant chain.
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.
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 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. was 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.
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.
F-9
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note B - Preparation of Financial Statements - Continued
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. 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.
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.
F-10
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
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, 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 December 31, 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 December 31, 2003 and 2002, and
subsequent thereto, the Company had no options outstanding. The outstanding
warrants and convertible preferred stock and mandatorily convertible
debentures are anti-dilutive due to the Company's net operating loss
position.
7. Advertising costs
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published.
F-11
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Inventory
As of December 31, 2003 and 2002, inventory consisted of the following
components:
December 31, December 31,
2003 2002
----------------------------------
Raw materials $ 523,550 $ 149,824
Work in process 360,450 116,216
Finished goods 212,832 118,774
------------ ----------
Totals $ 1,112,756 $ 384,814
============ ==========
Note F - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2003 2002 useful life
-----------------------------------------
Manufacturing equipment $ 7,131,233 $ 6,843,135 3-10 years
Office furniture and fixtures 62,893 58,528 3-7 years
Leasehold improvements 184,690 188,263 8-20 years
---------- -----------
7,378,816 7,089,926
Accumulated depreciation (4,066,390) (3,393,301)
---------- -----------
Net property and equipment $ 3,312,426 $ 3,696,625
=========== ===========
Total depreciation expense charged to operations for the years ended December
31, 2003 and 2002 was approximately $673,090 and $655,585, respectively.
F-12
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note F - Property and Equipment - Continued
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
December 31, December 31,
2003 2002
------------------------------
Manufacturing and processing equipment $ 153,400 $ 153,400
Less accumulated depreciation (69,859) (54,519)
--------- ---------
$ 83,541 $ 98,881
========= =========
Note G - Capital Leases Payable
Capital leases payable consist of the following as of December 31, 2003 and
2002, respectively:
December 31, December 31,
2003 2002
--------------------------
Three separate capital leases payable to various equipment
financing companies. Interest ranging between 11.37% and
14.05%. Payable in aggregate monthly installments of
approximately $935, including interest. Final maturities
occur between September 2004 and December 2004.
Collateralized the underlying leased manufacturing
equipment. $ 7,841 $ 17,348
Less current maturities (7,841) (9,507)
--------- ---------
Long-term portion $ - $ 7,841
========= =========
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
------------------------
2004 $ 7,841
=======
Note H - Long-Term Debt Payable to a Bank
On June 28, 2001, the Company executed a $950,000 note payable to a financial
institution. This 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
aggregating $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 Calendar 2003, the Company made two (2) lump-sum principal reductions
aggregating $450,000 to the outstanding balance on this note. As of March 31,
2003, this note was retired in full.
F-13
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - 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 then
outstanding principal balance on the Debenture.
The Debenture bears interest at 8.0% and matures on October 4, 2004. 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.
At December 31, 2003 and 2002, respectively, the outstanding balance on the
Debenture was approximately $391,365 and $250,000.
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 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.
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%.
F-14
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Convertible Debenture - Continued
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
On various dates through December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 shares of restricted, unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
As of December 31, 2003, pursuant to the conversion terms of the Debenture, the
Debenture Holder was approximately $77,500 in arrears in the contractually
obligated conversions, and accordingly, the related mandatory warrant exercise
of approximately $775,000.
Note J - Preferred Stock Transactions
Preferred stock consists of the following as of December 31, 2003 and 2002,
respectively:
December 31, 2003 December 31, 2002
----------------- -----------------
# shares value # shares value
-------- --------- -------- ---------
Series A Cumulative Convertible Stock 12,000 $ 60,000 41,000 $ 205,000
Series B Cumulative Convertible Stock 91,700 458,500 - -
-------- --------- -------- ---------
103,700 $ 518,500 41,000 $ 205,000
======== ========= ======== =========
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.
F-15
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - 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.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
In January 2003, three separate holders of 9,000 shares of Series A Preferred
Stock exercised their conversion rights and converted these shares of Series A
Preferred stock into 99,000 shares of restricted, unregistered common stock.
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 K - 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.
F-16
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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 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.
F-17
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
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.
F-18
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
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.
F-19
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Common Stock Transactions - Continued
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.
In October 2003, in a separate transaction, the Company sold 2,200,000 shares of
restricted, unregistered common stock to the Debenture Holder for cash proceeds
of approximately $400,000, or approximately $0.18 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 October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 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 $146,189 during this time period.
In October 2003, the Company issued an aggregate 37,866 shares of restricted,
unregistered common stock in payment of approximately $16,710 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarters ended June 30, 2003 and September 30, 2003, collectively.
Note L - Rental Commitments
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long- term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on July 31, 2004 and contains a clause that upon expiration,
the Company and the controlling shareholder shall renegotiate the annual rental
amount. Total rent expense under this lease was approximately $67,075 and
$54,100, respectively, for each of the years ended December 31, 2003 and 2002.
F-20
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Rental Commitments - Continued
The Company's subsidiary, IPE, leases it's manufacturing facility from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of approximately $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2003 and 2002.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
-------------------------------
2004 $ 60,754
2005 23,565
2006 24,276
2007 4,076
---------
Totals $ 112,671
=========
Note M - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2003 and 2002, respectively, are as follows:
Year ended Year ended
December 31, December 31,
2003 2002
------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of December 31, 2003, the Company has a net operating loss carryforward of
approximately $8,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward will begin to expire in 2003. The
amount and availability of the net operating loss carryforwards may be subject
to limitations set forth by the Internal Revenue Code. Factors such as the
number of shares ultimately issued within a three year look-back period; whether
there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
F-21
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
The Company's income tax expense (benefit) for the years ended December 31, 2003
and 2002, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2003 2002
--------------------------
Statutory rate applied to loss before income taxes $(999,400) $ (640,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 999,400 640,000
--------- ----------
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, 2003 and 2002, respectively:
Year ended Year ended
December 31, December 31,
2003 2002
----------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 2,900,000 $ 2,244,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (250,000)
----------- -----------
2,650,000 1,994,000
Less valuation allowance (2,650,000) (1,994,000)
----------- -----------
Net Deferred Tax Asset $ - $ -
=========== ===========
During the years ended December 31, 2003 and 2002, respectively, the valuation
allowance increased by approximately $656,000 and $629,000.
F-22
AMERICAN AMMUNITION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note N - Revenue Concentrations
The Company sells to both commercial and governmental customers, in both
domestic and foreign markets. The following table shows the Company's gross
revenue composition:
Year ended Year ended
December 31, 2003 December 31, 2002
----------------- -----------------
Amount % of total Amount % of total
---------------------- ----------------------
Domestic
Commercial
Customer A $ 524,210 24.96 $ 555,895 43.24
Customer B 463,423 22.07 - -
Customer C 188,546 8.98 347,100 22.80
Others 348,022 16.58 619,705 33.96
----------- ------ ----------- ------
1,524,201 72.59 1,522,700 100.00
----------- ------ ----------- ------
Governmental
Customer D 421,290 20.06 - -
Others 23,663 1.12 - -
----------- ------ ----------- ------
444,953 21.18 - -
----------- ------ ----------- ------
Foreign
Governmental 130,710 6.23 - -
------------ ----------- ------ ----------- ------
Totals $ 2,099,864 100.00 $ 1,522,700 100.00
=========== ====== =========== ======
Note O - Selected Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2003 and 2002, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended
March 31, June 30, September 30, December 31, December 31,
Calendar 2003
Revenues - net $ 608,437 $ 289,551 $ 317,729 $ 769,280 $ 1,984,997
Gross profit $ (66,668) $ (463,653) $ (462,483) $ (254,221) $(1,247,025)
Net earnings after
provision for
income taxes $ (300,355) $ (1,232,951) $ (1,200,981) $ (205,108) $(2,939,395)
Basic and fully diluted
earnings per share $ (0.01) $ (0.02) $ (0.02) nil $ (0.05)
Weighted average
number of shares
issued and outstanding 56,638,979 59,294,402 61,683,424 66,253,535 61,202,839
Calendar 2002
Revenues - net $ 272,493 $ 434,641 $ 570,320 $ 131,910 $ 1,409,364
Gross profit $ (144,971) $ (74,098) $ (223,402) $ (604,819) $(1,047,290)
Net earnings after
provision for
income taxes $ (236,254) $ (262,562) $ (528,024) $ (856,247) $(1,883,087)
Basic and fully diluted
earnings per share $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.04)
Weighted average
number of shares
issued and outstanding 50,165,120 52,023,409 53,395,558 54,684,555 52,605,993
F-23