UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2005
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-32379
American Ammunition, Inc.
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(Exact name of small business issuer as specified in its charter)
California 91-2021594
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(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
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(Address of principal executive offices)
(305) 835-7400
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [_]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: October 28, 2005: 74,9919,791
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
American Ammunition, Inc.
Form 10-QSB for the Quarter ended September 30, 2005
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 20
Item 3 Controls and Procedures 25
Part II - Other Information
Item 1 Legal Proceedings 26
Item 2 Recent Sales of Unregistered Securities and Use of Proceeds 26
Item 3 Defaults Upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits 26
Signatures 26
Part I
Item 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2005 and 2004
(Unaudited)
September 30, September 30,
2005 2004
------------------ ------------------
ASSETS
Current Assets
Cash on hand and in bank $ 107,972 $ 658,641
Accounts receivable - trade, net allowance for
doubtful accounts of $-0- and $-0-, respectively 105,773 255,236
Inventory 566,870 1,025,824
Prepaid expenses 61,684 62,725
------------------ -----------------
Total Current Assets 842,299 2,002,426
------------------ -----------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 8,096,289 7,623,415
, Office furniture and fixtures 55,577 82,719
Leasehold improvements 190,277 187,397
------------------ -----------------
8,342,143 7,893,531
Accumulated depreciation (5,379,112) (4,595,887)
------------------ -----------------
Net Property and Equipment 2,993,031 3,297,644
------------------ -----------------
Other Assets
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately $50,543 225,147 -
Loan costs, net of accumulated amortization of approximately $2,620 21,380 -
Deposits and other 83,660 415,000
------------------ -----------------
TOTAL ASSETS $ 4,135,517 $ 5,715,070
================== =================
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2005 and 2004
(Unaudited)
September 30, September 30,
2005 2004
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ - $ 525
Customer deposits 201,890 220,006
Accounts payable - trade 957,487 665,077
Working capital advance - 74,000
Other accrued liabilities 186,792 82,866
------------------ ------------------
Total Current Liabilities 1,346,169 1,042,474
Long-Term Liabilities
Loans from Shareholders 650,000 -
Capital leases payable - -
------------------ ------------------
Total Liabilities 1,996,169 1,042,474
------------------ ------------------
Commitments and Contingencies
Convertible Debenture 241,365 266,365
------------------ ------------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A
12,000 shares issued and outstanding 12 12
1,000,000 shares allocated to Series B
91,700 shares issued and outstanding 92 92
1,905,882 shares allocated to Series C
1,905,882 and -0- shares issued and outstanding, respectively 1,906 -
Common stock - $0.001 par value.
300,000,000 shares authorized.
76,626,631 and 73,686,672 shares issued and outstanding 76,627 73,687
Additional paid-in capital 25,011,948 23,616,708
Accumulated deficit (23,154,209) (19,009,268)
------------------ ------------------
1,936,376 4,681,231
Stock subscription receivable (38,393) (275,000)
------------------ ------------------
Total Stockholders' Equity 1,897,983 4,406,231
------------------ ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,135,517 $ 5,715,070
================== =================
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2005 and 2004
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
-----------------------------------------------------------------------
Revenues $2,233,336 $1,712,280 $ 378,326 $861,988
--------- --------- ---------- -------
Cost of Sales
Materials, Direct Labor
and other direct costs 3,447,036 1,911,210 944,194 308,503
Depreciation 573,466 523,815 191,155 176,304
---------- ---------- ---------- --------
Total Cost of Sales 4,020,502 2,435,025 1,135,349 484,807
--------- --------- --------- -------
Gross Profit (1,787,166) (722,745) (757,023) 377,181
--------- --------- -------- -------
Operating Expenses
Research and development expenses 2,615 8,332 804 1,858
Marketing and promotion expenses 161,502 368,458 49,750 114,404
Other operating expenses 910,423 845,663 278,902 250,570
Bad debt expense - 27,819 - -
Interest expense 26,639 15,825 16,508 58
Depreciation and amortization 45,305 5,681 15,102 1,894
Compensation expense related to
common stock issuances at less
than "fair value" 198,000 356,000 - -
---------- --------- ----------- -------------
Total Operating Expenses 1,344,484 1,627,778 361,066 368,784
--------- --------- ---------- -------
Loss from Operations (3,131,650) (2,350,523) (1,118,089) 8,397
Other Income (Expense)
Interest and other income 8,146 1,409 1,914 1,155
Amortization of Beneficial
Conversion Feature Discount
on Preferred Stock - - - -
--------- ---------- ----------- -------------
Loss before Income Taxes (3,131,650) (2,349,114) (1,116,175) 9,552
Provision for Income Taxes - - - -
---------- ---------- ----------- -------------
Net Loss (3,131,650) (2,349,114) (1,116,175) 9,552
Other Comprehensive Income - - - -
----------- ---------- ----------- -------------
Comprehensive Loss $(3,131,650) $(2,349,114) $(1,116,175) $ 9,552
========= ========= ========= =========
Net Loss $(3,131,650) $(2,349,114) $(1,116,175) $ 9,552
Preferred Stock dividends (40,830) (31,110) (13,610) (10,370)
----------- ----------- ----------- ------
Net Loss available to
Common Shareholders $(3,172,480) $(2,380,224) $(1,129,785) $ (818)
========= ========= ========= ========
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $(0.04) $(0.03) $(0.01) $0.00
==== ===== ==== ====
Weighted-average number of
common shares outstanding 75,358,091 70,873,791 76,241,380 73,673,416
========== ========== ========== ==========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2005 and 2004
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2005 2004
------------------ ------------------
Cash flows from operating activities
Net loss for the year $ (3,123,504) $ (2,349,114)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 621,390 529,496
Bad debt expense - 27,819
Compensation expense related to common stock
issuances at less than "fair value" 198,000 356,000
Common stock issued for fees and services 17,333 90,160
(Increase) Decrease in
Accounts receivable 533,671 237,780
Inventory 345,554 86,932
Prepaid expenses, deposits and other (2,838) (28,137)
Increase (Decrease) in
Accounts payable - trade (29,398) 36,213
Other accrued expenses 15,773 69,445
Customer deposits (239,016) 215,906
------------------ ------------------
Net cash used in operating activities (1,663,035) (727,500)
------------------ ------------------
Cash flows from investing activities
Purchase of property and equipment (111,065) (436,214)
------------------ ------------------
Net cash used in investing activities (111,065) (436,214)
------------------ ------------------
Cash flows from financing activities
Funding of working capital advance - 74,000
Principal paid on long-term capital leases - (7,316)
Cash paid to obtain capital (10,000) -
Cash received loans from shareholders 650,000 -
Cash received on sale of common stock 436,607 1,250,000
------------------ ------------------
Net cash provided by financing activities 1,076,607 1,316,684
------------------ ------------------
Increase (Decrease) in Cash (697,493) 152,970
Cash at beginning of year 805,465 505,671
------------------ ------------------
Cash at end of year $ 107,972 $ 658,641
------------------ ------------------
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
6
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2005 and 2004
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2005 2004
------------------ ------------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 10,753 $ 825
================= ================
Income taxes paid for the period $ - $ -
================= ================
Supplemental disclosure of non-cash investing and financing activities
Asset purchase agreement for equipment, inventory and
intellectual property accrued as a component of accounts payable $ - $ 500,000
================= ================
Common stock issued for payment of loan costs $ 24,000 $ -
================= ================
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
7
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in accordance with the Laws of the State of California. The Company functions as
a holding company providing management oversight services to it's wholly-owned
operating subsidiaries; F&F Equipment, Inc. and Industrial Plating Enterprise
Co.
F&F Equipment, Inc.(F&F) was incorporated on October 4, 1983 in accordance with
the Laws of the State of Florida. F&F is engaged in the design, manufacture and
international sales of small arms ammunition. F&F has conducted its business
operations under the assumed name of "American Ammunition" since its inception.
Industrial Plating Enterprise Co. (IPE), which was incorporated and commenced
production on June 14, 2002. IPE is a fully licensed and approved state of the
art electrochemical metallization facility for processing the Company's line of
small arms projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
The facility meets or exceeds all current environmental requirements and enjoys
the "conditionally exempt small quantity generator" status for State and Federal
regulations. All activities of IPE since it's inception have been dedicated to
the needs and demands of F&F.
Note B - Preparation of Financial Statements
The Company and its subsidiaries follow the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of
America and have adopted a year-end of December 31 for all entities.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2004. The information presented within these interim financial
statements may not include all disclosures required by generally accepted
accounting principles and the users of financial information provided for
interim periods should refer to the annual financial information and footnotes
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2005.
8
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note B - Preparation of Financial Statements - Continued
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. and its wholly-owned subsidiaries, F&F Equipment, Inc.
and Industrial Plating Enterprise Co. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
"Company".
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts receivable and Revenue Recognition
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United
States. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
The Company ships all product on an FOB-Plant, "as-is" basis. Accordingly,
revenue is recognized by the Company at the point at which an order is
shipped at a fixed price, collection is reasonably assured and the Company
has no remaining performance obligations related to the sale. The Company
sells all products with "no right of return" by the purchaser for any
factor other than defects in the product's production.
On rare occasion, the Company may elect to accept product returns from
customers on a case-by-case basis to offset unpaid accounts receivable.
These situations are a "last case" scenario and are initiated by senior
management through negotiations with the respective customer.
3. Inventory
Inventory consists of raw materials, work-in-process and finished goods
related to the production and sale of small arms ammunition. Inventory is
valued at the lower of cost or market using the first-in, first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using
the straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are recognized
as incurred and are included in operations.
9
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
4. Property, plant and equipment - continued
In accordance with SFAS No. 144, the Company evaluates the accompanying
financial statements to determine if any impairment indicators are present
related to its fixed assets and other long-term assets. If impairment
indicators were present, future cash flows related to the asset group are
estimated. The sum of the undiscounted future cash flows attributable to
the asset group was then compared to the carrying amount of the asset
group. The cash flows were estimated utilizing various assumptions
regarding future revenue and expenses, availability of working capital, and
proceeds, if any, from asset disposals on a basis consistent with the
Company's strategic plan. If the carrying amount exceeded the sum of the
future undiscounted future cash flows, the Company discounted the future
cash flows using a risk-free discount rate and recorded an impairment
charge as the difference between the discounted cash flows and the carrying
value of the asset group. Generally, the Company performed its testing of
the asset group at the overall corporate level, as this is the lowest level
for which identifiable cash flows are available. As a result of the
impairment testing described above, management is of the opinion that no
impairment charge is appropriate.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At September 30, 2005 and 2004, the deferred tax asset and deferred
tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
As of September 30, 2005 and 2004, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. If these
carryforwards are not utilized, they will begin to expire at the end of
2005.
6. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income
(loss) per share except that the denominator is increased to include the
number of common stock equivalents (primarily outstanding options and
warrants).
Common stock equivalents represent the dilutive effect of the assumed
exercise of the outstanding stock options and warrants, using the treasury
stock method, at either the beginning of the respective period presented or
the date of issuance, whichever is later, and only if the common stock
equivalents are considered dilutive based upon the Company's net income
(loss) position at the calculation date.
As of September 30, 2005 and 2004, and subsequent thereto, the Company had
no options outstanding. The outstanding warrants and convertible preferred
stock and mandatorily convertible debentures are anti-dilutive due to the
Company's net operating loss position.
7. Advertising costs
The Company does not conduct any direct response advertising activities.
For non-direct response advertising, the Company charges the costs of these
efforts to operations at the first time the related advertising is
published.
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Concentrations of Credit Risk
The Company maintains its cash accounts in a single financial institutions
subject to insurance coverage issued by the Federal Deposit Insurance
Corporation (FDIC). Under FDIC rules, the Company and its subsidiaries are
entitled to aggregate coverage of $100,000 per account type per separate legal
entity per financial institution.
During the period ended September 30, 2005 and the periods subsequent thereto,
respectively, the various operating companies maintained deposits in this
financial institution with credit risk exposures in excess of statutory FDIC
coverage. The Company incurred no losses through September 30, 2005,and
subsequent thereto, as a result of any of these unsecured situations.
Note F - Inventory
As of September 30, 2005 and 2004, inventory consisted of the following
components:
September 30 September 30,
2005 2004
-------------- ----------------
Raw materials $ 434,305 $ 231,456
Work in process 122,561 515,622
Finished goods 10,004 278,746
-------- ---------
Totals $ 566,870 $ 1,025,824
======== =========
Note G - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2005 2004 useful life
----------------------------------------
Manufacturing equipment $ 8,096,289 $ 7,623,415 3-10 years
Office furniture and fixtures 55,577 82,719 3-7 years
Leasehold improvements 190,277 187,397 8-20 years
---------- ----------
8,342,143 7,893,531
Accumulated depreciation (5,379,112) (4,595,887)
---------- ---------
Net property and equipment $ 2,963,031 $ 3,297,644
========== ==========
11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note G - Property and Equipment - Continued
Total depreciation expense charged to operations for the nine months ended
September 30, 2005 and 2004 was approximately $577,417 and $529,496,
respectively.
Included in the accompanying balance sheet are the following fixed assets on
long-term capital leases:
September 30, September 30,
2006 2005
------------------------------
Manufacturing equipment $ - $ 153,400
Less accumulated depreciation - (81,364)
------- --------
$ - $ 72,036
======= ========
Note H- Capital Leases Payable
Capital leases payable consist of the following as of September 30, 2005 and
2004, respectively:
September 30, September 30,
2005 2004
----------------------------
Three capital leases, respectively, payable to various
equipment financing companies. Interest, at March 31, 2002,
ranging between 11.37% and 14.05%. Payable in aggregate
monthly installments of approximately $935, including
accrued interest. Final maturities occur between September
2004 and December 2004. Collateralized the underlying leased
manufacturing equipment. $ - $ 525
Less current maturities - (525)
------ ------
Long-term portion $ - $ -
====== ======
Note I - Loans from Shareholders
Four separate notes payable to three separate shareholders
in the amounts of $50,000, $50,000, $50,000 and $500,000,
respectively. Interest at 8.0%, payable monthly. Principal
due at maturity on December 31, 2006. Shareholder/lender has
the option to convert the principal amount into common stock
of the Company at the lesser of 66-2/3% of the average
closing bid and ask price on the date of conversion or $0.07
per share. Each note is unsecured. $650,000 $ -
======= ======
Note J - Convertible Debenture
The Company entered into a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. ("La Jolla") on October 4, 2002 for the sale of (I) $250,000 in
convertible debentures and (ii) warrants to buy 30,000,000 shares of our common
stock. On March 13, 2003 and May 6, 2003, La Jolla advanced an aggregate of
$350,000 to our company which such funding was allocated towards the principal
balance of our convertible debentures.
(Remainder of this page left blank intentionally)
12
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Convertible Debenture - Continued
As of September 30, 2005, the outstanding balance on the convertible debenture
is approximately $241,365 and we have approximately 2,413,650 warrants
outstanding. A recap of the debenture activity is as follows:
Debenture Warrant
(in dollars) (in shares)
------------ -----------
Initial amount $ 600,000 6,000,000
2003 redemptions (208,635) (2,086,350)
2004 redemptions (135,000) (1,250,000)
2005 redemptions (25,000) (250,000)
--------- ----------
Balances outstanding
at March 31, 2005 $ 241,365 2,413,650
======== =========
The debentures bear interest at 8%, mature on June 30, 2007, and are convertible
into our common stock, at the selling stockholder's option. The convertible
debentures are convertible into the number of our shares of common stock equal
to the principal amount of the debentures being converted multiplied by 11, less
the product of the conversion price multiplied by 10 times the dollar amount of
the debenture. The conversion price for the convertible debentures is the lesser
of (I) $1.00 or (ii) seventy six percent of the average of the five lowest
volume weighted average prices during the twenty (20) trading days prior to the
conversion. Accordingly, there is in fact no limit on the number of shares into
which the debenture may be converted.
However, in the event that our market price is less than $.30, we will have the
option to prepay the debenture at 125% rather than have the debenture converted.
In addition, the selling stockholder is obligated to exercise the warrant
concurrently with the submission of a conversion notice by the selling
stockholder. As of June 30, 2005, the warrant is exercisable into 2,413,650
shares of common stock at an exercise price of $1.00 per share.
In December 2004, the Company entered into an addendum to the convertible
debenture and warrant whereby the Company agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
LaJolla has contractually agreed to restrict its ability to convert or exercise
its warrants and receive shares of our common stock such that the number of
shares of common stock held by them and their affiliates after such conversion
or exercise does exceed 4.9% of the then issued and outstanding shares of common
stock.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
13
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Convertible Debenture - Continued
On various dates through December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 shares of restricted, unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
On various dates between January 1, 2004 and December 31, 2004, the Debenture
Holder elected to convert an aggregate $125,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,150,000 shares of common stock to
the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 1,250,000 shares of the Company's common stock for gross proceeds of
$1,250,000. As of December 31, 2004, an aggregate of 1,000,000 shares of the
Company's common stock have been issued by the Company and are being held in
escrow by the Company's counsel pending receipt of the final $150,000 from the
Debenture Holder.
Between January 1, 2005 and June 30, 2005, the Debenture Holder elected to
convert an aggregate $25,000, through a separate transactions, in outstanding
Debenture principal into registered common stock. This election caused the
Company to issue 750,000 shares of common stock to the Debenture Holder.
Additionally, pursuant to the contract terms, the Debenture Holder concurrently
exercised a portion of the outstanding Warrant to purchase 250,000 shares of the
Company's common stock for gross proceeds of $250,000.
On May 6, 2005 and June 21, 2005, the Company authorized the issuance of an
aggregate 14,000,000 shares into the A designated escrow account for the purpose
of facilitating future conversions of the outstanding Debenture into common
stock in conjunction with the exercise of the outstanding Warrants. Subsequent
to June 30, 2005, the Debenture Holder, in 4 separate transactions, was issued
an aggregate 5,824,758 shares for the conversion of an aggregate $40,000 in
Convertible Debenture and the exercise of 400,000 Warrants at an aggregate price
of $400,000.
Note K - Preferred Stock Transactions
Preferred stock consists of the following as of September 30, 2005 and 2004,
respectively:
September 30, 2005 September 30, 2004
------------------ ------------------
# shares value # shares value
-------- ----- -------- -----
Series A Cumulative
Convertible Preferred Stock 12,000 $ 60,000 12,000 $ 60,000
Series B Cumulative
Convertible Preferred Stock 91,700 458,500 91,700 458,500
Series C Convertible
Preferred Stock 1,905,882 324,000 - -
--------- ------- ------- -------
2,009,582 $842,500 103,700 $ 518,500
========= ======= ======= =======
Series A Convertible Preferred Stock
In September, October and November 2001, the Company sold an aggregate 222,600
shares of $5.00 Series A Convertible Preferred Stock (Series A Preferred Stock)
for total proceeds of approximately $1,113,000 through a Private Placement
Memorandum. The Series A Convertible Preferred Stock provides for cumulative
dividends at a rate of 8.0% per year, payable quarterly, in cash or shares of
the Company's common stock at the Company's election. Each share of Series A
Preferred Stock is convertible into 11 shares of the Company's common stock
initially at any time after 6 months of the date of issue and prior to the
notice of redemption at the option of the holder, subject to adjustments for
customary anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
In September 2001, the Company's principal stockholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
14
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions - Continued
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In December 2001, concurrent with a modification in the holding period prior to
conversion, certain holders of the Series A Preferred Stock orally notified the
Company of their intent to exercise the conversion features on 1,749,720 issued
and outstanding shares of Series A Preferred Stock into 19,246,920 shares of
common stock prior to December 31, 2001. Due to the timing of the requisite
documentation, the clerical activities related to this conversion were not
completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold after
the Company's common stock was approved for trading by the National Association
of Securities Dealers on the OTC Bulletin Board in October 2001. The shares of
Series A Preferred Stock sold subsequent to this date had an equivalent per
share value of common stock below the ending quoted market price of the
Company's common stock on their respective issue dates. This difference created
a Beneficial Conversion Feature Discount of approximately $1,207,993. This
discount was then amortized over the unexpired time period between the date of
issue of the eligible shares and the eligible conversion date, as amended. All
of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock exercised
his conversion rights and converted these shares of Series A Preferred Stock
into 55,000 shares of restricted, unregistered common stock.
In January 2003, three separate holders of 9,000 shares of Series A Preferred
Stock exercised their conversion rights and converted these shares of Series A
Preferred stock into 99,000 shares of restricted, unregistered common stock.
Series B Convertible Preferred Stock
In May 2003, the Company sold an aggregate 91,700 shares of $5.00 Series B
Convertible Preferred Stock (Series B Preferred Stock) for total proceeds of
approximately $458,500 through a separate Private Placement Memorandum. The
Series B Convertible Preferred Stock provides for cumulative dividends at a rate
of 8.0% per year, payable quarterly, in cash or shares of the Company's common
stock at the Company's election. Each share of Series B Preferred Stock is
convertible into 11 shares of the Company's common stock initially at any time
after 6 months of the date of issue and prior to the notice of redemption at the
option of the holder, subject to adjustments for customary anti-dilution events.
Series C Convertible Preferred Stock
In November 2004, the Company sold 1,905,882 shares of Series C Convertible
Preferred Stock to an existing shareholder and officer of the Company in a
private transaction pursuant to Section (4)2 of the Securities Act of 1933 for
gross proceeds of approximately $324,000. No underwriter was used in conjunction
with this transaction.
The Series C Convertible Preferred Stock provides for dividends at a rate of
4.0% per annum, to be declared and paid monthly in either cash or stock at the
discretion of the Company.
Each share of Series C Preferred Stock is convertible at a rate of $0.18 per
share into 1,800,000 shares of the Company's common stock at any time at the
option of the holder, subject to adjustments for customary anti- dilution
events.
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15
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions
Calendar 2004 transactions
During the period from February 13, 2004 through June 4, 2004, the Company
issued an aggregate 4,150,000 shares of common stock, in 5 separate
transactions, in exchange for the redemption of approximately $125,000 in
outstanding debenture balance and approximately $1,250,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $356,000 during this time period.
Additionally, on June 29, 2004, the Company issued an additional 1,000,000
shares of common stock in advance of the exercise of a $25,000 redemption on the
outstanding debenture payable and a $250,000 cash payment on the exercise of the
affiliated warrant. As of December 31, 2004, the Company has received $100,000
in cash on the warrant exercise and has not applied the debt reduction portion
of this transaction.
In January 2004, the Company issued 38,038 shares of restricted, unregistered
common stock in payment of approximately $10,000 in accrued dividends payable on
the Company's outstanding Series A and Series B Preferred Stock for the quarter
ended December 31, 2003. The Company relied upon Section 4(2) of the Securities
Act of 1933, as amended, for an exemption from registration of these shares and
no underwriter was used in this transaction.
In May 2004, the Company issued 25,260 shares of restricted, unregistered common
stock in payment of approximately $9,170 in accrued dividends payable on the
Company's outstanding Series B Preferred Stock for the quarter ended March 31,
2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
On May 26, 2004, the Company issued 300,000 shares of restricted, unregistered
common stock to two separate corporations in payment and full satisfaction of
all amounts due for fees and/or commissions due in conjunction with the
Company's convertible debenture financing transaction. This transaction was
valued at approximately $36,000, which was less than the closing price on the
date of the respective transaction resulted in a charge to operations of
approximately $24,000. The Company relied upon Section 4(2) of the Securities
Act of 1933, as amended, for an exemption from registration of these shares and
no underwriter was used in this transaction.
In August 2004, the Company issued 29,746 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended June
30, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
On October 19, 2004, the Company issued 1,111,112 shares of restricted,
unregistered common stock to acquire certain assets valued at an aggregate
$500,000. The assets consist principally of equipment (approximately $134,000),
inventory (approximately $89,500) and patents and a covenant not-to-compete
(approximately $276,500).
In November 2004, the Company issued 53,908 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended June
30, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
Calendar 2005 Transactions
Between January 1, 2005 and June 30, 2005, the Debenture Holder elected to
convert an aggregate $25,000, through a separate transactions, in outstanding
Debenture principal into registered common stock. This election caused the
Company to issue 750,000 shares of common stock to the Debenture Holder.
Additionally, pursuant to the contract terms, the Debenture Holder concurrently
exercised a portion of the outstanding Warrant to purchase 250,000 shares of the
Company's common stock for gross proceeds of $250,000.
16
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
Calendar 2005 transactions - continued
On May 6, 2005 and June 21, 2005, the Company authorized the issuance of an
aggregate 14,000,000 shares into the A designated escrow account for the purpose
of facilitating future conversions of the outstanding Debenture into common
stock in conjunction with the exercise of the outstanding Warrants. Subsequent
to June 30, 2005, the Debenture Holder, in 4 separate transactions, was issued
an aggregate 5,824,758 shares for the conversion of an aggregate $40,000 in
Convertible Debenture and the exercise of 400,000 Warrants at an aggregate price
of $400,000.
In February 2005, the Company issued 55,608 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended
December 31, 2004. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
In July and August 2005, the Company issued an aggregate 416,666 shares of
restricted, unregistered common stock in 2 separate transactions for the payment
of various consulting fees. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in these transactions.
In July 2005, the Company issued 166,666 shares of restricted, unregistered
common stock as additional compensation to the Company's Director of Dealer
Direct Sales. This transaction was valued at approximately $17,333, which
approximated the closing price of the Company's common stock on the transaction
date. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
In August 2005, the Company issued 250,000 shares of restricted, unregistered
common stock for the payment of loan origination costs in connection with a
$500,000 Loan from an existing shareholder. This transaction was valued at
approximately $24,000, which approximated the closing price of the Company's
common stock on the transaction date. The Company relied upon Section 4(2) of
the Securities Act of 1933, as amended, for an exemption from registration of
these shares and no underwriter was used in this transaction.
In August and September 2005, the Company issued 84,053, 105,400 and 113,212
shares of restricted, unregistered common stock in payment of approximately
$9,170 in accrued dividends due at March 31, 2005, June 30, 2005, and September
30, 2005, respectively, on the Company's outstanding Series B Cumulative
Preferred Stock. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
Note M - Rental Commitments
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long- term operating lease agreement. The lease
requires a monthly payment of approximately $5,735, 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.
The Company's subsidiary, IPE, leases it's manufacturing facility from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of approximately $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2004 and 2003.
17
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Rental Commitments - Continued
In May 2004, the Company entered into a long-term lease agreement for a
warehouse facility adjacent to the Company's primary office and manufacturing
facility. This lease is for a period of two (2) years and requires payments of
approximately $6,206 per month for the first 12 months and approximately $6,393
for the second 12 months, plus applicable sales taxes. The Company is
responsible for all utilities and maintenance expenses. This lease expires on
May 31, 2006. Further, the Company is responsible for any incremental real
estate taxes and property insurance in excess of the amounts incurred by the
landlord for the calendar year immediately preceding the execution of the lease.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------ ----------
2005 $ 166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $ 494,491
=========
For the respective years ended December 31, 2004, the Company paid an aggregate
of $131,804 and $87,826 for rent under these agreements.
Note N - Income Taxes
The components of income tax (benefit) expense for the respective nine month
periods ended September 30, 2005 and 2004 are as follows:
Period from
July 31, 2001
Nine month Nine month (date of inception)
ended ended through
September 30, September 30, September 30,
2005 2004 2005
-------------- ------------- ------------------
Federal:
Current $ - $ - $ -
Deferred - - -
-------------- ------------- ------------------
- - -
-------------- ------------- ------------------
State:
Current - - -
Deferred - - -
-------------- ------------- ------------------
- - -
-------------- ------------- ------------------
Total $ - $ - $ -
============== ============= ==================
As of December 31, 2004, the Company has a net operating loss carryforward of
approximately $8,150,000 to offset future taxable income. Subject to current
regulations, components of this carryforward began to expire at the end of
Calendar 2003. The amount and availability of the net operating loss
carryforwards may be subject to limitations set forth by the Internal Revenue
Code. Factors such as the number of shares ultimately issued within a three year
look-back period; whether there is a deemed more than 50 percent change in
control; the applicable long-term tax exempt bond rate; continuity of historical
business; and subsequent income of the Company all enter into the annual
computation of allowable annual utilization of the carryforwards.
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18
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Income Taxes - Continued
The Company's income tax expense (benefit) for the nine months ended September
30, 2005 and 2004, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2005 2004
--------------------------
Statutory rate applied to loss before income taxes $ (1,062,000) $ (799,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 1,062,000 799,000
--------- -------
Income tax expense $ - $ -
=========== ==========
Temporary differences, consisting primarily of the net operating loss
carryforward and statutory differences in the depreciable lives for property and
equipment, between the financial statement carrying amounts and tax bases of
assets and liabilities give rise to deferred tax assets and liabilities as of
December 31, 2004 and 2003, respectively:
Year ended Year ended
December 31, December 31,
2004 2003
-------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $2,669,000 $2,900,000
Deferred tax liabilities - long-term
Statutory depreciation differences (690,000) (250,000)
---------- ----------
1,979,000 2,650,000
Less valuation allowance (1,979,000) (2,650,000)
---------- ----------
Net Deferred Tax Asset $ - $ -
========== ==========
During the years ended December 31, 2004 and 2003, respectively, the valuation
allowance increased (decreased) by approximately $(671,000)and $656,000.
Note O - Subsequent Events
On October 7, 2005, the Company issued an aggregate 667,100 shares of
restricted, unregistered common stock in exchange for the conversion of 9,170
shares of Series B Convertible Preferred Stock in accordance with the terms and
conditions afforded the Preferred shareholders.
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19
Item 2 - Management's Discussion and Analysis or Plan of Operation
(1) Caution Regarding Forward-Looking Information
Certain statements contained in this Quarterly Report including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Quarterly Report and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Overview
We were incorporated on February 1, 2000 in the State of California as
FirsTelevision.com. We subsequently changed our corporate name to FBI Fresh
Burgers International which unsuccessfully marketed a business plan concept of a
national "fast food" restaurant chain.
American Ammunition, Inc. is a holding company with two operating subsidiaries:
F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. was incorporated on October 4, 1983 under the laws of the
State of Florida. The company was formed to engage principally in the "import,
export, retail & wholesale of firearms equipment, ammunition & other devices and
for the purpose of transacting any and/or all lawful business." F&F conducts its
business operations under the assumed name of "American Ammunition."
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co., which started production on June 14, 2002.
Industrial Plating is a fully licensed and approved electrochemical
metallization facility with significant capacity for processing our line of
projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
During the third quarter of 2003, the Company's operations experienced the
negative impact of a lower than anticipated or budgeted purchases by Elliot
Brothers, a significant customer. However, during this same time period, the
Company has entered into a strategic alliance with Israel Military Industries
(IMI), an entity owned by the State of Israel, for the cross-production and sale
of various small arms ammunition. This alliance is anticipated to greatly expand
the Company's catalog of products and assist in utilizing existing production
capacity. While this relationship has not generated the initially anticipated
volumes, management remains positive on this relationship.
In prior periods, the Company executed a private labeling agreement with Century
International Arms, Inc. (Century). Under this agreement, the Company was to
produce it's standard catalog of small arms ammunition plus one specialty small
arms cartridge to Century's specifications for packaging in Century's designated
labeling. This agreement required no modifications to the Company's production
line and did not require the addition of supplemental personnel or equipment.
The Company made an initial shipment under this agreement to Century during
December 2003. Virtually immediately, the Company began to experience problems
with Century regarding Century's compliance with their performance criteria
under this agreement. During the first quarter of 2004, Century defaulted on
certain agreed-upon payment schedules on merchandise sold during December 2003.
In repayment of the outstanding trade debt, the Company accepted unscheduled
product returns as payment of the trade debt. As a result of these issues, the
Company recognized a charge to operations of approximately $28,000 on it's
business activity with Century. The returned merchandise was repackaged and is
resalable by the Company to other customers. As of June 30, 2004, the Company
has cancelled this agreement, and is contemplating litigation against Century
for breach of contractual obligations under this agreement.
20
Additionally, the Company has been awarded three (3) separate contracts from
various departments of the U. S. Government. Each contract is for an initial
term of one year (commencing between April 24, 2003 and September 30, 2003) with
four (4) successive individual one-year extension options. The contracts, which
remain in force as of September 30, 2004 and subsequent thereto) are summarized
as follows:
Contract 1: U. S. Department of State. Minimum annual volume of approximately
100,000 rounds of military grade small arms ammunition. Maximum
annual volume of approximately 5,000,000 rounds. Maximum volume
may be increased at the discretion of the Contracting Officer and
respective utilization requirements. The Company has received
firm orders for 2,265,000 rounds of ammunition under this
contract and has approximately 1,265,000 rounds ready for
shipment. The ammunition under this contract will be subject to
the strategic alliance with Israel Military Industries (IMI). The
Company has applied for and received an engineering change to
allow for the substitution of Company manufactured items in
substitution for the components originally to be supplied by IMI.
Contract 2: U. S. Department of Energy. This contract covers seven (7)
separate products in the Company's standard catalog of products.
The U. S. Department of Energy is obligated to purchase an
aggregate of 4,549,000 rounds of ammunition under this contract.
Contract 3: U. S. Department of Homeland Security. This contract covers four
(4) separate products being introduced to the Company's catalog
through the strategic alliance with IMI and requires no
modifications to the Company's production facilities or additions
to the labor force. The minimum annual volume is 1,000 rounds of
each product and a maximum annual volume of 9,600,000 rounds of
two (2) products and 36,000,000 of the remaining two (2)
products. The Company has shipped all first article samples, as
defined in the contract, and has received favorable feedback on a
20,000 round shipment during the first quarter of 2004. Full
scale shipments are anticipated to commence during the second
quarter of 2004. The Company has applied for and received an
engineering change to allow for the substitution of Company
manufactured items in substitution for the components originally
to be supplied by IMI.
The Company remains in negotiation for the issuance of purchase orders against
these contracts and continues to prepare bids on other contracts from these and
other U. S. Governmental agencies.
During the first quarter of 2004, the Company commenced a direct solicitation
program for it's "dealer direct" sales program. As this endeavor has received a
very positive initial response from the qualified retail resellers of the
Company's product, the announcement of this program had a significantly
detrimental impact on the Company's relationship with wholesale distributors
and, accordingly, had a significant negative impact on first quarter 2004 sales.
The Company continues to experience increases in customer demand, order size and
reorder quantities in this program by smaller "single store" owner/operators of
retail outlets selling the Company's products. It is anticipated that the
overall Calendar 2004 sales volume through the "dealer direct" program may well
equal or exceed the sales volumes generated by wholesale distributors in prior
years.
Results of Operations
Nine months ended September 30, 2005 compared with the nine months ended
September 30, 2004
During the nine months ended September 30, 2005, we experienced aggregate net
revenues of approximately $2,233,336, as compared to approximately $1,712,280
during the comparable period ended September 30, 2004. The second quarter of
2005 profiles comparably to the same quarter of 2004 with net sales of
approximately $378,000 versus $862,000. During the third quarter of 2005,
management elected to suspend production for a period of time to facilitate the
qualification of the production facility for contracting proposals with various
U. S. Military channels and/or to provide qualified subcontract production to
other prime contractors on U. S. Military contracts. This situation caused a
significant decline in production and, accordingly, sales during the third
quarter of 2005. Management is of the opinion that these actions will be
fruitful in future periods.
During the first quarter of 2004, the Company commenced a direct solicitation
program for it's "dealer direct" sales program. As this endeavor has received a
very positive initial response from the qualified retail resellers of the
Company's product, the announcement of this program had a significantly
detrimental impact on the Company's relationship with wholesale distributors
and, accordingly, had a significant negative impact on first quarter 2004 sales.
The Company continues to experience high demand for small arms ammunition from
both the retail channel market and domestic and foreign governments. The Company
has identified certain production issues which has inhibited the full
realization of existing product demands and has begun to take the necessary
steps to add specific machinery to counteract these issues.
21
Through September 30, 2005, and subsequent thereto, we continue to experience
negative trends off of our standard production costs for material and labor due
to difficulties in training new employees, adding new products to our catalog
and lower than expected orders due to uncontrollable delays in ordering by
various U. S. Governmental entities. Further, as previously discussed,
management invested considerable time and resources into qualifying the
production facility for U. S. Department of Defense orders and/or being a
participant with other prime manufacturers of small-arms ammunition for U. S.
Military contracts. This effort involved shutting down production for a period
of time; however, management is of the opinion that future U. S. Military
contracts will be obtained as a result of this effort.
Management remains of the opinion that the production labor force is stable and
able to maintain a constant standard of quality for future periods. We continue
to experience considerable variable costs in the area of material consumption
and direct labor.
For the nine month periods ended September 30, 2005 and 2004, we generated a
negative gross profit of approximately $(1,787,000), or (80.02%), and
approximately $(723,000), or (42.21%). Based on orders received and products
shipped during the first six months of 2005 and our ongoing conversations with
various customers, management continues to believe that the Company should be
able to generate a positive gross profit in future periods based on our
estimated backlog going into the 4th quarter of approximately $3,000,000.
We experienced nominal research and development expenses of approximately $2,600
and $8,300, respectively, during the respective nine month periods ended
September 30, 2005 and 2004, principally related to refinements in and the
expansion of our product line.
During the first nine months of 2005 and 2004, we expended approximately
$162,000 and $368,000, respectively, in advertising and marketing expenses,
principally in developing and promoting our retail dealer direct program. We
anticipate to continue our marketing efforts in this area in future periods;
however, the volume and frequency of our expenditures may fluctuate as
management allocates available capital to these efforts.
Other general and administrative expenses increased by approximately $64,000
from approximately $846,000 for the nine months ended September 30, 2005 as
compared to approximately $910,000 for the nine months ended September 30, 2004.
These increases are not identifiable by one specific area; however, relate to
general corporate expenses, office and administrative wages and salaries and
other related office overhead.
Included in our results of operations for the first nine months of 2005 and 2004
are certain non-cash expenditure charges to operations of approximately $198,000
and $356,000 for compensation expense related to common stock issuances at less
than "fair value". The calculation of these charges result from our issuing
common stock for either cash or services at valuations below the closing quoted
market price of our common stock and either the cash received or the value of
the services provided to us by third parties.
We recognized a net loss of approximately $(3,132,000) and $(2,349,000) for the
respective nine month periods ended September 30, 2005 and 2004, respectively,
or approximately $(0,04) and $(0.03) per share in each respective period.
Nine months ended September 30, 2004 compared with the nine months ended
September 30, 2003.
During the nine and three months ended September 30, 2004, we experienced net
revenues of approximately $1,712,000 and $862,000, respectively, as compared to
approximately $1,216,000 and $317,000 for the same respective periods of 2003.
During the first quarter of 2004, the Company commenced a direct solicitation
program for it's "dealer direct" sales program. As this endeavor has received a
very positive initial response from the qualified retail resellers of the
Company's product, the announcement of this program had a significantly
detrimental impact on the Company's relationship with wholesale distributors
and, accordingly, had a significant negative impact on first quarter 2004 sales.
The Company continues to experience significant increases in customer demand,
order size and reorder quantities in this program by smaller "single store"
owner/operators of retail outlets selling the Company's products.
During November 2004, the Company qualified it's 1,000th dealer under this
program for direct sales and it is anticipated that the overall Calendar 2004
sales volume through the "dealer direct" program may well equal or exceed the
sales volumes generated by wholesale distributors in prior years.
We experienced costs of goods sold of approximately $2,435,000 for the nine
months ended September 30, 2004
22
as compared to approximately $2,209,000 for the nine months ended September 30,
2003. Included in these amounts are approximately $524,000 and $495,000,
respectively, for depreciation expense on manufacturing equipment and leasehold
improvements on our production facility.
Management is of the opinion that the production labor force is stable and able
to maintain a constant standard of quality for future periods. We experience
variable costs in the area of material consumption and direct labor.
These depreciation levels are anticipated to remain fairly constant as compared
to the first quarter of 2004. Management has placed on order, and placed initial
deposits on, new manufacturing equipment to automate the product packaging
process and to add new quality assurance equipment on the production line. These
commitments aggregate approximately $450,000, of which the majority has been
expended through September 30, 2004.
Management, at this time, does not anticipate any further significant capital
equipment acquisitions.
Further, the addition of the Industrial Plating Enterprise Co. equipment during
2003 allows us to produce certain components which were previously outsourced to
unrelated third parties.
For the nine month periods ended September 30, 2004 and 2003, respectively, we
have generated a negative gross profit of approximately $(723,000), or (42.21%),
and approximately $(993,000), or (81.66%).
As previously reported, our research during the second quarter of 2004 has
revealed that the various governmental agencies which have issued purchase
contracts to us either purchased large quantities during the last 60 days of the
Federal Government's year ended September 30, 2003 or are experiencing
transitional purchasing problems or issues surrounding the reorganization of
various agencies into the Department of Homeland Security, with the related
issues of Congressional appropriations for funding the necessary expenditures of
these reorganized agencies. The actions of the third quarter proved this
research to be correct and we received several purchase order releases on our
contract with the Department of Homeland Security. The timing of Congressional
approval of the related appropriation bills to fund the various executive branch
departments of the United States of America continues to impact the timing and
release of purchase orders under our contracts as previously discussed.
We continue to anticipate that with the fulfillment of the government contracts
discussed above, continually expanding retail consumer demand for our product
line, lower production costs being experienced from internally generated plating
activities and adequate liquidity, we will be able to generate a positive gross
profit in future periods. Further, based on production cost information
developed during the 4th quarter of 2002 and further refined during 2003,
management has developed a new model for the pricing of its products to its
customers. It is anticipated that this model will allow management to better
manage expense levels, control labor costs and maximize revenue opportunities.
We had minimal costs allocated to research and development expenses during
either of the quarters ended September 30, 2004 and 2003.
Through the nine months ending September 30, 2004, we expended approximately
$368,000 in advertising and marketing expenses, principally in developing and
promoting our retail dealer direct program. We anticipate to continue our
marketing efforts in this area in future periods; however, the volume and
frequency of our expenditures may fluctuate as management allocates available
capital to these efforts.
Other general and administrative expenses increased by approximately $57,000
from approximately $789,000 for the nine months ended September 30, 2003 as
compared to approximately $846,000 for the nine months ended September 30, 2004.
These increases are not identifiable by one specific area; however, relate to
general corporate expenses, office and administrative wages and salaries and
other related office overhead.
Included in our results of operations for the first nine months of 2004 are
certain non-cash expenditure charges to operations of approximately $356,000 for
compensation expense related to common stock issuances at less than "fair
value". The calculation of these charges result from our issuing common stock
for either cash or services at valuations below the closing quoted market price
of our common stock (as discounted, as applicable) and either the cash received
or the value of the services provided to us by third parties. During Calendar
2003, we experienced a charge of approximately $94,000 for the amortization of
the Beneficial Conversion Feature Discount on our Preferred Stock. This charge
results from the difference between the closing quoted market price on our
common stock and the equivalent converted price of our Mandatory Convertible
Preferred Stock which was sold and converted during 2003.
We recognized a net loss of approximately $(2,350,000) and $(2,662,000) for the
respective three month periods ended September 30, 2004 and 2003, respectively,
or $(0.03) and $(0.04) per share.
23
Liquidity And Capital Resources
As of September 30, 2005, December 31, 2004 and September 30, 2004,
respectively, we had working capital of approximately $(504,000), $872,000 and
$960,000. Our working capital position continues to fluctuate based on our sales
volume, collections on our trade accounts receivable and cash received from the
contractually mandatory exercise of our outstanding warrant related to our
convertible debenture. Further, we anticipate that we have sufficient inventory
levels to support our retail dealer direct program and our existing and
anticipated U. S. Government contracts.
We have used cash in operating activities of approximately $(1,663,000) and
$(728,000) during the nine month periods ended September 30, 2005 and 2004,
respectively.
We anticipate that our liquidity position will continue to improve as management
is of the opinion that, with the current changes to our production capacity, the
Company will be in a position to better support all existing orders and accept
existing inquiries which have previously been denied due to the lack of
production capacity and liquidity.
During the nine months ended September 30, 2005 and 2004, respectively, we added
approximately $111,000 and $436,000 in new equipment. Based on communicated
future demand for our products, we have instituted a program to expand our
production capacity through the addition of additional equipment from the open
market. The equipment ultimately to be added is fully dependent upon the
Company's cash position, the availability of either new equity or debt capital
and the ultimate realization of communicated future product sales demand.
Management is of the opinion that sufficient demand will be present, as
supported by new product development and increased product marketing efforts, to
justify this expansion. However, we may not be able to obtain additional funding
or, that such funding, if available, will be obtained on terms favorable to or
affordable by us.
Convertible Debenture
The Company entered into a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. ("La Jolla") on October 4, 2002 for the sale of (I) $250,000 in
convertible debentures and (ii) warrants to buy 30,000,000 shares of our common
stock. On March 13, 2003 and May 6, 2003, La Jolla advanced an aggregate of
$350,000 to our company which such funding was allocated towards the principal
balance of our convertible debentures.
As of September 30, 2005, the outstanding balance on the convertible debenture
is approximately $241,365 and we have approximately 2,413,650 warrants
outstanding.
The debentures bear interest at 8%, mature on June 30, 2007, and are convertible
into our common stock, at the selling stockholder's option. The convertible
debentures are convertible into the number of our shares of common stock equal
to the principal amount of the debentures being converted multiplied by 11, less
the product of the conversion price multiplied by 10 times the dollar amount of
the debenture. The conversion price for the convertible debentures is the lesser
of (I) $1.00 or (ii) seventy six percent of the average of the five lowest
volume weighted average prices during the twenty (20) trading days prior to the
conversion. Accordingly, there is in fact no limit on the number of shares into
which the debenture may be converted. However, in the event that our market
price is less than $.30, we will have the option to prepay the debenture at 125%
rather than have the debenture converted. In addition, the selling stockholder
is obligated to exercise the warrant concurrently with the submission of a
conversion notice by the selling stockholder. As of June 30, 2005, the warrant
is exercisable into 2,413,650 shares of common stock at an exercise price of
$1.00 per share.
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby the Company agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being
declared effective, La Jolla is required to submit a debenture
conversion in the amount of $10,000 and every ten business days
thereafter La Jolla shall submit three additional debenture conversion
in the amount of $10,000 each;
* within five business days after this registration statement being
declared effective, La Jolla shall wire $400,000 to us as a prepayment
towards the exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in
connection with the debenture conversions in the aggregate amount of
$40,000, La Jolla shall wire $275,000 to us as a prepayment towards
the exercise of its warrant and shall submit a debenture conversion in
the amount of $6,250 on the first business day of each month until the
debenture is no longer outstanding.
LaJolla has contractually agreed to restrict its ability to convert or exercise
its warrants and receive shares of our common stock such that the number of
shares of common stock held by them and their affiliates after such conversion
or exercise does exceed 4.9% of the then issued and outstanding shares of common
stock.
24
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires simultaneous
exercise upon conversion of the Debenture, no value was assigned to the issued
warrant. Upon exercise of the warrant, the Company will record the issuance of
the underlying shares as a new issuance of common stock on the date of each
respective exercise.
On various dates through December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 shares of restricted, unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
On various dates between January 1, 2004 and December 31, 2004, the Debenture
Holder elected to convert an aggregate $150,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,900,000 shares of common stock to
the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 1,500,000 shares of the Company's common stock for gross proceeds of
$1,500,000. As of December 31, 2004, an aggregate of 1,000,000 shares of the
Company's common stock have been issued by the Company and are being held in
escrow by the Company's counsel pending receipt of the final $150,000 from the
Debenture Holder.
Between January 1, 2005 and September 30, 2005, the Debenture Holder elected to
convert an aggregate $25,000, through a separate transactions, in outstanding
Debenture principal into registered common stock. This election caused the
Company to issue 750,000 shares of common stock to the Debenture Holder.
Additionally, pursuant to the contract terms, the Debenture Holder concurrently
exercised a portion of the outstanding Warrant to purchase 250,000 shares of the
Company's common stock for gross proceeds of $250,000.
On May 6, 2005 and June 21, 2005, the Company authorized the issuance of an
aggregate 14,000,000 shares into the A designated escrow account for the purpose
of facilitating future conversions of the outstanding Debenture into common
stock in conjunction with the exercise of the outstanding Warrants. Subsequent
to June 30, 2005, the Debenture Holder, in 4 separate transactions, was issued
an aggregate 5,824,758 shares for the conversion of an aggregate $40,000 in
Convertible Debenture and the exercise of 400,000 Warrants at an aggregate price
of $400,000.
Item 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's President, Chief Executive and Chief
Financial Officer. Based upon that evaluation, the Company's President, Chief
Executive and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
25
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Recent Sales of Unregistered Securities and Use of Proceeds
In July 2005, the Company issued 166,666 shares of restricted, unregistered
common stock as additional compensation to Paul Goebel, the Company's Director
of Dealer Direct Sales. This transaction was valued at approximately $17,333,
which approximated the closing price of the Company's common stock on the
transaction date. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
In August 2005, the Company issued 250,000 shares of restricted, unregistered
common stock for the payment of loan origination costs in connection with a
$500,000 Line of Credit facility. This transaction was valued at approximately
$24,000, which approximated the closing price of the Company's common stock on
the transaction date. The Company relied upon Section 4(2) of the Securities Act
of 1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
In August and September 2005, the Company issued 84,053, 105,400 and 113,212
shares of restricted, unregistered common stock in payment of approximately
$9,170 in accrued dividends due at March 31, 2005, June 30, 2005, and September
30, 2005, respectively, on the Company's outstanding Series B Cumulative
Preferred Stock. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
IItem 6 - Exhibits and Reports on Form 8-K
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits are incorporated herein.
Exhibit
number Descriptions
--------- -----------------------
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Dated: October 28, 2005 /s/ Andres F. Fernandez
-----------------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
26