UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14C INFORMATION STATEMENT
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[X] Definitive Information Statement
American Ammunition, Inc.
-------------------------------------------------
(Name of Registrant as Specified in its Charter)
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Identify the previous filing by registration statement number, or the Form or
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AMERICAN AMMUNITION, INC.
3545 NW 71st Street
Miami, Florida 33147
INFORMATION STATEMENT PURSUANT TO SECTION 14
OF THE SECURITIES EXCHANGE ACT OF 1934
AND REGULATION 14C AND SCHEDULE 14C THEREUNDER
Dear Stockholders:
The purpose of this information statement (this "Information Statement") is to
inform the holders of record, as of the close of business on July 1, 2005
("Record Date"), of shares of common stock, par value $.001 per share (the
"Common Stock") and shares of preferred stock, par value $.001 per share (the
"Preferred Stock") of American Ammunition, Inc., a California corporation
("Ammo" or the "Company"), that the holders of 61% of our voting capital stock
have consented in writing as of June 30, 2005 to the following corporation
actions:
(1) to approve and adopt an Agreement of Merger with a Nevada corporation
to be formed, American Ammunition, Inc. whereby the Company will merge with and
into this Nevada corporation for the purpose of reincorporating the Company in
the State of Nevada (the "Merger"). Upon the Merger being effective, holders of
Common Stock of the Company will receive one (1) share of $.001 par value common
stock in the Nevada corporation for one (1) issued and outstanding shares of
Common Stock held in the Company and holders of Preferred Stock of the Company
will receive one (1) share of $.001 par value preferred stock in the Nevada
corporation with the same rights and preferences as the Preferred Stock for one
(1) issued and outstanding shares of Preferred Stock held in the Company. The
purpose of this merger is to change the Company's domicile from California to
Nevada; and
(2) to approve the American Ammunition, Inc. 2005 Stock Issuance Plan,
adopted by our directors on June 30, 2005, pursuant to which we will be
authorized to grant, in the aggregate, up to 10,000,000 shares (presplit) of
restricted Common Stock and options to purchase shares of our Common Stock; and
(3) to effect a one-for-twenty reverse stock split of the Company's Common
Stock by reducing the number of issued and outstanding shares of Common Stock
from 77,407,300 to approximately 3,870,365 shares (the "Reverse Split").
A copy of our Form of Plan of Merger and a copy of certain California Statutes
are attached as Appendix A, and a copy of our 2005 Stock Option Plan is attached
to this Information Statement as Appendix B. The Company's Board of Directors
has approved, and a majority of our common and Series C preferred stockholders
(collectively "voting capital stock") owning or entitled to vote an aggregate of
2
70,611,256 shares of our voting capital stock, representing 61% of our voting
capital stock as of June 30, 2005 have consented in writing to the actions
described in this Information Statement. Such approval and consent constitute
the approval and consent of a majority of the total number of shares of
outstanding voting capital stock and are sufficient under the California
Statutes and the Company's By-Laws to approve the actions. Accordingly, we will
not submit these actions to the other stockholders of the Company for a vote,
and a Special Meeting of the stockholders to approve the actions described in
this Information Statement is unnecessary. The adoption of the foregoing
resolutions will become effective 20 calendar days after the mailing of this
Information Statement. Our Board of Directors will implement the action
thereafter. The resolution(s) authorize the Board of Directors in its discretion
to withdraw or terminate any one or more of these actions prior to
implementation and effectiveness thereof.
The Company is required to send this Information Statement to its stockholders
in accordance with Section 14(c) of the Securities Exchange Act of 1934, as
amended. While you are not required to take any action in response to this
Information Statement, we urge you to read it carefully. WE ARE NOT ASKING YOU
FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
This Information Statement is first being furnished by the Company to its
stockholders on or about July 12, 2005.
For the Board of Directors of AMERICAN AMMUNITION, INC.
By: /s/ Andres F. Fernandez
------------------------------
Andres F. Fernandez, President and CEO
3
AMERICAN AMMUNITION, INC. 3545 NW 71st Street Miami, Florida 33147
INFORMATION STATEMENT REGARDING ACTION TAKEN BY WRITTEN CONSENT OF MAJORITY
VOTING STOCKHOLDERS IN LIEU OF A SPECIAL MEETING. WE ARE NOT ASKING YOU FOR A
PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ACTIONS BY BOARD OF
DIRECTORS AND CONSENTING VOTING STOCKHOLDERS.
The Company will pay all costs associated with the distribution of this
Information Statement, including the costs of printing and mailing. The Company
will only deliver one Information Statement to multiple stockholders sharing an
address unless the Company has received contrary instructions from one or more
of the stockholders. The Company will promptly deliver a separate copy of this
Information Statement and future stockholder communication documents to any
stockholder at a shared address to which a single copy of this Information
Statement was delivered, or deliver a single copy of this Information Statement
and future stockholder communication documents to any stockholder or holders
sharing an address to which multiple copies are now delivered, upon written or
oral request to the following address:
3545 NW 71st Street
Miami, Florida 33147
(305) 835-7400
Stockholders may also address future requests regarding delivery of information
statements and/or annual reports by contacting the Company at the address listed
above. Pursuant to the Company's Bylaws and the California Statutes, a vote by
the holders of at least a majority of the Company's outstanding voting capital
stock is required to take the actions described in this Information Statement.
The Company's Articles of Incorporation do not authorize cumulative voting. As
of June 30, 2005, the Company had 300,000,000 authorized shares of common stock,
par value $0.001 of which 77,407,300 were issued and outstanding and had
20,000,000 authorized shares of preferred stock, of which 12,000 of Series A
Preferred Stock were issued and outstanding; 91,700 of Series B Preferred Stock
were issued and outstanding; and 1,905,882 of Series C Preferred Stock were
issued and outstanding. The Series A and Series B Preferred Stock do not contain
any voting rights. Each share of Series C Preferred Stock is entitled to vote 20
shares of common stock. A majority of our common and preferred stockholders
owning or entitled to vote an aggregate of 70,611,256 shares of our voting
capital stock, which represents 61% of the shares entitled to vote of the
Company's outstanding voting capital stock have approved this action. Pursuant
to applicable California Statutes, the consenting stockholders voted in favor of
the actions described by written consent, dated June 30, 2005. The actions taken
by the Company's Board of Directors and the consenting stockholders will become
effective on July 31, 2005, twenty (20) days following the mailing of this
Information Statement to the stockholders of record on June 30, 2005. No
consideration was paid to the consenting stockholders to obtain their written
consent to these actions.
DISSENTERS' RIGHTS OF APPRAISAL
No action was taken in connection with the proposals by the Company's Board of
Directors or the consenting Voting Stockholders for which California law, our
Articles of Incorporation or our Bylaws provide a right of a stockholder to
dissent and obtain appraisal of or payment for such stockholder's shares.
4
VOTING SECURITIES
As of June 30, 2005, we had 77,407,300 shares of Common Stock and 1,905,882
shares of Series C Preferred Stock issued and outstanding, which are the only
classes of voting securities that would be entitled to vote at a stockholders'
meeting if one were to be held. Each share of Common Stock is entitled to one
vote and each share of Series C Preferred Stock is entitled to 20 votes.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
OUTSTANDING COMMON STOCK OF AMERICAN AMMUNITION, INC.
As of June 30, 2005, we had 77,407,300 shares of Common Stock and 1,905,882
shares of Series C Preferred Stock issued and outstanding. Each share of Common
Stock entitles the holder thereof to one vote on all matters submitted to
stockholders. Our common stock and Series C Preferred Stock are our only classes
of our voting securities; the holders of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock have no voting rights except in limited
instances in which their rights pursuant to the designations, rights and
preferences of the Series A and Series B Convertible Preferred Stock
respectively could be changed or materially adversely affected. Each share of
common stock has one vote per share, and each share of Series C Convertible
Preferred Stock has 20 votes per share.
The following table sets forth, as of June 30, 2005,information known to us
relating to the beneficial ownership of these shares by:
- each person who is the beneficial owner of more than 5% of the
outstanding shares of the class of stock;
- each director;
- each executive officer; and
- all executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed is 3545
NW 71st Street, Miami, FL 33147. We believe that all persons named in the table
have sole voting and investment power with respect to all shares beneficially
owned by them. Under securities laws, a person is considered to be the
beneficial owner of securities he owns and that can be acquired by him within 60
days from June 30, 2005 upon the exercise of options, warrants, convertible
securities or other understandings. We determine a beneficial owner's percentage
ownership by assuming that options, warrants or convertible securities that are
held by him, but not those held by any other person and which are exercisable
within 60 days of June 30, 2005 have been exercised or converted.
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Common Stock
------------------------------
Amount and Nature of Percentage of
Name and Address of Beneficial of Class(1) Voting
Beneficial Owner Director/Officer Ownership(1) Control (1)
---------------------- ------------------------- -------------------- ------------ --------------
J.A. Fernandez, Sr. Chairman of the Board 8,485,365(2) 10.6% 7.2%
3545 NW 71st Street
Miami, Florida 33147
Andre F. Fernandez Chief Executive Officer, 14,905,905(3) 18.7% 12.6%
3545 NW 71st Street President and Director
Miami, Florida 33147
Emilio D. Jara Vice-President and Director 54,250 0.1% 0.0%
3545 NW 71st Street
Miami, Florida 33147
Maria A. Fernandez Director 260,000 0.3% 0.2%
3545 NW 71st Street
Miami, Florida 33147
Amelia C. Fernandez Former Officer and Director 4,281,900 5.4% 3.6%
3545 NW 71st Street
Miami, Florida 33147
All directors and officers
as a group (4 persons) 27,987,420 36.46%
Series C Convertible Preferred Stock
------------------------------
Amount and Nature of Percentage of
Name and Address of Beneficial of Class(1) Voting
Beneficial Owner Director/Officer Ownership(1) Control (1)
---------------------- ------------------------- -------------------- ------------ --------------
J.A. Fernandez, Sr. Chairman of the Board 1,905,882 100% 32.3%
3545 NW 71st Street
Miami, Florida 33147
----------------------------
* Less than one percent
(1) Percentage of Voting Control is based upon the number of issued and
outstanding shares of our common stock and shares of our Series C
Convertible Preferred Stock at June 30, 2005. At June 30, 2005 the holders
of our outstanding shares of Common Stock and Series C Preferred Stock were
entitled to an aggregate of 115,524,940 votes at any meeting of our
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stockholders, which includes 77,407,300 votes attributable to the
outstanding shares of Common Stock and 38,117,640 votes attributable to the
outstanding shares of Series C Preferred Stock. Each share of Series C
Preferred Stock entitles the holder to 20 votes at any meeting of our
stockholders and such shares will vote together with our common
stockholders.
(2) J.A. Fernandez, Sr. and Amelia C. Fernandez are husband and wife and the
parents of Andres F. Fernandez and Maria A. Fernandez. Some or all of the
securities owned by the individual Fernandez family members may be
aggregated together and/or ownership imputed to one another.
(2A) In addition to his common stock, in November 2004, J.A. Fernandez was
issued 1,905,882 shares of Series C Preferred Stock. Each share of Series C
Preferred Stock provides voting rights of 20 shares of the Company's Common
Stock. Each share of Series C Preferred Stock is convertible, at the option
of the holder, into shares of the Company's Common Stock equal to $0.18 per
share, subject to adjustments in the case of any stock split, combination,
capital reorganization, reclassification, consolidation or merger, and
certain dividends. Subject to certain exceptions, the conversion price is
also subject to weighted average anti-dilution adjustment in the case of an
issuance of shares of common stock or securities exercisable for or
convertible into common stock, at a per share price, exercise price or
conversion price less than the conversion price then in effect.
(3) In addition to his common stock, in September 2001, Andres Fernandez
converted unsecured indebtedness of the Company to him in the amount of
$7,553,600 for 1,510,720 shares of $5.00 Series A Convertible Preferred
Stock. The Series A Convertible Preferred Stock provides for cumulative
dividends at the rate of 8% per year, payable quarterly, in cash or shares
of the Company's common stock at the Company's election. Each share of
Series A Convertible Preferred Stock is convertible, at the option of the
holder, into eleven (11) shares of the Company's common stock at any time
after six (6) months from the date of issuance and prior to notice of
redemption, subject to adjustments for customary anti-dilution events. In
February 2002, certain holders of the Series A Preferred Stock, including
Andres F. Fernandez, 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. Andres F. Fernandez
converted 1,510,720 shares of such Preferred Stock into 16,617,920 shares
of restricted common stock of the Company. Due to the timing of the
conversion in relation to the Company's year-end and the first available
date for such conversion, the effect of the conversion exercise is
reflected in this report as well as the accompanying financial statements
as if the conversion had occurred on December 31, 2001.
(4) These do not include the 384,500 shares Maria Fernandez holds as a Trustee
for an entity in which neither she nor any of the other Officer or Director
is the beneficial owner.
(5) Except as noted above, each of the Officers and Directors received all of
their other shares as part of the Share Exchange whereby the Company
acquired F.&F. Equipment, Inc. d/b/a American Ammunition, ("AA") in
September 2001.
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OUTSTANDING PREFERRED STOCK OF AMERICAN AMMUNITION, INC.
The Series A Convertible Preferred Stock provides for cumulative dividends at a
rate of 8% per year, payable quarterly, in cash or shares of our common stock at
our election. Each share of Series A Convertible Preferred Stock is convertible
into 11 shares of our common stock at any time after six months after the date
of issuance and prior to notice of redemption at the option of the holder,
subject to adjustments for customary anti-dilution events. As of the date of
this report, except for 46,000 shares, all of the shares of Series A Convertible
Preferred Stock have been converted in shares of common stock pursuant to its
terms.
The Series B $5.00 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
Convertible 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. As of the date of this report, no shares of
Series B Convertible Preferred Stock have been converted in shares of common
stock pursuant to its terms.
Each share of the Company's Series C Preferred Stock provides for voting rights
equal to 20 shares of the Company's Common Stock. Each share of Series C
Preferred Stock is convertible, at the option of the holder, into shares of the
Company's Common Stock equal to $0.18 per share, subject to adjustments in the
case of any stock split, combination, capital reorganization, reclassification,
consolidation or merger, and certain dividends. Subject to certain exceptions,
the conversion price is also subject to weighted average anti-dilution
adjustment in the case of an issuance of shares of common stock or securities
exercisable for or convertible into common stock, at a per share price, exercise
price or conversion price less than the conversion price then in effect.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding our directors and executive
officers. There are no family relationships between any of our directors or
executive officers except as set forth below.
Name Age Position
--------------------- --- ------------------------------------
J.A. Fernandez, Sr. 67 Chairman of the Board of Directors and Director of
Sales
Andres F. Fernandez 38 Chief Executive Officer, President and Director
Emilio D. Jara 39 Vice President of Operations, Secretary and
Director
Maria A. Fernandez 44 Director
----------------------------
8
Executive Compensation
The following table provides information about the compensation paid by the
Company to current executive officers who were serving as executive officers at
the end of 2004, 2003, 2002, 2001 and 2000.
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities LTIP All
Name and Annual Stock Underlying Pay- Other
Principal Year Salary Bonus Compen- Award(s) Options/ outs Compen-
Position (1) ($) ($) sation ($) ($) SARs (f) sation ($)
----------------- ------ -------- -------- ------------ ---------- ------------ -------- ----------
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 2004 $104,000 $0 $0 $0 $0 $0 $0
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 2004 $132,600 $0 $0 $0 $0 $0 $0
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, 2004 $ 52,000 $0 $0 $0 $0 $0 $0
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 2004 $ 78,702 $0 $0 $0 $0 $0 $0
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
2004 $0 $0 $0 $0 $0 $0 $0
--------------------
We did not have a bonus, profit sharing, or deferred compensation plan for the
benefit of employees, officers or directors for the years ended 2004, 2003 and
2002. Andres F. Fernandez has an employment agreement with the Company. Pursuant
to his employment agreement, the Company pays Mr. Fernandez an annual salary of
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$132,600 and the Company's Board of Directors has the discretion to grant an
annual bonus to him. Mr. Fernandez is entitled to participate in all employee
benefit plans or programs that are available to the Company's management
employees and all other benefit plans or programs as may be specified by the
Company's Board of Directors. The employment agreement provides that either the
Company or Mr. Fernandez may terminate his agreement at any time.
Compensation of Non-Employee Directors
We do not pay our directors who are not employees of our Company a director's
fee.
Certain Relationships and Related Transactions
Except as set forth below, there have been no material transactions during the
past two fiscal years between the Company and any officer, director or any
stockholder owning greater than 5% of our outstanding shares, nor any member of
the above referenced individuals' immediate family.
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,735, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on December 1, 2009 and contains a clause that upon
expiration, the Company and the controlling shareholder shall renegotiate the
annual rental amount.
[Balance of this page intentionally left blank.]
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PROPOSAL 1
APPROVAL OF REINCORPORATION IN NEVADA
Introduction
For the reasons set forth below, the Board of Directors believe that the best
interests of the Company and its shareholders will be served by changing the
state of incorporation of the Company from California to Nevada (the "Proposed
Reincorporation"). Shareholders are urged to read carefully the following
sections of this Information Statement, including the exhibit. In this
discussion of the Proposed Reincorporation, the term "Ammo California" refers to
the existing California corporation and the term "Ammo Nevada" refers to the new
Nevada corporation that is the proposed successor to Ammo California.
The change in the state of incorporation of the Company from California to
Nevada will be effected by the Agreement and Plan of Merger by and between Ammo
California and Ammo Nevada, a proposed copy of which is attached hereto as
Exhibit A (the "Merger Agreement"). Pursuant to the Merger Agreement, Ammo
California will merge with and in Ammo Nevada, and Ammo Nevada, under its
current Articles of Incorporation, will continue as the surviving corporation.
Each outstanding share of Ammo California Common Stock and Ammo California
Preferred Stock will automatically be converted into one share of Ammo Nevada
Common Stock and Ammo Nevada Preferred Stock with the same rights and
preferences respectively upon the effective date of the merger. Shareholders of
Ammo California will have no dissenters' rights of appraisal with respect to the
Proposed Reincorporation. See "Significant Differences Between the Corporation
Laws of California and Nevada - Appraisal Rights."
Principal Reasons for the Proposed Reincorporation
Nevada follows a policy of encouraging incorporation in that state and, in
furtherance of that policy, has adopted comprehensive, flexible corporate laws
responsive to the legal and business needs of corporations organized under its
laws. In the judgment of the Company's Board of Directors, the corporate laws of
Nevada are less subject to volatility, and should be interpreted more
predictably, than the corporate laws of California, which from time to time have
been the subject of voter initiatives. The Company believes it can better
protect the interests of its shareholders if the corporate law governing its
activities are both more stable and predictable, on one hand, and permits
greater flexibility, on the other hand.
Antitakeover Implications
Nevada, like many other states, permits a corporation to adopt a number of
measures through amendment of the corporate charter or bylaws or otherwise, and
provides default legal provisions that apply unless the corporation has
affirmatively chosen to opt out, designed to reduce a corporation's
vulnerability to unsolicited takeover attempts. For example, Sections 78.411 to
11
78.444 of the Nevada General Corporation Law restrict certain "combinations"
with "interested stockholders" for three years following the date that a person
becomes an interested stockholder, unless the Board of Directors has approved
either the business combination or the transaction by which the interested
stockholder became an interested stockholder prior to the time such person
became an interested person. Even after the three-year period, such combinations
are restricted unless certain tests are satisfied.
The Proposed Reincorporation is not being proposed in order to prevent such a
change in control, nor is it in response to any present attempt known to the
Board of Directors to acquire control of the Company, obtain representation on
the Board of Directors, or take significant action that affects the Company.
Ammo Nevada intends to affirmatively "opt out" of those default legal
provisions, such as Sections 78.411 to 78.444 of the Nevada General Corporation
Law, that in its judgment are designed to have an antitakeover effect.
In the discharge of its fiduciary obligations to its shareholders, the Board of
Directors has evaluated the Company's vulnerability to potential unsolicited
bidders. In the course of such evaluation, the Board of Directors of the Company
has considered, or may consider again in the future, certain defensive
strategies designed to enhance the Board's ability to negotiate with an
unsolicited bidder. These strategies include, but are not limited to, the
adoption of a shareholder rights plan; severance agreements for its management
and key employees that become effective upon the occurrence of a change in
control of the Company; and the authorization of preferred stock, the rights and
preferences of which are determined by the Board of Directors.
Certain effects of the Proposed Reincorporation may be considered to have
antitakeover implications simply by virtue of the Company being subject to
Nevada law. For example, in responding to an unsolicited bidder, the Nevada
General Corporation Law authorizes directors to consider not only the interests
of stockholders, but also the interests of employees, suppliers, creditors,
customers, the economy of the state and nation, the interests of the community
and society in general, and the long-term as well as short-term interests of the
corporation and its stockholders, including the possibility that these interests
may be best served by the continued independence of the corporation. For a
discussion of these and other differences between the laws of California and
Nevada, see "Significant Differences Between the Corporation Laws of California
and Nevada" below.
Despite the belief of the Board of Directors as to the benefits to shareholders
of the Proposed Reincorporation, such proposal may be disadvantageous to the
extent that it has the effect of discouraging a future takeover attempt that is
not approved by the Board of Directors, but which a majority of the shareholders
may deem to be in their best interests or in which shareholders may receive a
substantial premium for their shares over the then-current market value or over
their cost basis in such shares. In addition, to the extent that the provisions
of Nevada law enable the Board of Directors to resist a takeover or a change in
control of the Company, they could make it more difficult to change the existing
Board of Directors and management.
12
No Change in the Board Members, Business, Management, or Location of Principal
Facilities of the Company; Certain Changes to Name and to Employee Plans.
The Proposed Reincorporation will effect a change in the legal domicile of the
Company and other changes of a legal nature, certain of which are described in
this Proxy Statement. The Proposed Reincorporation will not result in any change
in the business, management, fiscal year, assets or liabilities, or location of
the principal facilities of the Company. The four directors who are the
directors of Ammo California will continue as the directors of Ammo Nevada. All
employee benefit and stock option plans of Ammo California, including the 2005
Stock Option Plan will be continued by Ammo Nevada and each outstanding option
to purchase shares of Ammo California stock will automatically be converted into
an option to purchase an equivalent number of shares of Ammo Nevada stock on the
same terms and subject to the same conditions. The name of the Company will
remain American Ammunition, Inc.
The Charter and Bylaws of Ammo California and Ammo Nevada
The provisions of the Ammo Nevada Articles of Incorporation are similar to those
of the Ammo California Articles of Incorporation. The material changes that have
been made in the Ammo Nevada Articles of Incorporation as compared with the Ammo
California Articles of Incorporation are described below in this section or
under "Significant Differences Between the Corporation Laws of California and
Nevada."
Authorized Stock
The Articles of Incorporation of Ammo California authorize 320,000,000 shares of
capital stock, $.001 par value, of which 300,000,000 shares are designated
Common Stock and 20,000,000 shares are designated Preferred Stock. The Articles
of Incorporation of Ammo Nevada authorize 320,000,000 shares of capital stock,
$.001 par value, of which 300,000,000 shares are designated Common Stock and
20,000,000 shares are designated Preferred Stock.
Indemnification
The indemnification provisions of Ammo California's Articles of Incorporation
and Bylaws are substantially similar to those of the Articles of Incorporation
and Bylaws of Ammo Nevada, though Ammo Nevada has placed certain of these
provisions in the Articles of Incorporation rather than in the Bylaws. These
provisions in Ammo Nevada's Articles of Incorporation state that the Company
shall indemnify directors and officers in connection with any action, suit, or
proceeding to the fullest extent permitted by law for acts as directors or
officers (of Ammo Nevada or of a predecessor to Ammo Nevada, or as a director,
officer, employee, or agent of another enterprise at the request of the
Company), and that the Company shall advance the expenses of directors and
officers in advance of the final disposition of any action, suit, or proceeding
upon receipt of an undertaking by the director or officer to repay the amount
advanced if a court ultimately determines that the director or officer is not
entitled to indemnification. Similar provisions also appear in the Bylaws of
both Ammo California and Ammo Nevada.
13
While the Bylaws of both Ammo California and Ammo Nevada permit the Company to
obtain insurance on behalf of directors, officers, employees, and agents, Ammo
Nevada's Bylaws also permit the Company to make other financial arrangements on
behalf of any such person for any liabilities or expenses incurred in such
capacity. See "Significant Differences Between the Corporation Laws of
California and Nevada" below.
Monetary Liability of Directors
The Articles of Incorporation of Ammo California and Ammo Nevada both provide
for the elimination or limitation of personal monetary liability of directors to
the fullest extent permissible under the laws of each corporation's respective
state of incorporation. The laws of Nevada and Ammo Nevada's Articles of
Incorporation also permit the elimination or limitation of the liability of
officers of the Company. Nevada permits liability to be limited to a greater
extent than does California law. See "Significant Differences Between the
Corporation Laws of California and Nevada" below.
Significant Differences Between the Corporation Laws of California and Nevada
The General Corporation Laws of California and Nevada differ in many respects.
It is not practical to summarize all differences in this Information Statement,
but the principal differences that could materially affect the rights of
shareholders are discussed below.
Appraisal Rights
Under both California and Nevada law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transaction.
Under Nevada law, dissenters' (or appraisal) rights are not available in a
merger or share exchange if the shares held by the stockholders prior to the
share exchange or merger were either listed on a national securities exchange or
held by at least 2,000 stockholders of record, unless the articles of
incorporation of the corporation provide for dissenters' rights or the
stockholders are required to accept under the plan of merger or share exchange
anything other than cash, shares of the surviving corporation, shares of a
publicly traded or widely held corporation, or a combination of these.
The limitations on the availability of appraisal rights under California law are
different from those under Nevada law. Shareholders of a California corporation
whose shares are listed on a national securities exchange or on a list of
over-the-counter margin stocks issued by the Board of Governors of the Federal
Reserve System generally do not have such appraisal rights unless the holders of
at least five percent of the class of outstanding shares claim the right or
unless the corporation or any law restricts the transfer of such shares.
14
Appraisal rights are also unavailable if the shareholders of a corporation or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity (as will be the case under the Proposed Reincorporation).
Appraisal or dissenters' rights are, therefore, not available to shareholders of
Ammo California with respect to the Proposed Reincorporation.
Business Combinations
In the last several years, a number of states, including Nevada, have adopted
special laws designed to make certain kinds of "unfriendly" corporate takeovers,
or other transactions involving a corporation and one or more of its significant
stockholders, more difficult.
Sections 78.411 to 78.444 of the Nevada General Corporation Law prohibit a
Nevada corporation from engaging in a "combination" with an "interested
stockholder" for three years following the date that such person becomes an
interested stockholder and place certain restrictions on such combinations even
after the expiration of the three-year period. With certain exceptions, an
interested stockholder is a person or group that owns 10% or more of the
corporation's outstanding voting power (including stock with respect to which
the person has voting rights and any rights to acquire stock pursuant to an
option, warrant, agreement, arrangement, or understanding or upon the exercise
of conversion or exchange rights) or is an affiliate or associate of the
corporation and was the owner of 10% or more of such voting stock at any time
within the previous three years.
For purposes of Sections 78.411 to 78.444, the term "combination" is defined
broadly to include mergers of the corporation or its subsidiaries with the
interested stockholder; sales or other dispositions to the interested
stockholder of assets of the corporation or a subsidiary equal to 5% of the
aggregate value of all assets of the corporation, equal to 5% of the value of
all outstanding shares of the corporation, or representing 10% of the
corporation's earning power or net income; the issuance or transfer by the
corporation or a subsidiary of shares equal to 5% of the value of all
outstanding shares of the corporation to the interested stockholder (except
under the exercise of warrants or rights to purchase shares offered or in a pro
rata distribution); the adoption of any plan of liquidation of the corporation
proposed by or under any agreement, arrangement, or understanding with the
interested stockholder; any reclassification, recapitalization, merger of the
corporation with any of its subsidiaries, or other transaction that has the
effect of increasing the proportionate ownership of the interested stockholder;
or receipt by the interested stockholder (except proportionately as a
stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges, or other financial assistance or tax advantages provided by or through
the corporation. These prohibitions also apply to affiliates and associates of
the interested stockholders.
The three-year moratorium imposed on business combinations by Sections 78.411 to
78.444 does not apply if, prior to the date on which such stockholder becomes an
15
interested stockholder, the board of directors approves either the business
combination or the transaction that resulted in the person becoming an
interested stockholder.
Even after expiration of the three-year period, the moratorium on combinations
continues to apply unless one of the following requirements is met: (i) prior to
the date on which such stockholder becomes an interested stockholder the board
of directors approves either the business combination or the transaction that
resulted in the person becoming an interested stockholder; (ii) the combination
is approved by a majority of the voting power not beneficially owned by the
interested stockholder or its affiliates or associates at a meeting called for
that purpose; or (iii) the combination satisfies certain provisions concerning
fair price.
Sections 78.411 to 78.444 only apply to Nevada corporations that have 200 or
more stockholders and, unless the articles of incorporation provide otherwise,
have a class of voting shares registered under Section 12 of the Securities
Exchange Act of 1934 (as the Common Stock of Ammo Nevada would be upon
consummation of the Reincorporation). A Nevada corporation may elect not to be
governed by Sections 78.411 to 78.444 by a provision in its original certificate
of incorporation or an amendment thereto, which amendment must be approved by a
majority of the outstanding voting power, although such amendment is not
effective until 18 months after the vote.
Ammo Nevada has elected not to be governed by Sections 78.411 to 78.444;
therefore, these Sections will not apply to Ammo Nevada.
Control Shares
Nevada law further seeks to impede "unfriendly" corporate takeovers by providing
in Sections 78.378 to 78.3793 of the Nevada General Corporation Law that an
"acquiring person" shall only obtain voting rights in the "control shares"
purchased by such person to the extent approved by the other stockholders at a
meeting. With certain exceptions, an acquiring person is one who acquires or
offers to acquire a "controlling interest" in the corporation, defined as
one-fifth or more of the voting power. Control shares include not only shares
acquired or offered to be acquired in connection with the acquisition of a
controlling interest, but also all shares acquired by the acquiring person
within the preceding 90 days. The statute covers not only the acquiring person
but also any persons acting in association with the acquiring person. California
does not have a control shares statute.
Under Sections 78.378 to 78.3793, a Nevada corporation may, if so provided in
the articles of incorporation or bylaws of the corporation in effect on the
tenth day following acquisition of a controlling interest, call for redemption
of not less than all of the control shares at the average price paid for the
control shares if (i) the acquiring person has not delivered an offeror's
statement to the corporation within ten days after acquisition of the control
shares or (ii) the other stockholders do not accord full voting rights to the
control shares.
16
Unless otherwise provided in the articles of incorporation or bylaws in effect
on the tenth day following acquisition of a controlling interest, if the control
shares are accorded full voting rights and the acquiring person has acquired a
majority of the voting power, then any stockholder of record who did not vote in
favor of authorizing such voting rights is entitled to demand payment for the
fair value of such stockholder's shares.
Sections 78.378 to 78.3793 apply only to Nevada corporations that (i) have 200
or more stockholders, at least 100 of whom are stockholders of record and are
resident in Nevada, and (ii) do business in Nevada directly or through an
affiliated corporation. A corporation may elect to opt out of the provisions of
Sections 78.378 to 78.3793 if, before an acquisition of a controlling interest
is made, the articles of incorporation or bylaws in effect on the tenth day
following the acquisition of a controlling interest by an acquiring person
provide that these Sections do not apply. The Company does not currently and
will not as a result of the Proposed Reincorporation have 100 or more record
stockholders resident in Nevada.
Ammo Nevada has elected not to be governed by Sections 78.378 to 78.3793;
therefore, these Sections will not apply to Ammo Nevada, even if the Company
hereafter has 100 or more record stockholders resident in Nevada.
Cumulative Voting
California law generally provides that if any shareholder has given notice of
his or her intention to cumulate votes for the election of directors, any other
shareholder of the corporation is also entitled to cumulate his or her votes at
such election.
Under Nevada law, cumulative voting is not mandatory, and cumulative voting
rights must be provided in a corporation's articles of incorporation if
stockholders are to be entitled to cumulative voting rights. The Articles of
Incorporation of Ammo Nevada do not provide for cumulative voting.
California law permits a corporation that is listed on a national securities
exchange, or that is listed on the Nasdaq National Market and has at least 800
stockholders as of the record date for the corporation's most recent annual
meeting of shareholders, to amend its articles or bylaws to eliminate cumulative
voting by approval of the board of directors and of the outstanding shares
voting together as a class. Ammo California's current Articles of Incorporation
have eliminated cumulative voting.
Elimination of Actions by Written Consent of Shareholders
Under California and Nevada law, shareholders may execute an action by written
consent in lieu of a shareholder meeting. While Nevada law permits a corporation
to eliminate such actions by written consent in its articles of incorporation or
bylaws, the Articles and Bylaws of Ammo Nevada do not currently prohibit actions
by written consent of the stockholders, although the Board of Directors could
amend the Bylaws in this respect. The ability of the Board of Directors under
Nevada law to limit or eliminate the right of stockholders to initiate action by
written consent may make it more difficult to change the existing Board of
Directors and management.
17
Filling Vacancies on the Board of Directors
Under California law, unless the articles of incorporation or bylaws provide
otherwise, any vacancy on the board of directors not created by removal of a
director may be filled by the board. If the number of directors is less than a
quorum, a vacancy may be filled by the unanimous written consent of the
directors then in office, by the affirmative vote of a majority of the directors
at a meeting held pursuant to notice or waivers of notice, or by a sole
remaining director. Unless the articles of incorporation or bylaws otherwise
provide, a vacancy created by removal of a director may be filled only by
approval of the shareholders. Ammo California's Articles of Incorporation and
Bylaws permit directors to fill vacancies; however, if the vacancy was created
by the removal of a director by the vote or written consent of the shareholders
or by court order, the vacancy may be filled only by the affirmative vote of a
majority of shares represented and voting at a duly held meeting at which a
quorum is present, or by the unanimous written consent of all the shares
entitled to vote thereon. Under Nevada law, unless a corporation's articles of
incorporation provide otherwise, any vacancy on the board of directors,
including one created by removal of a director or an increase in the number of
authorized directors, may be filled by the majority of the remaining directors,
even if such number constitutes less than a quorum. The Articles of
Incorporation of Ammo Nevada provide that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may only be filled by the affirmative vote of a majority of shares represented
and voting at a duly held meeting at which a quorum is present, or by the
unanimous written consent of all the shares entitled to vote thereon, unless the
number of remaining directors is less than a quorum, in which case the vacancy
may be filled by the unanimous written consent of the directors then in office,
by the affirmative vote of a majority of the directors at a meeting held
pursuant to notice or waivers of notice, or by a sole remaining director.
Inspection of Shareholder List
California law allows any shareholder to inspect the shareholder list, the
accounting books and records, and the minutes of board and shareholder
proceedings for a purpose reasonably related to such person's interest as a
shareholder. California law provides, in addition, for an absolute right to
inspect and copy the corporation's shareholder list by persons who hold an
aggregate of five percent or more of a corporation's voting shares or who hold
one percent or more of such shares and have filed a Schedule 14A with the
Securities and Exchange Commission.
Nevada law allows inspection of a stockholder list only upon five days' notice
by either a person who has been a stockholder of record at least six months or a
person holding, or authorized in writing by the holder of, five percent of the
corporation's outstanding shares. In addition, the corporation may deny such
inspection rights if the stockholder requesting disclosure refuses to sign an
affidavit to the effect that (i) the inspection is not desired for a purpose
that is in the interest of a business or object other than the business of the
18
corporation and (ii) the stockholder has not at any time sold or offered for
sale any list of stockholders of any corporation or aided and abetted any other
person for such purpose. To inspect the accounting and financial books and
records of a corporation, a stockholder must hold or have the written
authorization of the holders of at least 15% of all issued and outstanding
shares, and a corporation may demand an affidavit to the effect that such
inspection is not desired for any purpose not related to such person's interest
in the corporation as a stockholder. No right to inspect the accounting and
financial books and records applies to any corporation listed and traded on a
recognized stock exchange or which furnishes detailed annual financial
statements to its stockholders.
Lack of access to stockholder records, even though unrelated to the
stockholder's interests as a stockholder, could result in impairment of the
stockholder's ability to coordinate opposition to management proposals,
including proposals with respect to a change in control of the Company. However,
California law provides that California provisions concerning the inspection of
shareholder lists apply not only to California corporations but also to
corporations organized under the laws of other states that have their principal
executive offices in California or customarily hold meetings of the board in
California, and that the California provisions concerning accounting books and
records and the minutes of board and shareholder proceedings apply to any such
foreign corporation that has its principal executive offices in California. For
so long as the Company continues too have its principal executive offices in
California and to hold board of directors meetings in Califrnia, and to the
extent such provisions applicable to foreign corporations are enforceable, the
Company must comply with California law concerning shareholder inspections. In
any event, the Company intends to continue complying with California law
concerning shareholder inspections even if it is not required to do so.
Interested Director Transactions
Under both California and Nevada law, certain contracts or transactions in which
one or more of a corporation's directors have an interest are not void or
voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under California and Nevada law. Under California and Nevada law, either
(i) the shareholders or the board of directors must approve any such contract or
transaction after full disclosure of the material facts and, in the case of
board approval, the contract or transaction must also be "just and reasonable"
(in California) to the corporation or (ii) the contract or transaction must have
been "just and reasonable" (in California) or "fair" (in Nevada) to the
corporation at the time it was approved. In the latter case, California law
explicitly places the burden of proof on the interested director. If board
approval is sought, the contract or transaction must be approved by a majority
vote of a quorum of the directors, without counting the vote of any interested
directors (except that interested directors may be counted for purposes of
establishing a quorum). Under California law, if shareholder approval is sought,
the interested director is not entitled to vote such director's shares at a
shareholder meeting with respect to any action regarding such contract or
transaction, whereas Nevada law requires that such director's votes be counted
for such purpose. Nevada law also provides that the transaction is not void or
19
voidable if the fact of the common directorship, office, or financial interest
at issue is not disclosed or known to the director at the time the transaction
is brought before the board for action. Nevada law addresses not only interested
directors but also transactions with interested officers.
Limitation of Liability and Indemnification
California and Nevada have similar laws respecting indemnification by a
corporation of its officers, directors, employees, and other agents. The laws of
both states also permit corporations to adopt a provision in their articles of
incorporation eliminating the liability of a director to the corporation or its
shareholders for monetary damages for breach of the director's fiduciary duty of
care. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
The Articles of Incorporation of Ammo California eliminate the liability of
directors to the fullest extent permissible under California law. California law
permits eliminating or limiting the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation (a
"derivative suit") for breach of a director's duties to the corporation and its
shareholders; provided, however, that the corporation may not eliminate or limit
liability for (i) intentional misconduct or knowing and culpable violation of
law; (ii) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence of
good faith on the part of the director; (iii) receipt of an improper personal
benefit; (iv) acts or omissions that show reckless disregard for the director's
duty to the corporation or its shareholders, where the director in the ordinary
course of performing a director's duties should be aware of a risk of serious
injury to the corporation or its shareholders; (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the corporation or its shareholders; (vi) interested
transactions between the corporation and a director in which a director has a
material financial interest; and (vii) liability for improper distributions,
loans, or guarantees.
The Articles of Incorporation of Ammo Nevada eliminate the liability of both
directors and officers to the fullest extent permissible under Nevada law, as
such law exists currently or as it may be amended in the future. Under Nevada
law, such provision may not eliminate or limit director or officer monetary
liability for (i) acts or omissions involving intentional misconduct, fraud, or
a knowing violation of law or (ii) the payment of certain prohibited
distributions. Such limitation of liability provision also may not limit a
director's or officer's liability for violation of, or otherwise relieve Ammo
Nevada or its directors or officers from the necessity of complying with,
federal or state securities laws, or affect the availability of nonmonetary
remedies such as injunctive relief or rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that, with respect to derivative actions, (a) no
indemnification may be made when a person is adjudged liable to the corporation
in the performance of that person's duty to the corporation and its shareholders
unless a court determine such person is entitled to indemnity for expenses, and
20
then such indemnification may be made only to the extent that such court shall
determine, and (b) no indemnification may be made in respect of amounts paid in
settling or otherwise disposing of a pending action, or expenses incurred in
defending a pending action that is settled or otherwise disposed of, without
court approval.
Indemnification is permitted by California law only for acts taken in good faith
and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action.
California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Nevada law, which requires
indemnification relating to a successful defense on the merits or otherwise).
Nevada law generally permits indemnification of expenses incurred in the defense
or settlement of a derivative or third-party action, provided that, unless a
court orders indemnification or the corporation is bound to advance expenses as
they are incurred, there is a determination by a disinterested quorum of the
directors, by independent legal counsel, or by the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation. Without court approval, however, no indemnification may be made
in respect of any derivative action in which such person is adjudged liable to
the corporation. Nevada law requires indemnification of expenses when the
individual being indemnified has successfully defended any action, claim, issue,
or matter therein, whether on the merits or otherwise.
Nevada law states that the indemnification provided by statute shall not be
deemed exclusive of any other rights under the articles of incorporation, any
bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
Each current officer and director of the Company has entered into or will enter
into an indemnification agreement with Ammo Nevada that conforms to Nevada law
and includes within its purview future changes in Nevada law that expand the
permissible scope of indemnification of directors and officers of Nevada
corporations.
Nevada law provides that the articles of incorporation or bylaws or an agreement
made by a corporation may provide that the expenses of directors and officers
incurred in defending an action must be paid by the corporation as they are
incurred and in advance of the final disposition of the action upon receipt of
an undertaking by or on behalf of the director or officer to repay the amount if
the court ultimately determines that such person is not entitled to
indemnification. The Articles of Incorporation and the Bylaws of Ammo Nevada
provide that the Company shall indemnify directors and officers to the fullest
extent permitted under Nevada law, and that the Company shall pay all expenses
incurred in defending an action in advance. The Bylaws of Ammo Nevada also
permit such indemnification of and advancement of expenses to employees and
agents of the Company.
21
Nevada law further provides that a corporation may purchase and maintain
insurance or make other financial arrangements on behalf of any director,
officer, employee, or agent of the corporation (or person who is serving in such
capacity with another enterprise at the request of the corporation), whether or
not the corporation has the authority to indemnify such person. These other
financial arrangements may include a trust fund, self-insurance, securing the
corporation's obligation by granting a security interest or other lien, or
establishing a letter of credit, guaranty, or surety, although no financial
arrangement may provide protection for intentional misconduct, fraud, or a
knowing violation of law except with respect to the advancement of expenses or
unless ordered by a court. In the absence of fraud, the decision of the board of
directors as to the propriety of any insurance or other financial arrangement is
conclusive, and the insurance or other financial arrangement is not void or
voidable and does not subject any director approving it to personal liability
even if such director is a beneficiary of the insurance or other financial
arrangement. The Bylaws of Ammo Nevada permit the Company to purchase and
maintain insurance and make such other financial arrangements.
Loans to Officers and Employees
Under California law, any loan to or guarantee for the benefit of a director or
officer of a corporation or its parent requires approval of the shareholders,
not counting any shares owned by the relevant director or officer, unless
suchloan or guaranty is provided under an employee benefit plan approved by
shareholders owning a majority of the outstanding shares of the corporation. In
addition, under California law shareholders of any corporation with 100 or more
shareholders of record may approve a bylaw authorizing the board of directors
alone, not counting the vote of any interested director, to approve loans or
guarantees to or on behalf of officers (whether or not such officers are
directors) if the board determines that any such loan or guaranty may reasonably
be expected to benefit the corporation. The Bylaws of Ammo California authorize
such loans or guarantees. These specific provisions of California law dealing
with loans and guarantees would no longer apply after the Proposed
Reincorporation.
Power to Call Special Shareholders' Meetings
Under California law, a special meeting of shareholders may be called by (a) the
board of directors, (b) the chairman of the board, (c) the president, (d) the
holders of shares entitled to cast not less than ten percent of the votes at
such meeting, or (e) such additional persons as are authorized by the articles
of incorporation or the bylaws. Under Nevada law, a special meeting of
stockholders may be called as set forth in the articles of incorporation or
bylaws. The Articles of Incorporation of Ammo Nevada authorize the Board of
Directors, the President, or the holders of at least ten percent of the
outstanding capital stock to call a special meeting of stockholders. Since the
right of the stockholders to call a special meeting is set forth in the Articles
of Incorporation of Ammo Nevada, it may be amended only by stockholder vote or
written consent, and therefore such right may not be limited or eliminated by
the Board of Directors.
22
Removal of Directors
Under California law, any director or the entire board of directors may be
removed, with or without cause, by the affirmative vote of a majority of the
outstanding shares entitled to vote; however, no individual director may be
removed (unless the entire board is removed) if the number of votes cast against
such removal, or not consenting in writing to removal, would be sufficient to
elect the director under cumulative voting. Under Nevada law, any director may
be removed from office, with or without cause, by the vote of stockholders
representing not less than two-thirds of the voting power of the class or series
of stock of the Company entitled to elect such director, unless the articles of
incorporation provide for cumulative voting or a different percentage of voting
stock. If a Nevada corporation's articles of incorporation provide for
cumulative voting, a director may not be removed except upon the vote of
stockholders owning sufficient voting power to have prevented such director's
election in the first instance. The Articles of Incorporation of Ammo Nevada do
not provide for cumulative voting, but do specify that any director or the
entire board of directors may be removed, with or without cause, by the
affirmative vote of a majority of the outstanding shares entitled to vote.
Shareholder Derivative Suits
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Nevada law,
a stockholder may only bring a derivative action on behalf of the corporation if
the stockholder was a stockholder of the corporation at the time of the
transaction in question or his or her stock thereafter devolved upon him or her
by operation of law. Nevada law also provides that a derivative action may not
be maintained if it appears that the plaintiff does not fairly and adequately
represent the interests of the stockholders similarly situated in enforcing the
right of the corporation.
Shareholder Voting
Both California and Nevada law generally require that a majority of shareholders
of both the acquiring and target corporations approve statutory mergers. Nevada
law does not require a stockholder vote of the surviving corporation in a merger
(unless the corporation provides otherwise in its articles of incorporation) if
(i) the merger agreement does not amend the existing articles of incorporation
of the surviving corporation, (ii) each stockholder of the surviving corporation
whose shares were outstanding before the merger will hold the same number of
shares with identical designations, preferences, limitations, and relative
rights after the merger, and (iii) the number of shares outstanding after the
merger plus the number of shares issued as a result of the merger, either by
conversion or exercise of securities issued pursuant to the merger, will not
exceed by more than 10% the number of shares of the surviving corporation
outstanding immediately prior to the merger. California law contains a similar
exception to its voting requirements for reorganizations where shareholders or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity.
23
Both California and Nevada law also require that a sale of all or substantially
all of the assets of a corporation be approved by a majority of the voting
shares of the corporation transferring such assets. With certain exceptions,
California law also requires that mergers, reorganizations, certain sales of
assets, and similar transactions be approved by a majority vote of each class of
shares outstanding. By contrast, Nevada law generally does not require class
voting, except in certain transactions involving an amendment to the articles of
incorporation that differentially affects a specific class of shares. As a
result, stockholder approval of such transactions may be easier to obtain under
Nevada law for companies that have more than one class of shares outstanding.
California law also requires that, except in a short-form merger or a merger of
a parent corporation into its subsidiary in which it owns at least 90% of the
outstanding shares, if a constituent corporation in the merger or its parent
owns at least 50% of another constituent corporation in the merger, the
nonredeemable common shares of a constituent corporation may be converted only
into nonredeemable common shares of the surviving corporation or a parent party
unless all shareholders of the class consent. This provision of California law
may have the effect of making a "cash-out" merger by a majority shareholder more
difficult to accomplish. Although Nevada law does not parallel California law in
this respect, under some circumstances Sections 78.411 to 78.444 (business
combinations with interested stockholders) and Sections 78.378 to 78.3793
(voting rights of acquiring person's control shares) of the Nevada General
Corporation Law do provide similar protection against coercive two-tiered bids
for a corporation in which the stockholders are not treated equally. California
law provides that, except in certain circumstances, when a tender offer or a
proposal for a reorganization or for a sale of assets is made by an interested
party (generally a controlling or managing party of the target corporation), an
affirmative opinion in writing as to the fairness of the consideration to be
paid to the shareholders must be delivered to the shareholders. This fairness
opinion requirement does not apply to a corporation that does not have shares
held of record by at least 100 persons or to a transaction that has been
qualified under California state securities laws. Furthermore, if a tender of
shares or vote is sought pursuant to an interested party's proposal and a later
proposal is made by another party at least ten days prior to the date of
acceptance of the interested party proposal, the shareholders must be informed
of the later offer and be afforded a reasonable opportunity to withdraw any
vote, consent, or proxy or to withdraw any tendered shares. Nevada law has no
comparable provision. Size of the Board of Directors Under California law,
changes in the number of directors or, if set forth in the articles of
incorporation or bylaws, the range in the number of directors must in general be
approved by a majority of the outstanding shares, but the board of directors may
fix the exact number of directors within a stated range, if authorized. Nevada
law permits not only the stockholders but also the board of directors acting
independently of the stockholders to change the authorized number, or the range,
of directors by amendment to the bylaws, unless the directors are not authorized
to amend the bylaws or the number of directors is fixed in the articles of
incorporation (in which case a change in the number of directors may be made
only by amendment to the articles of incorporation following approval of such
change by the stockholders). The Articles of Incorporation of Ammo Nevada
provide that the number of Directors shall be within the range specified in the
Articles, and that the Board of Directors may fix the exact number of directors
within the stated range by amendment to the Bylaws. If the Proposed
24
Reincorporation is approved, the four directors of Ammo California will continue
as directors of Ammo Nevada and the Bylaws of Ammo Nevada will initially provide
for a four-member Board of Directors.
Application of the General Corporation Law of California to Nevada Corporations
Under Section 2115 of the California General Corporation Law, certain foreign
corporations (i.e., corporations not organized under California law) are placed
in a special category if they have characteristics of ownership and operation
indicating that they have certain significant business contacts with California
and more than one half of their voting securities are held of record by persons
having addresses in California. So long as a Nevada or other foreign corporation
is in this special category, and it does not qualify for one of the statutory
exemptions, it is subject to a number of key provisions of the California
General Corporation Law applicable to corporations incorporated in California.
Among the more important provisions are those relating to the election and
removal of directors, cumulative voting, prohibition of classified boards of
directors in privately held corporations, standards of liability and
indemnification of directors, distributions, dividends and repurchases of
shares, shareholder meetings, approval of certain corporate transactions,
dissenters' and appraisal rights, and inspection of corporate records. See
"Significant Differences Between the Corporation Laws of California and Nevada"
above. An exemption from Section 2115 is provided for a corporation whose shares
are listed on a major national securities exchange, or are traded on the Nasdaq
National Market and has 800 or more shareholders as of the record date for its
most recent annual meeting of shareholders. As Ammo Nevada will not have its
shares listed and publicly traded on the Nasdaq National Market, the Company
will not qualify for the exemption from 2115 described above.
Certain Federal Income Tax Consequences
The following is a discussion of certain federal income tax consequences to
holders of Ammo California capital stock who receive Ammo Nevada capital stock
in exchange for their Ammo California capital stock as a result of the Proposed
Reincorporation. No state, local, or foreign tax consequences are addressed
herein.
This discussion does not address all the tax consequences of the Proposed
Reincorporation that may be relevant to particular Ammo California shareholders,
including without limitation dealers in securities, holders of stock options,
and those Ammo California shareholders who acquired their shares upon the
exercise of stock options. In view of the varying nature of such tax
consequences, shareholders are urged to consult their own tax advisors as to the
specific tax consequences to them of the Proposed Reincorporation, including the
applicability of federal, state, local, or foreign tax laws.
25
The Company has not requested a ruling from the Internal Revenue Service (the
"IRS") or an opinion of counsel with respect to the federal income tax
consequences of the Proposed Reincorporation under the Internal Revenue Code of
1986, as amended (the "Code"). The Company believes, however, that: (a) the
Proposed Reincorporation will constitute a tax-free reorganization under Section
368(a) of the Code; (b) no gain or loss will be recognized by holders of capital
stock of Ammo California upon receipt of capital stock of Ammo Nevada pursuant
to the Proposed Reincorporation; (c) the aggregate tax basis of the capital
stock of Ammo Nevada received by each shareholder will be the same as the
aggregate tax basis of the capital stock of Ammo California held by such
shareholder as a capital asset at the time of the Proposed Reincorporation; and
(d) the holding period of the capital stock of Ammo Nevada received by each
shareholder of Ammo California will include the period for which such
shareholder held the capital stock of Ammo California surrendered in exchange
therefor, provided that such Ammo California capital stock was held by such
shareholder as a capital asset at the time of the Proposed Reincorporation.
A successful IRS challenge to the tax-free status of the Proposed
Reincorporation would result in a shareholder recognizing gain or loss with
respect to each share of Ammo California capital stock surrendered equal to the
difference between that shareholder's basis in such share and the fair market
value, as of the time of the Proposed Reincorporation, of the Ammo Nevada
capital stock received in exchange therefor. In such event, a shareholder's
aggregate basis in the shares of Ammo Nevada capital stock received in the
exchange would equal such fair market value, and such shareholder's holding
period for such shares would not include the period during which such
shareholder held Ammo California capital stock.
State, local, or foreign income tax consequences to shareholders may vary from
the federal tax consequences described above. Shareholders should consult their
own tax advisors as to the effect of the Proposed Reincorporation under
applicable federal, state, local, or foreign income tax laws.
The Company should not recognize gain or loss for federal income tax purposes as
a result of the Proposed Reincorporation, and Ammo Nevada should succeed without
adjustment to the federal income tax attributes of Ammo California.
Vote Required for the Proposed Reincorporation
Approval of the Proposed Reincorporation, which includes approval of the Merger
Agreement, requires the Affirmative vote of the holders of a majority of the
outstanding shares of Ammo California Common Stock.
26
PROPOSAL 2
APPROVAL OF THE COMPANY'S 2005 STOCK OPTION PLAN
On June 30, 2005, our Board of Directors voted unanimously to authorize and
recommend that our stockholders approve a proposal to establish and maintain the
2005 Stock Option Plan (the "Plan"), providing for the issuance of qualified and
non-qualified incentive stock options and direct restricted stock grants to
officers, employees, consultants and others providing services to the Company.
The directors of the Company will be eligible to be issued options and
restricted stock under the Plan. As of June 30, 2005, there were no incentive
stock options or nonqualified stock options granted pursuant to the Plan.
The Compensation Committee of the Board of Directors or another committee
approved by the Board of Directors of the Company (or the entire Board) will
administer the Plan. The committee administering the Plan (or the entire Board)
will establish the exercise price, the term, the vesting schedule and the other
terms and conditions of each option or restricted stock to be granted under the
Plan. No option shall have a term of longer than ten (10) years, and certain
incentive stock options may not have a term of longer than five (5) years. Up to
1,000,000 shares of our Common Stock may be issued in connection with awards
granted under the Plan. The purposes of the Plan are to advance the best
interest of our shareholders and to attract, retain and motivate key employees
and persons affiliated with us, and provide such persons with additional
incentive to further the business, promote the long-term financial success and
increase shareholder value by increasing their proprietary interest in our
success. The Board of Directors believes the Plan will fulfill these purposes
and that the availability of equity incentives under the Plan will be a
significant factor in our ability to attract and retain key management personnel
who share primary responsibility for our management and growth.
The following is a summary of the principal features of the Plan, and does not
purport to be a complete description of the Plan. A complete copy of the Plan is
attached as Exhibit A.
Eligibility. The Plan is open to key employees, officers, directors and
consultants of the Company and its affiliates. As of June 30, 2005, we had no
employees which were eligible for participation in the Plan.
Changes in the Company's Capital Structure. The Plan will not affect our
right to authorize adjustments, recapitalizations, reorganizations or other
changes in our capital structure. In the event of an adjustment,
recapitalization or reorganization, the award shall be adjusted accordingly. In
the event of a merger, consolidation or liquidation, the eligible person will be
eligible to receive a like number of shares of stock in the new entity that he
or she would have been entitled to if, immediately prior to the merger, he or
she had exercised his or her option. In the event of a merger, consolidation or
liquidation, all outstanding options may be canceled by the Board of Directors
upon written notice to the eligible person and by granting a period in which the
options may be exercised.
27
Options and Option price. We may grant incentive or nonqualified stock
options. The exercise price of incentive options shall not be less than the fair
market value on the date of grant. The exercise price for incentive options for
10% or more shareholders shall be not less than 110% of fair market value. The
exercise price of nonqualified options shall be determined by the Board.
Duration. No option may be exercisable after the period of ten years. In
the case of a 10% or more shareholder, no incentive option may be
exercisableafter the expiration of five years.
Amount exercisable. In the event an eligible person exercises incentive
options during the calendar year whose aggregate fair market value exceeds
$100,000, the exercise of options over $100,000 will be considered nonqualified
stock options.
Exercise of Options. Options may be exercised by written notice to the
Compensation Committee with: (a) cash, certified check, bank draft, or postal or
express money order payable to the order of the company for an amount equal to
the option price of the shares; or, if approved in advance by the Compensation
Committee (b) stock at its fair market value on the date of exercise; (c) an
election to make a cashless exercise through a registered broker-dealer; (d) an
election to have shares of stock, which otherwise would be issued on exercise,
withheld in payment of the exercise price; or (e) any other form of payment
which is acceptable to the Compensation Committee.
Stock appreciation rights or SARs. SARs may be included in each option
granted under the Plan. A SAR permits the recipient to surrender that option, or
a portion of the part which is exercisable, and receive in exchange an amount
equal to the excess of the fair market value of the stock covered by the option,
over the exercise price of the stock.
Termination of Options or SARs. Unless expressly provided in the option or
SAR agreement, options or SARs shall terminate three months after an employee's
severance of employment with the company other than by death or disability.
Unless the option or SAR expires sooner, the option or SAR will expire one year
after the death or disability of the eligible person.
Restricted Stock Awards. The Board may issue shares of stock to an eligible
person subject to the terms of a restricted stock agreement. The restricted
stock may be issued for no payment by the eligible person or for payment below
the fair market value on the date of grant. Restricted stock shall be subject to
restrictions as to sale, transfer, alienation, pledge, or other encumbrance and
generally will be subject to vesting over a period of time specified in the
restricted stock agreement. The Board shall determine the period of vesting, the
number of shares, the price, if any, of stock included in a restricted stock
award, and the other terms and provisions which are included in a restricted
stock agreement.
28
Amendment or Termination of the Plan. The Board may amend, terminate or
suspend the Plan at any time, in its sole and absolute discretion; provided,
however, that no amendment that would increase the number of shares of stock
that may be issued under the Plan, or withdraw the administration of the Plan
from the Board or Compensation Committee, shall be made without the approval of
our shareholders. Subject to the preceding sentence, the Board shall have the
power to make any changes in the Plan and in the regulations and administrative
provisions under it or in any outstanding incentive option as in the opinion of
counsel for the company may be necessary or appropriate from time to time to
enable any incentive option granted under this Plan to continue to qualify as an
incentive stock option or such other stock option as may be defined under the
Code so as to receive preferential federal income tax treatment.
Federal Tax Consequences. The following is a brief summary of the tax
consequences of the grant and exercise of stock options under the federal income
tax laws. This summary does not, among other things, purport to describe state
or local tax consequences or to describe all federal income tax consequences.
Incentive Stock Options and Nonqualified Options. Recipients of incentive
options generally are not subject to income tax at the time the option is
granted or exercised. However, upon the exercise of any incentive option, any
excess of the fair market value of shares received over the exercise price may
be subject to the alternative minimum tax. Upon disposition of any shares
obtained through the exercise of an incentive option, long-term capital gain or
loss will be recognized in an amount equal to the difference between the sales
price and the aggregate exercise price, provided that the participant has held
the shares for at least one year from the date the incentive option was
exercised and at least two years from the date the incentive option was granted.
If the participant disposes of the shares within that time period (a
"Disqualifying Disposition"), the participant will recognize ordinary income to
the extent of the difference between the exercise price and the lesser of the
fair market value on the date the incentive option is exercised or the amount
realized on the Disqualifying Disposition. Any remaining gain or loss is treated
as a short-term or long-term capital gain or loss, depending on the period the
shares were held by the participant. We are not entitled to any tax deduction
upon either the exercise of any incentive option or upon any subsequent
disposition of the shares acquired pursuant to such exercise, except to the
extent that the participant recognizes ordinary income pursuant to a
Disqualifying Disposition.
A participant receiving nonqualified options does not generally recognize income
at the time the option is granted. However, when the option is exercised, the
participant will recognize ordinary income equal to the difference between the
fair market value of the shares on the exercise date and the exercise price. We
receive a tax deduction equal to the amount of ordinary income recognized by the
participant. The participant's basis in the shares is equal to the exercise
price plus any recognized ordinary income.
As of June 30, 2005, there were no grants made pursuant to the Plan.
EQUITY COMPENSATION PLAN INFORMATION
We do not currently have any equity compensation plans except for the 2005 Stock
Option Plan which is included in this Information Statement.
29
PROPOSAL 3
THE REVERSE STOCK SPLIT
General Information
On June 30, 2005, our Board of Directors voted unanimously to authorize and
recommend that our stockholders approve a 1:20 reverse split of the Company's
common stock and retain the same number of authorized shares. The Amendment to
the Certificate of Incorporation provides that each 20 shares of common stock
outstanding on the Effective Date will be exchanged for one post-Reverse Split
share of the Company's common stock ("New Common Stock").
The Company will effect the reverse stock split by reducing the number of shares
of our common stock issued and outstanding, but will not increase the par value
of our common stock, and will not change the number of authorized shares of our
common stock.
Reasons for the Reverse Stock Split
Purpose of the Reverse Stock Split. The Company requires additional financing to
fund its plan for continued growth. The Board of Directors has reviewed various
alternatives for additional financing and has come to the conclusion that an
increase in the market price of the common stock may enhance the marketability
of the common stock and so improve the Company's prospects for obtaining
additional financing. It is hoped that the Reverse Split will increase the per
share market price of the common stock. There is, however, no assurance that the
market price will increase, or that it will not return to its current levels
after the Reverse Split. Recently, the market price for the Company's common
stock has been only pennies per share. Many brokerage firms are reluctant to
recommend lower-priced stocks to their clients. The policies and practices of
some brokerage houses tend to discourage individual brokers within those firms
from dealing in lower priced stocks. Additionally, the brokerage commission on
the purchase or sale of stock with a relatively low per share price generally
tends to represent a higher percentage of the sales price than the brokerage
commission charged on a stock with a relatively high per share price. The Board
of Directors believes that these issues are best addressed by an increase in the
inherent value per share of common stock that will occur as a result of the
Reverse Split. The Board believes that, absent the Reverse Split, the Company is
not likely to obtain any additional financing. Accordingly, the Board believes
that the proposed Reverse Split is essential to the Company's prospects for
raising additional financing through the sale of its common stock or derivative
securities.
Potential Risks of the Reverse Stock Split
If the Board does effect a reverse stock split there can be no assurance that
the bid price of our common stock will continue at a level in proportion to the
reduction in the number of outstanding shares resulting from the reverse stock
split. The market price of our common stock will also be based on our
performance and other factors, many of which are unrelated to the number of
shares outstanding. If the reverse stock split is effected and the market price
of our common stock declines, the percentage decline as an absolute number and
as a percentage of our overall capitalization may be greater than would occur in
the absence of a reverse stock split. Furthermore, liquidity of our common stock
could be adversely affected by the reduced number of shares that would be
outstanding after the reverse stock split.
30
Potential Effects of the Reverse Stock Split
Pursuant to the reverse stock split, each holder of shares of our common stock,
par value $0.001 per share, as of the Record Date of the reverse stock split
will become a holder of a lesser number (depending on the exact reverse ratio)
of shares our common stock, par value $0.001 per share, after consummation of
the reverse stock split.
Accounting Matters
The reverse stock split will not affect the par value of our common stock. As a
result, on the effective date of the reverse stock split, the stated par value
capital on our balance sheet attributable to our common stock will be reduced
and the additional paid-in capital account shall be credited with the amount by
which the stated capital is reduced. The per share net income or loss and net
book value per share of our common stock will be increased because there will be
fewer shares of our common stock outstanding.
Effect on Authorized and Outstanding Shares
We are currently authorized to issue a maximum of 300,000,000 shares of common
stock. As of June 30, 2005, there were 77,407,300 shares of our common stock
issued and outstanding, or held as treasury shares. Although the number of
authorized shares of common stock is not to change as a result of the reverse
stock split, the number of shares of common stock issued and outstanding, or
held as treasury shares, will be reduced to a number that will be approximately
equal to the number of shares of our common stock issued and outstanding, or
held as treasury shares, immediately prior to the effectiveness of the reverse
stock split, divided by the ratio of the reverse as determined by the Board of
Directors.
With the exception of the number of shares issued and outstanding, or held as
treasury shares, the rights and preferences of the shares of our common stock
prior and subsequent to the reverse stock split will remain the same. Following
the effective date of the reverse stock split, it is not anticipated that our
financial condition, the percentage ownership of management, the number of our
stockholders, or any aspect of our business would materially change as a result
of the reverse stock split.
The reverse stock split will be effected simultaneously for all of our common
stock and the exchange ratio will be the same for all of our common stock. The
reverse split will affect the Series A preferred stock holders uniformly. The
reverse stock split will also affect all of our stockholders uniformly and will
not affect any stockholder's percentage ownership interests in the Company,
except to the extent that the reverse stock split results in any of our
stockholders owning a fractional share. See "Fractional Shares" below. Common
stock issued pursuant to the reverse stock split will remain fully paid and
non-assessable.
Our common stock is currently registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and as a result, we are
subject to periodic reporting and other requirements. The proposed reverse stock
split will not affect the registration of our common stock under the Exchange
Act.
31
Potential Odd Lots
If approved, the reverse stock split will result in some stockholders owning
"odd-lots" of less than 100 shares of our common stock. Brokerage commissions
and other costs of transactions in odd-lots are generally somewhat higher than
the costs of transactions in "round-lots" of even multiples of 100 shares.
Increase of Shares of Common Stock Available for Future Issuance
As a result of the reverse stock split, there will be a reduction in the number
of shares of our common stock issued and outstanding, or held as treasury
shares, and an associated increase in the number of authorized shares which
would be unissued and available for future issuance after the reverse stock
split. The increase in available shares could be used for any proper corporate
purpose approved by the Board including, among other purposes, future financing
transactions.
Potential Anti-Takeover Effect
Although the increased proportion of unissued authorized shares to issued shares
could, under certain circumstances, have an anti-takeover effect (for example,
by permitting issuances that would dilute the stock ownership of a person
seeking to effect a change in composition of our Board or contemplating a tender
offer or other transaction for the combination of the Company with another
company), the reverse stock split proposal is not being proposed in response to
any effort of which we are aware to accumulate our shares of common stock or
obtain control of us, nor is it part of a plan by management to recommend a
series of similar amendments to our Board and stockholders. Other than the
reverse stock split proposal, our Board does not currently contemplate
recommending the adoption of any other amendments to our certificate of
incorporation that could be construed to affect the ability of third parties to
take over or change the control of the Company.
Effectiveness of the Reverse Stock Split
The reverse stock split will become effective upon the filing with the
appropriate regulatory bodies. It is expected that such filing will take place
on July 31, 2005.
Commencing upon the effectiveness of the reverse stock split, each certificate
of our common stock will be deemed for all corporate purposes to evidence
ownership of the reduced number of shares of common stock resulting from the
reverse stock split. As soon as practicable after the effective date,
stockholders may surrender their certificates representing shares of common
stock prior to the reverse stock split in exchange for certificates representing
shares of common stock after the reverse stock split. HOWEVER, SUCH EXCHANGE IS
NOT MANDATORY. We intend to use Atlas Stock Transfer as our exchange agent in
effecting the exchange of the certificates following the effectiveness of the
reverse stock split.
Fractional Shares
We will not issue fractional shares in connection with the reverse stock split.
Instead, any fractional share that results from the reverse stock split will be
rounded up to the next whole share. We are doing this so that we may avoid the
expense and inconvenience of issuing and transferring fractional shares of our
common stock as a result of the stock split. The shares do not represent
separately bargained for consideration.
32
Certain Federal Income Tax Consequences
The following discussion summarizing certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended, the applicable Treasury
Regulations promulgated thereunder, judicial authority and current
administrative rulings and practices in effect on the date of this Information
Statement. This discussion is for general information only and does not discuss
consequences that may apply to special classes of taxpayers (e.g., non-resident
aliens, broker-dealers, or insurance companies). Stockholders are urged to
consult their own tax advisors to determine the particular consequences to them.
The receipt of the common stock following the effective date of the reverse
stock split, including whole shares issued in lieu of fractional shares, solely
in exchange for the common stock held prior to the reverse stock split will not
generally result in a recognition of gain or loss to the stockholders. The
adjusted tax basis of a stockholder in the common stock received after the
reverse stock split will be the same as the adjusted tax basis of the common
stock held prior to the reverse stock split exchanged therefore, and the holding
period of the common stock received after the reverse stock split will include
the holding period of the common stock held prior to the reverse stock split
exchanged therefore. No gain or loss will be recognized by the Company as a
result of the reverse stock split.
Appraisal Rights
No appraisal rights are available under the California Corporate Code or under
our certificate of incorporation or by-laws to any stockholder who dissents from
the proposal to approve the amendment to the certificate of incorporation to
effect the reverse stock split.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires officers, directors and beneficial
owners of more than 10% of the Company's shares to file reports with the
Commission and submit those reports to the Company. Based solely on a review of
the reports and representations furnished to the Company during the last fiscal
year by such persons, the Company believes that each of these persons is in
compliance with all applicable filing requirements.
ADDITIONAL INFORMATION
The Company's annual report on Form 10-KSB for the fiscal year ended December
31, 2004 and quarterly report on Form 10-QSB for the quarter ended March 31,
2005 are being delivered to you with this Information Statement. The Company
will furnish a copy of any exhibit thereto or other information upon request by
a stockholder to Andres F. Fernandez, President and Chief Executive Officer,
American Ammunition, Inc., 3545 NW 71st Street, Miami, Florida 33147; (305)
835-7400.
We are required to file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document we file
at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C.,
and at its offices in New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for more information on the operation of the public
reference rooms. Copies of our SEC filings are also available to the public from
the SEC's web site at www.sec.gov.
By Order of the Board of Directors,
/s/ Andres F. Fernandez
-----------------------------------
Andres F. Fernandez
President and Chief Executive Offer
33
EXHIBIT A
Form of Plan of Merger
Note: Newco is a fictitious name used as an example because management has not
yet incorporated the new Nevada corporation.
PLAN OF MERGER
This Plan of Merger is made and entered into this ____day of __________, 2005,
by and between American Ammunition, Inc., ("NEWCO" or the "Surviving
corporation"), a corporation in organization in the State of Nevada, and
American Ammunition, Inc., a California corporation, ("AMMO" or the
"Disappearing Corporation").
RECITALS
A. AMMO is a corporation organized and existing under the laws of the State of
California and has an authorized capital stock consisting of 320,000,000 total
shares, of which 300,000,000 common shares are authorized par value $0.001 per
share, of which 77,407,300 common shares are issued and outstanding as of June
__, 2005 and 20,000,000 authorized preferred shares, of which 1,795,320 have
been designated as Series A Preferred shares, 91,700 have been designated as
Series B Preferred shares and 1,905,882 have been designated as Series C shares,
of which 12,000 of Series A Preferred Stock were issued and outstanding; 91,700
of Series B Preferred Stock were issued and outstanding; and 1,905,882 of Series
C Preferred Stock were issued and outstanding.
B. NEWCO is a corporation in organization under the laws of the State of Nevada
and will have authorized capital stock consisting of 320,000,000 total shares,
of which 300,000,000 common shares are authorized par value $0.001 per share and
20,000,000 authorized preferred shares, of which 1,795,320 have been designated
as Series A Preferred shares, 91,700 have been designated as Series B Preferred
shares and 1,905,882 have been designated as Series C shares. No shares have
been issued.
C. The Board of Directors of AMMO deems it advisable for AMMO to merge with and
into NEWCO when the Nevada corporate organization has been accomplished.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, NEWCO and AMMO hereby agree to the following Plan of Merger:
1. Names of Constituent Corporations. AMMO will merge with and into NEWCO.
NEWCO will be the Surviving Corporation.
2. Terms and Conditions of Merger. The effective date of merger will be the
date upon which the Articles of Merger are filed with the California and Nevada
Secretaries of State. Upon the effective date of the merger the separate
corporate existence of AMMO will cease; title to all real estate and other
property owned by AMMO will be vested in NEWCO without reversion or impairment;
and the Surviving Corporation will have all liabilities of AMMO. Any proceeding
pending by or against AMMO may be continued as if such merger did not occur, or
the Surviving Corporation may be substituted in the proceeding for AMMO.
3. Governing Law. The laws of the State of Nevada will govern the Surviving
Corporation.
4. Name. The name of the Surviving Corporation will be American Ammunition,
Inc.
5. Registered Office. The present address of the registered office of the
Surviving and Disappearing corporations are 6075 Southeastern Avenue, Suite 1,
Las Vegas, NV 89119 and 827 State Street, Suite 26, Santa Barbara, CA 93101.
48
6. Accounting. The assets and liabilities of NEWCO and AMMO (collectively
the "Constituent Corporations") as of the effective date of the merger will be
taken up on the books of the Surviving Corporation at the amounts at which they
are carried at that time on the respective books of the Constituent
Corporations.
7. Bylaws. The Bylaws of NEWCO as of the effective date of the merger will
be the Bylaws of the Surviving Corporation until the same will be altered or
amended in accordance with the provisions thereof.
8. Directors. The directors of NEWCO as of the effective date of the merger
will be the directors of the Surviving Corporation until their respective
successors are duly elected and qualified. [Note: The AMMO Board of Directors,
or their successors, will be the directors of NEWCO]
9. Manner and Basis of Converting Shares. As of the effective date of the
merger:
(a) Each share of AMMO common stock, with par value of $0.001 per share,
issued and outstanding will continue to be one share of common stock with a
par value of $0.001 per share of the Surviving Corporation. Each share of
AMMO Series A Preferred Stock, with par value of $0.0001 per share, Series
B Preferred Stock, with a par value of $0.001 per share and Series C
Preferred Stock with a par value of $0.001 per share (collectively
"Preferred Stock") will continue to be one share of Series A, B and C
Preferred Stock with a par value of $0.001 per share of the Surviving
Corporation respectively.
(b) The Surviving Corporation will convert or exchange each share of AMMO
common stock and one share of AMMO Preferred Stock for one share of the
common stock and one share of the preferred stock with the same rights and
preferences of the Surviving Corporation. Fractional shares will be rounded
up to the nearest whole number.
(c) On the effective date of the merger, holders of certificates of common
stock or Preferred Stock in AMMO may surrender them to the Surviving
Corporation, or its stock transfer agent, in such manner as the Surviving
Corporation legally may require. This exchange will not be mandatory as a
new CUSIP number will be used to designate the change.
To the extent shareholders desire to tender their shares for new
certificates, the cost of issuance will be borne by the shareholder. Upon
receipt of such certificate, the Surviving Corporation will issue in
exchange a certificate of shares of common stock or preferred stock in the
Surviving Corporation representing the number of shares of stock to which
such holder will be entitled as set forth above.
(d) In addition, the shareholders will be entitled to receive any dividends
on the shares of common stock and preferred stock of the Surviving
Corporation which may have been declared and paid between the effective
date of the merger and the issuance to such shareholder of the certificate
of such common stock or preferred stock, if any.
10. Shareholder Approval. This Plan of Merger will be submitted to the
shareholders of AMMO for approval in the manner provided by law. After approval,
the Articles of Merger will be filed as required under the laws of the States of
Nevada and California.
11. Rights of Dissenting Shareholders. Any shareholder of AMMO who has the
right to dissent from this merger, if any, as provided in the California
Corporations
49
Code, and who so dissents in accordance with the requirements thereof, will be
entitled, upon surrender of the certificate or certificates representing
certificated shares or upon imposition of restrictions of transfer of
uncertificated shares, to receive payment of the fair value of such
shareholder's shares as provided for by California Corporations Code Chapter 13.
(Chapter 13 of the California Corporations Code is attached to this Plan of
Merger as Exhibit "A")
12. Termination of Merger. This merger may be abandoned at any time prior
to the filing of Articles of Merger with the Secretary of State, upon a vote of
a majority of the Board of Directors of both NEWCO and AMMO. If the merger is
terminated, there will be no liability on the part of either Constituent
Corporation, their respective Boards of Directors, or shareholders.
13. Counterparts. This Plan of Merger may be executed in any number of
counterparts, and all such counterparts and copies will be and constitute an
original instrument.
IN WITNESS WHEREOF, this Plan of Merger has been adopted by the undersigned as
of this____ day of_________, 2005.
NEWCO AMERICAN AMMUNITION, INC.
a Nevada corporation to be formed. a California corporation.
By: By:
--------------------------------- --------------------------------
Name: Name:
Title: Incorporator Title: President
Exhibit B
AMERICAN AMMUNITION, INC.
2005 STOCK OPTION PLAN
ARTICLE I - PLAN
1.1 PURPOSE. This Plan is a plan for key employees, officers, directors, and
consultants of the Company and its Affiliates and is intended to advance the
best interests of the Company, its Affiliates, and its stockholders by providing
those persons who have substantial responsibility for the management and growth
of the Company and its Affiliates with additional incentives and an opportunity
to obtain or increase their proprietary interest in the Company, thereby
encouraging them to continue in the employ of the Company or any of its
Affiliates.
1.2 RULE 16B-3 PLAN. The Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and therefore the
Plan is intended to comply with all applicable conditions of Rule 16b-3 (and all
subsequent revisions thereof) promulgated under the 1934 Act. To the extent any
provision of the Plan or action by the Board of Directors or Committee fails to
so comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee. In addition, the Board of Directors may amend
the Plan from time to time, as it deems necessary in order to meet the
requirements of any amendments to Rule 16b-3 without the consent of the
shareholders of the Company.
1.3 EFFECTIVE DATE OF PLAN. The Plan shall be effective June 30, 2005 (the
"Effective Date"), provided that the Plan shall have been approved by at least a
majority vote of stockholders voting in person or by proxy at a duly held
stockholders' meeting within one year of such date. No Incentive Option,
Nonqualified Option, Stock Appreciation Right, or Restricted Stock Award shall
be granted pursuant to the Plan ten years after the Effective Date.
ARTICLE II - DEFINITIONS
The words and phrases defined in this Article shall have the meaning set out in
these definitions throughout this Plan, unless the context in which any such
word or phrase appears reasonably requires a broader, narrower, or different
meaning.
2.1 "Affiliate" means any subsidiary corporation. The term "subsidiary
corporation" means any corporation (other than the Company) in an unbroken chain
of corporations beginning with the Company if, at the time of the action or
transaction, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain.
2.2 "Award" means each of the following granted under this Plan: Incentive
Option, Nonqualified Option, Stock Appreciation Right, or Restricted Stock
Award.
2.3 "Board of Directors" means the board of directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
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2.5 "Committee" means the Compensation Committee of the Board of Directors or
such other committee designated by the Board of Directors or the entire Board of
Directors. It is intended that the Committee shall be comprised solely of at
least two members who are both Non-Employee Directors and Outside Directors;
provided, however, that until such time as two such Directors are available to
serve in such roles, the failure to meet this requirement shall not effect the
validity of any grants under this Plan.
2.6 "Company" means American Ammunition, Inc., a California corporation.
2.7 "Consultant" means any person, including an advisor, engaged by the Company
or Affiliate to render services and who is compensated for such services.
2.8 "Non-Employee Director" means that term as defined in Rule 16b-3 under the
1934 Act.
2.9 "Eligible Persons" shall mean, with respect to the Plan, those persons who,
at the time that an Award is granted, are (i) Employees and all other key
personnel, including officers and directors, of the Company or Affiliate, or
(ii) Consultants or independent contractors who provide valuable services to the
Company or Affiliate as determined by the Committee.
2.10 "Employee" means a person employed by the Company or any Affiliate to whom
an Award is granted.
2.11 "Fair Market Value" of the Stock as of any date means (a) the average of
the high and low sale prices of the Stock on that date on the principal
securities exchange on which the Stock is listed; or (b) if the Stock is not
listed on a securities exchange, the average of the high and low sale prices of
the Stock on that date as reported on the NASDAQ; or (c) if the Stock is not
listed on the NASDAQ, the average of the high and low bid quotations for the
Stock on that date as reported by the National Quotation Bureau Incorporated; or
(d) if none of the foregoing is applicable, an amount at the election of the
Committee equal to (x), the average between the closing bid and ask prices per
share of Stock on the last preceding date on which those prices were reported or
(y) that amount as determined by the Committee in good faith.
2.12 "Incentive Option" means an option to purchase Stock granted under this
Plan which is designated as an "Incentive Option" and satisfies the requirements
of Section 422 of the Code.
2.13 "Nonqualified Option" means an option to purchase Stock granted under this
Plan other than an Incentive Option.
2.14 "Option" means both an Incentive Option and a Nonqualified Option granted
under this Plan to purchase shares of Stock.
2.15 "Option Agreement" means the written agreement by and between the Company
and an Eligible Person, which sets out the terms of an Option.
2.16 "Outside Director" shall mean a member of the Board of Directors serving on
the Committee who satisfies Section 162(m) of the Code.
2.17 "Plan" means the American Ammunition, Inc. 2005 Stock Option Plan, as set
out in this document and as it may be amended from time to time.
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2.18 "Plan Year" means the Company's fiscal year.
2.19 "Restricted Stock" means Stock awarded or purchased under a Restricted
Stock Agreement entered into pursuant to this Plan, together with (i) all
rights, warranties or similar items attached or accruing thereto or represented
by the certificate representing the stock and (ii) any stock or securities into
which or for which the stock is thereafter converted or exchanged. The terms and
conditions of the Restricted Stock Agreement shall be determined by the
Committee consistent with the terms of the Plan.
2.20 "Restricted Stock Agreement" means an agreement between the Company or any
Affiliate and the Eligible Person pursuant to which the Eligible Person receives
a Restricted Stock Award subject to this Plan.
2.21 "Restricted Stock Award" means an Award of Restricted Stock.
2.22 "Restricted Stock Purchase Price" means the purchase price, if any, per
share of Restricted Stock subject to an Award. The Committee shall determine the
Restricted Stock Purchase Price. It may be greater than or less than the Fair
Market Value of the Stock on the date of the Stock Award.
2.23 "Stock" means the common stock of the Company, $.001 par value, or, in the
event that the outstanding shares of common stock are later changed into or
exchanged for a different class of stock or securities of the Company or another
corporation, that other stock or security.
2.24 "Stock Appreciation Right" and "SAR" means the right to receive the
difference between the Fair Market Value of a share of Stock on the grant date
and the Fair Market Value of the share of Stock on the exercise date.
2.25 "10% Stockholder" means an individual who, at the time the Option is
granted, owns Stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or of any Affiliate. An individual shall
be considered as owning the Stock owned, directly or indirectly, by or for his
brothers and sisters (whether by the whole or half blood), spouse, ancestors,
and lineal descendants; and Stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust, shall be considered as being owned
proportionately by or for its stockholders, partners, or beneficiaries.
ARTICLE III - ELIGIBILITY
The individuals who shall be eligible to receive Awards shall be those Eligible
Persons of the Company or any of its Affiliates as the Committee shall determine
from time to time. The Board of Directors may designate one or more individuals
who shall not be eligible to receive any Award under this Plan or under other
similar plans of the Company.
ARTICLE IV - GENERAL PROVISIONS RELATING TO AWARDS
4.1 AUTHORITY TO GRANT AWARDS. The Committee may grant to those Eligible Persons
of the Company or any of its Affiliates, as it shall from time to time
determine, Awards under the terms and conditions of this Plan. The Committee
shall determine subject only to any applicable limitations set out in this Plan,
the number of shares of Stock to be covered by any Award to be granted to an
Eligible Person.
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4.2 DEDICATED SHARES. The total number of shares of Stock with respect to which
Awards may be granted under the Plan shall be ten million (10,000,000)
shares. The shares may be treasury shares or authorized but unissued shares. The
number of shares stated in this Section 4.2 shall be subject to adjustment in
accordance with the provisions of Section 4.5. In the event that any outstanding
Award shall expire or terminate for any reason or any Award is surrendered, the
shares of Stock allocable to the unexercised portion of that Award may again be
subject to an Award under the Plan.
4.3 NON-TRANSFERABILITY. Awards shall not be transferable by the Eligible Person
otherwise than by will or under the laws of descent and distribution, and shall
be exercisable, during the Eligible Person's lifetime, only by him. Restricted
Stock shall be purchased by and/or become vested under a Restricted Stock
Agreement during the Eligible Person's lifetime, only by him. Any attempt to
transfer an Award other than under the terms of the Plan and the Agreement shall
terminate the Award and all rights of the Eligible Person to that Award.
4.4 REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any
Stock under any Award if issuing that Stock would constitute or result in a
violation by the Eligible Person or the Company of any provision of any law,
statute, or regulation of any governmental authority. Specifically, in
connection with any applicable statute or regulation relating to the
registration of securities, upon exercise of any Option or pursuant to any
Award, the Company shall not be required to issue any Stock unless the Committee
has received evidence satisfactory to it to the effect that the holder of that
Option or Award will not transfer the Stock except in accordance with applicable
law, including receipt of an opinion of counsel satisfactory to the Company to
the effect that any proposed transfer complies with applicable law. The
determination by the Committee on this matter shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register any
Stock covered by this Plan pursuant to applicable securities laws of any country
or any political subdivision. In the event the Stock issuable on exercise of an
Option or pursuant to an Award is not registered, the Company may imprint on the
certificate evidencing the Stock any legend that counsel for the Company
considers necessary or advisable to comply with applicable law. The Company
shall not be obligated to take any other affirmative action in order to cause
the exercise of an Option or vesting under an Award, or the issuance of shares
pursuant thereto, to comply with any law or regulation of any governmental
authority.
4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE.
(a) The existence of outstanding Options or Awards shall not affect in any
way the right or power of the Company or its stockholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business, or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Stock or its rights, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise. If the Company shall effect a subdivision or
consolidation of shares or other capital readjustment, the payment of a Stock
37
dividend, or other increase or reduction of the number of shares of the Stock
outstanding, without receiving compensation for it in money, services or
property, then (a) the number, class, and per share price of shares of Stock
subject to outstanding Options under this Plan shall be appropriately adjusted
in such a manner as to entitle an Eligible Person to receive upon exercise of an
Option, for the same aggregate cash consideration, the equivalent total number
and class of shares he would have received had he exercised his Option in full
immediately prior to the event requiring the adjustment; and (b) the number and
class of shares of Stock then reserved to be issued under the Plan shall be
adjusted by substituting for the total number and class of shares of Stock then
reserved, that number and class of shares of Stock that would have been received
by the owner of an equal number of outstanding shares of each class of Stock as
the result of the event requiring the adjustment.
(b) If the Company is merged or consolidated with another corporation and
the Company is not the surviving corporation, or if the Company is liquidated or
sells or otherwise disposes of substantially all its assets while unexercised
Options remain outstanding under this Plan (each of the foregoing referred to as
a "Corporate Transaction"):
(i) Subject to the provisions of clause (ii) below, in the event of
such a Corporate Transaction, any unexercised Options shall automatically
accelerate so that they shall, immediately prior to the specified effective
date for the Corporate Transaction become 100% vested and exercisable;
provided, however, that any unexercised Options shall not accelerate, as
described above, if and to the extent such Option is, in connection with
the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof (the "Successor Corporation") or to be
replaced with a comparable award for the purchase of shares of the capital
stock of the Successor Corporation. Whether or not any unexercised Option
is assumed or replaced shall be determined by the Company and the Successor
Corporation in connection with the Corporate Transaction. The Board of
Directors shall make the determination of what constitutes a comparable
award to the unexercised Option, and its determination shall be conclusive
and binding. The unexercised Option shall terminate and cease to remain
outstanding immediately following the consummation of the Corporate
Transaction, except to the extent assumed by the Successor Corporation.
(ii) All outstanding Options may be canceled by the Board of Directors
as of the effective date of any Corporate Transaction, if (i) notice of
cancellation shall be given to each holder of an Option and (ii) each
holder of an Option shall have the right to exercise that Option in full
(without regard to any limitations set out in or imposed under this Plan or
the Option Agreement granting that Option) during a period set by the Board
of Directors preceding the effective date of the Corporate Transaction and,
if in the event all outstanding Options may not be exercised in full under
applicable securities laws without registration of the shares of Stock
issuable on exercise of the Options, the Board of Directors may limit the
exercise of the Options to the number of shares of Stock, if any, as may be
issued without registration. The method of choosing which Options may be
exercised, and the number of shares of Stock for which Options may be
exercised, shall be solely within the discretion of the Board of Directors.
(c) In each situation described in this Section 4.5, the Committee will
make similar adjustments, as appropriate, in outstanding Stock Appreciation
Rights.
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(d) The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services either upon direct sale or upon the exercise of rights
or warrants to subscribe for them, or upon conversion of shares or obligations
of the Company convertible into shares or other securities, shall not affect,
and no adjustment by reason of such issuance shall be made with respect to, the
number, class, or price of shares of Stock then subject to outstanding Awards.
4.6 ELECTION UNDER SECTION 83(B) OF THE CODE. No Eligible Person shall exercise
the election permitted under Section 83(b) of the Code without written approval
of the Committee. Any Eligible Person doing so shall forfeit all Awards issued
to him under this Plan.
ARTICLE V - OPTIONS AND STOCK APPRECIATION RIGHTS
5.1 TYPE OF OPTION. The Committee shall specify at the time of grant whether a
given Option shall constitute an Incentive Option or a Nonqualified Option.
Incentive Stock Options may only be granted to Employees.
5.2 OPTION PRICE. The price at which Stock may be purchased under an Incentive
Option shall not be less than the greater of: (a) 100% of the Fair Market Value
of the shares of Stock on the date the Option is granted or (b) the aggregate
par value of the shares of Stock on the date the Option is granted. The
Committee in its discretion may provide that the price at which shares of Stock
may be purchased under an Incentive Option shall be more than 100% of Fair
Market Value. In the case of any 10% Stockholder, the price at which shares of
Stock may be purchased under an Incentive Option shall not be less than 110% of
the Fair Market Value of the Stock on the date the Incentive Option is granted.
The price at which shares of Stock may be purchased under a Nonqualified Option
shall be such price as shall be determined by the Committee in its sole
discretion but in no event lower than the par value of the shares of Stock on
the date the Option is granted.
5.3 DURATION OF OPTIONS AND SARS. No Option or SAR shall be exercisable after
the expiration of ten (10) years from the date the Option or SAR is granted. In
the case of a 10% Stockholder, no Incentive Option shall be exercisable after
the expiration of five (5) years from the date the Incentive Option is granted.
5.4 AMOUNT EXERCISABLE -- INCENTIVE OPTIONS. Each Option may be exercised from
time to time, in whole or in part, in the manner and subject to the conditions
the Committee, in its sole discretion, may provide in the Option Agreement, as
long as the Option is valid and outstanding. To the extent that the aggregate
Fair Market Value (determined as of the time an Incentive Option is granted) of
the Stock with respect to which Incentive Options first become exercisable by
the optionee during any calendar year (under this Plan and any other incentive
stock option plan(s) of the Company or any Affiliate) exceeds $100,000, the
portion in excess of $100,000 of the Incentive Option shall be treated as a
Nonqualified Option. In making this determination, Incentive Options shall be
taken into account in the order in which they were granted.
5.5 EXERCISE OF OPTIONS. Each Option shall be exercised by the delivery of
written notice to the Committee setting forth the number of shares of Stock with
respect to which the Option is to be exercised, together with:
39
(a) cash, certified check, bank draft, or postal or express money order
payable to the order of the Company for an amount equal to the option price of
the shares;
(b) stock at its Fair Market Value on the date of exercise (if approved in
advance in writing by the Committee);
(c) an election to make a cashless exercise through a registered
broker-dealer (if approved in advance in writing by the Committee);
(d) an election to have shares of Stock, which otherwise would be issued on
exercise, withheld in payment of the exercise price (if approved in advance in
writing by the Committee); and/or
(e) any other form of payment which is acceptable to the Committee.
As promptly as practicable after receipt of written notification and payment,
the Company shall deliver to the Eligible Person certificates for the number of
shares with respect to which the Option has been exercised, issued in the
Eligible Person's name. If shares of Stock are used in payment, the aggregate
Fair Market Value of the shares of Stock tendered must be equal to or less than
the aggregate exercise price of the shares being purchased upon exercise of the
Option, and any difference must be paid by cash, certified check, bank draft, or
postal or express money order payable to the order of the Company. Delivery of
the shares shall be deemed effected for all purposes when a stock transfer agent
of the Company shall have deposited the certificates in the United States mail,
addressed to the Eligible Person, at the address specified by the Eligible
Person.
Whenever an Option is exercised by exchanging shares of Stock owned by the
Eligible Person, the Eligible Person shall deliver to the Company certificates
registered in the name of the Eligible Person representing a number of shares of
Stock legally and beneficially owned by the Eligible Person, free of all liens,
claims, and encumbrances of every kind, accompanied by stock powers duly
endorsed in blank by the record holder of the shares represented by the
certificates (with signature guaranteed by a commercial bank or trust company or
by a brokerage firm having a membership on a registered national stock
exchange). The delivery of certificates upon the exercise of Options is subject
to the condition that the person exercising the Option provides the Company with
the information the Company might reasonably request pertaining to exercise,
sale or other disposition.
5.6 STOCK APPRECIATION RIGHTS. All Eligible Persons shall be eligible to receive
Stock Appreciation Rights. The Committee shall determine the SAR to be awarded
from time to time to any Eligible Person. The grant of a SAR to be awarded from
time to time shall neither entitle such person to, nor disqualify such person
from, participation in any other grant of awards by the Company, whether under
this Plan or any other plan of the Company. If granted as a stand-alone SAR
Award, the terms of the Award shall be provided in a Stock Appreciation Rights
Agreement.
5.7 STOCK APPRECIATION RIGHTS IN TANDEM WITH OPTIONS. Stock Appreciation Rights
may, at the discretion of the Committee, be included in each Option granted
40
under the Plan to permit the holder of an Option to surrender that Option, or a
portion of the part which is then exercisable, and receive in exchange, upon the
conditions and limitations set by the Committee, an amount equal to the excess
of the Fair Market Value of the Stock covered by the Option, or the portion of
it that was surrendered, determined as of the date of surrender, over the
aggregate exercise price of the Stock. In the event of the surrender of an
Option, or a portion of it, to exercise the Stock Appreciation Rights, the
shares represented by the Option or that part of it which is surrendered, shall
not be available for reissuance under the Plan. Each Stock Appreciation Right
issued in tandem with an Option (a) will expire not later than the expiration of
the underlying Option, (b) may be for no more than 100% of the difference
between the exercise price of the underlying Option and the Fair Market Value of
a share of Stock at the time the Stock Appreciation Right is exercised, (c) is
transferable only when the underlying Option is transferable, and under the same
conditions, and (d) may be exercised only when the underlying Option is eligible
to be exercised.
5.8 CONDITIONS OF STOCK APPRECIATION RIGHTS. All Stock Appreciation Rights shall
be subject to such terms, conditions, restrictions or limitations as the
Committee deems appropriate, including by way of illustration but not by way of
limitation, restrictions on transferability, requirement of continued
employment, individual performance, financial performance of the Company, or
payment of any applicable employment or withholding taxes.
5.9 PAYMENT OF STOCK APPRECIATION RIGHTS. The amount of payment to which the
Eligible Person who reserves an SAR shall be entitled upon the exercise of each
SAR shall be equal to the amount, if any by which the Fair Market Value of the
specified shares of Stock on the exercise date exceeds the Fair Market Value of
the specified shares of Stock on the date of grant of the SAR. The SAR shall be
paid in either cash or Stock, as determined in the discretion of the Committee
as set forth in the SAR agreement. If the payment is in Stock, the number of
shares to be paid shall be determined by dividing the amount of such payment by
the Fair Market Value of Stock on the exercise date of such SAR.
5.10 EXERCISE ON TERMINATION OF EMPLOYMENT. Unless it is expressly Provided
otherwise in the Option or SAR agreement, Options and SAR's granted to Employees
shall terminate three months after severance of employment of the Employee from
the Company and all Affiliates for any reason, with or without cause, other than
death, retirement under the then established rules of the Company, or severance
for disability. The Committee shall determine whether authorized leave of
absence or absence on military or government service shall constitute severance
of the employment of the Employee at that time.
5.11 DEATH. If, before the expiration of an Option or SAR, the Eligible Person,
whether in the employ of the Company or after he has retired or was severed for
disability, or otherwise dies, the Option or SAR shall continue until the
earlier of the Option's or SAR's expiration date or one year following the date
of his death, unless it is expressly provided otherwise in the Option or SAR
41
agreement. After the death of the Eligible Person, his executors,
administrators, or any persons to whom his Option or SAR may be transferred by
will or by the laws of descent and distribution shall have the right, at any
time prior to the Option's or SAR's expiration or termination, whichever is
earlier, to exercise it, to the extent to which he was entitled to exercise it
immediately prior to his death, unless it is expressly provided otherwise in the
Option or SAR's agreement.
5.12 RETIREMENT. Unless it is expressly provided otherwise in the Option or SAR
Agreement, before the expiration of an Option or SAR, the Employee shall be
retired in good standing from the employ of the Company under the then
established rules of the Company, the Option or SAR shall continue until the
earlier of the Option's or SAR's expiration date or six months following the
date of his retirement, unless it is expressly provided otherwise in the Option
or SAR agreement.
5.13 DISABILITY. If, before the expiration of an Option or SAR, the Employee
shall be severed from the employ of the Company for disability, the Option or
SAR shall terminate on the earlier of the Option's or SAR's expiration date or
one year after the date he was severed because of disability, unless it is
expressly provided otherwise in the Option or SAR agreement.
5.14 SUBSTITUTION OPTIONS. Options may be granted under this Plan from time to
time in substitution for stock options held by employees of other corporations
who are about to become employees of or affiliated with the Company or any
Affiliate as the result of a merger or consolidation of the employing
corporation with the Company or any Affiliate, or the acquisition by the Company
or any Affiliate of the assets of the employing corporation, or the acquisition
by the Company or any Affiliate of stock of the employing corporation as the
result of which it becomes an Affiliate of the Company. The terms and conditions
of the substitute Options granted may vary from the terms and conditions set out
in this Plan to the extent the Committee, at the time of grant, may deem
appropriate to conform, in whole or in part, to the provisions of the stock
options in substitution for which they are granted.
5.15 NO RIGHTS AS STOCKHOLDER. No Eligible Person shall have any rights as a
stockholder with respect to Stock covered by his Option until the date a stock
certificate is issued for the Stock.
ARTICLE VI - AWARDS
6.1 RESTRICTED STOCK AWARDS. The Committee may issue shares of Stock to an
Eligible Person subject to the terms of a Restricted Stock Agreement. The
Restricted Stock may be issued for no payment by the Eligible Person or for a
payment below the Fair Market Value on the date of grant. Restricted Stock shall
be subject to restrictions as to sale, transfer, alienation, pledge or other
encumbrance and generally will be subject to vesting over a period of time
specified in the Restricted Stock Agreement. The Committee shall determine the
period of vesting, the number of shares, the price, if any, of Stock included in
a Restricted Stock Award, and the other terms and provisions which are included
in a Restricted Stock Agreement.
42
6.2 RESTRICTIONS. Restricted Stock shall be subject to the terms and conditions
as determined by the Committee, including without limitation, any or all of the
following:
(a) a prohibition against the sale, transfer, alienation, pledge, or Other
encumbrance of the shares of Restricted Stock, such prohibition to lapse (i) at
such time or times as the Committee shall determine (whether in annual or more
frequent installments, at the time of the death, disability, or retirement of
the holder of such shares, or otherwise);
(b) a requirement that the holder of shares of Restricted Stock forfeit, or
in the case of shares sold to an Eligible Person, resell back to the Company at
his cost, all or a part of such shares in the event of termination of the
Eligible Person's employment during any period in which the shares remain
subject to restrictions;
(c) a prohibition against employment of the holder of Restricted Stock by
any competitor of the Company or its Affiliates, or against such holder's
dissemination of any secret or confidential information belonging to the Company
or an Affiliate;
(d) unless stated otherwise in the Restricted Stock Agreement, (i) if
restrictions remain at the time of severance of employment with the Company and
all Affiliates, other than for reason of disability or death, the Restricted
Stock shall be forfeited; and (ii) if severance of employment is by reason of
disability or death, the restrictions on the shares shall lapse and the Eligible
Person or his heirs or estate shall be 100% vested in the shares subject to the
Restricted Stock Agreement.
6.3 STOCK CERTIFICATE. Shares of Restricted Stock shall be registered in the
name of the Eligible Person receiving the Restricted Stock Award and deposited,
together with a stock power endorsed in blank, with the Company. Each such
certificate shall bear a legend in substantially the following form:
"The transferability of this certificate and the shares of
Stock represented by it is restricted by and subject to the
terms and conditions (including conditions of forfeiture)
contained in the American Ammunition, Inc., 2005 Stock
Option Plan, and an agreement entered into between the
registered owner and the Company. A copy of the Plan and
agreement is on file in the office of the Secretary of the
Company."
6.4 RIGHTS AS STOCKHOLDER. Subject to the terms and conditions of the Plan and
unless otherwise provided in the Restricted Stock Award agreement, each Eligible
Person receiving a certificate for Restricted Stock shall have all the rights of
a stockholder with respect to the shares of Stock included in the Restricted
Stock Award during any period in which such shares are subject to forfeiture and
restrictions on transfer, including without limitation, the right to vote such
shares. Dividends paid with respect to shares of Restricted Stock in cash or
property other than Stock in the Company or rights to acquire stock in the
43
Company shall be paid to the Eligible Person currently. Dividends paid in Stock
in the Company or rights to acquire Stock in the Company shall be added to and
become a part of the Restricted Stock.
6.5 LAPSE OF RESTRICTIONS. At the end of the time period during which any shares
of Restricted Stock are subject to forfeiture and restrictions on sale,
transfer, alienation, pledge, or other encumbrance, such shares shall vest and
will be delivered in a certificate, free of all restrictions, to the Eligible
Person or to the Eligible Person's legal representative, beneficiary or heir;
provided the certificate shall bear such legend, if any, as the Committee
determines is reasonably required by applicable law. By accepting a Stock Award
and executing a Restricted Stock Agreement, the Eligible Person agrees to remit
when due any federal and state income and employment taxes required to be
withheld.
6.6 RESTRICTION PERIOD. No Restricted Stock Award may provide for restrictions
continuing beyond ten (10) years from the date of grant.
ARTICLE VII - ADMINISTRATION
The Committee shall administer the Plan. All questions of interpretation and
application of the Plan and Awards shall be subject to the determination of the
Committee. A majority of the members of the Committee shall constitute a quorum.
All determinations of the Committee shall be made by a majority of its members.
Any decision or determination reduced to writing and signed by a majority of the
members shall be as effective as if it had been made by a majority vote at a
meeting properly called and held. This Plan shall be administered in such a
manner as to permit the Options, which are designated to be Incentive Options,
to qualify as Incentive Options. In carrying out its authority under this Plan,
the Committee shall have full and final authority and discretion, including but
not limited to the following rights, powers and authorities, to:
(a) determine the Eligible Persons to whom and the time or times at which
Options or Awards will be made;
(b) determine the number of shares and the purchase price of Stock covered
in each Option or Award, subject to the terms of the Plan;
(c) determine the terms, provisions, and conditions of each Option and
Award, which need not be identical;
(d) accelerate the time at which any outstanding Option or SAR may be
exercised, or Restricted Stock Award will vest;
(e) define the effect, if any, on an Option or Award of the death,
disability, retirement, or termination of employment of the Employee;
(f) prescribe, amend and rescind rules and regulations relating to
administration of the Plan; and
(g) make all other determinations and take all other actions deemed
necessary, appropriate, or advisable for the proper administration of this Plan.
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The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive and
binding on all parties.
ARTICLE VIII - AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may amend, terminate or suspend this Plan
at any time, in its sole and absolute discretion; provided, however, that to the
extent required to qualify this Plan under Rule 16b-3 promulgated under Section
16 of the Securities Exchange Act of 1934, as amended, no amendment that would
(a) materially increase the number of shares of Stock that may be issued under
this Plan, (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) otherwise materially increase the benefits
accruing to participants under this Plan, shall be made without the approval of
the Company's stockholders; provided further, however, that to the extent
required to maintain the status of any Incentive Option under the Code, no
amendment that would (a) change the aggregate number of shares of Stock which
may be issued under Incentive Options, (b) change the class of employees
eligible to receive Incentive Options, or (c) decrease the Option price for
Incentive Options below the Fair Market Value of the Stock at the time it is
granted, shall be made without the approval of the Company's stockholders.
Subject to the preceding sentence, the Board of Directors shall have the power
to make any changes in the Plan and in the regulations and administrative
provisions under it or in any outstanding Incentive Option as in the opinion of
counsel for the Company may be necessary or appropriate from time to time to
enable any Incentive Option granted under this Plan to continue to qualify as an
incentive stock option or such other stock option as may be defined under the
Code so as to receive preferential federal income tax treatment.
ARTICLE IX - MISCELLANEOUS
9.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set aside nor shall a
trust fund of any kind be established to secure the rights of any Eligible
Person under this Plan. All Eligible Persons shall at all times rely solely upon
the general credit of the Company for the payment of any benefit which becomes
payable under this Plan.
9.2 NO EMPLOYMENT OBLIGATION. The granting of any Option or Award shall not
constitute an employment contract, express or implied, nor impose upon the
Company or any Affiliate any obligation to employ or continue to employ any
Eligible Person. The right of the Company or any Affiliate to terminate the
employment of any person shall not be diminished or affected by reason of the
fact that an Option or Award has been granted to him.
9.3 FORFEITURE. Notwithstanding any other provisions of this Plan, if the
Committee finds by a majority vote after full consideration of the facts that an
Eligible Person, before or after termination of his employment with the Company
or an Affiliate for any reason (a) committed or engaged in fraud, embezzlement,
theft, commission of a felony, or proven dishonesty in the course of his
employment by the Company or an Affiliate, which conduct damaged the Company or
Affiliate, or disclosed trade secrets of the Company or an Affiliate, or (b)
participated, engaged in or had a material, financial, or other interest,
whether as an employee, officer, director, consultant, contractor, stockholder,
owner, or otherwise, in any commercial endeavor in the United States which is
competitive with the business of the Company or an Affiliate without the written
consent of the Company or Affiliate, the Eligible Person shall forfeit all
outstanding Options and all outstanding Awards, and including all exercised
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Options and other situations pursuant to which the Company has not yet delivered
a stock certificate. Clause (b) shall not be deemed to have been violated solely
by reason of the Eligible Person's ownership of stock or securities of any
publicly owned corporation, if that ownership does not result in effective
control of the corporation.
The decision of the Committee as to the cause of an Employee's discharge, the
damage done to the Company or an Affiliate, and the extent of an Eligible
Person's competitive activity shall be final. No decision of the Committee,
however, shall affect the finality of the discharge of the Employee by the
Company or an Affiliate in any manner.
9.4 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to deduct
from other compensation payable to each Eligible Person any sums required by
federal, state, or local tax law to be withheld with respect to the grant or
exercise of an Option or SAR, or lapse of restrictions on Restricted Stock. In
the alternative, the Company may require the Eligible Person (or other person
exercising the Option, SAR or receiving the Stock) to pay the sum directly to
the employer corporation. If the Eligible Person (or other person exercising the
Option or SAR or receiving the Stock) is required to pay the sum directly,
payment in cash or by check of such sums for taxes shall be delivered within 10
days after the date of exercise or lapse of restrictions. The Company shall have
no obligation upon exercise of any Option or lapse of restrictions on Stock
until payment has been received, unless withholding (or offset against a cash
payment) as of or prior to the date of exercise or lapse of restrictions is
sufficient to cover all sums due with respect to that exercise. The Company and
its Affiliates shall not be obligated to advise an Eligible Person of the
existence of the tax or the amount which the employer corporation will be
required to withhold.
9.5 WRITTEN AGREEMENT. Each Option and Award shall be embodied in a written
agreement which shall be subject to the terms and conditions of this Plan and
shall be signed by the Eligible Person and by a member of the Committee on
behalf of the Committee and the Company or an executive officer of the Company,
other than the Eligible Person, on behalf of the Company. The agreement may
contain any other provisions that the Committee in its discretion shall deem
advisable which are not inconsistent with the terms of this Plan.
9.6 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With respect to
administration of this Plan, the Company shall indemnify each present and future
member of the Committee and the Board of Directors against, and each member of
the Committee and the Board of Directors shall be entitled without further act
on his part to indemnity from the Company for, all expenses (including
attorney's fees, the amount of judgments, and the amount of approved settlements
made with a view to the curtailment of costs of litigation, other than amounts
paid to the Company itself) reasonably incurred by him in connection with or
arising out of any action, suit, or proceeding in which he may be involved by
reason of his being or having been a member of the Committee and/or the Board of
Directors, whether or not he continues to be a member of the Committee and/or
the Board of Directors at the time of incurring the expenses, including, without
limitation, matters as to which he shall be finally adjudged in any action, suit
or proceeding to have been found to have been negligent in the performance of
his duty as a member of the Committee or the Board of Directors. However, this
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indemnity shall not include any expenses incurred by any member of the Committee
and/or the Board of Directors in respect of matters as to which he shall be
finally adjudged in any action, suit or proceeding to have been guilty of gross
negligence or willful misconduct in the performance of his duty as a member of
the Committee and the Board of Directors. This right of indemnification shall
inure to the benefit of the heirs, executors or administrators of each member of
the Committee and the Board of Directors and shall be in addition to all other
rights to which a member of the Committee and the Board of Directors may be
entitled as a matter of law, contract, or otherwise.
9.7 GENDER. If the context requires, words of one gender when used in this Plan
shall include the others and words used in the singular or plural shall include
the other.
9.8 HEADINGS. Headings of Articles and Sections are included for convenience of
reference only and do not constitute part of the Plan and shall not be used in
construing the terms of the Plan.
9.9 OTHER COMPENSATION PLANS. The adoption of this Plan shall not affect any
other stock option, incentive or other compensation or benefit plans in effect
for the Company or any Affiliate, nor shall the Plan preclude the Company from
establishing any other forms of incentive or other compensation for employees of
the Company or any Affiliate.
9.10 OTHER OPTIONS OR AWARDS. The grant of an Option or Award shall not confer
upon the Eligible Person the right to receive any future or other Options or
Awards under this Plan, whether or not Options or Awards may be granted to
similarly situated Eligible Persons, or the right to receive future Options or
Awards upon the same terms or conditions as previously granted.
9.11 GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Nevada.
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