UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal year ended December 31, 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)
Nevada 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)
Securities registered under Section 12 (b) of the Exchange Act - None
Securities registered under Section 12(g) of the Exchange Act: - Common Stock -
$0.001 par value
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The issuer's revenues for the fiscal year ended December 31, 2005 were
$3,243,633.
The aggregate market value of voting common equity held by non-affiliates as of
April 6, 2006 was approximately $1,210,859.
As of April 6, 2006, there were 4,897,112 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure
Format : Yes [_] No [X]
American Ammunition, Inc.
Index to Contents
Page Number
Part I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Part II
Item 5 Market for Company's Common Stock and Related Stockholders Matters
Item 6 Management's Discussion and Analysis or Plan of Operation
Item 7 Financial Statements
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Item 8A Controls and Procedures
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 12 Certain Relationships and Related Transactions
Item 13 Exhibits and Reports on 8-K
Item 14 Principal Accountant Fees and Services
Signatures
Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
PART I
Item 1 - Description of Business
American Ammunition, Inc. (the "Company") was incorporated on February 1, 2000
in accordance with the Laws of the State of California as FirsTelevision.com. In
2001, we consummated a reverse acquisition transaction with American Ammunition
Inc., a then-privately held Florida corporation. Upon completion of the reverse
acquisition transaction with American Ammunition, Inc., we have been engaged in
the manufacture and sale of small-arms ammunition for the wholesale and
governmental markets.
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Effective January 1, 2006, we changed our state of incorporation from California
to Nevada by means of a merger with and into a Nevada corporation formed on
December 28, 2005 solely for the purpose of effecting the reincorporation. The
Certificate of Incorporation and Bylaws of the Nevada corporation are the
Certificate of Incorporation and Bylaws of the surviving Nevada corporation.
There were no changes to the Company's capital structure as a result of this
action.
On or about January 9, 2006, we completed a previously approved 1 for 20 reverse
split of our then issued and outstanding common stock. This action took our
issued and outstanding shares from 92,576,839 to 4,629,831. All share and per
share amounts reflect this action as of the first day of the first period
presented in our financial statements or discussed in our narrative(s).
We are an established small arms munition manufacturer with an existing
distribution network. The small-arms ammunition market is principally dominated
by three domestic and approximately ten international major manufacturers. Our
operations are geared to provide the highest quality product in quantities
significant to meet our developed wholesale and governmental market demands. We
began as an assembler and re-loader of ammunition in several calibers. As our
operations grew, our management realized that the only way to break into the
industry was to become a vertically integrated manufacturer. Our founders
invested heavily in research and development, equipment, and technology in prior
years to focus on increasing our market share. Our current product line consists
of various cailbers with varying projectiles as follows: 9 millimeter, .45
automatic, .380 automatic, .32 automatic, .40 Smith and Wesson, 38 Special, .357
Magnum, 30 carbine, 223 Remington, 38 Super, .44 Special, 32 Smith and Wesson
Long, 44 special, 44 Magnum, .45 Colt and 6.8 SPC. We have identified these
products as having the largest share of the market for the next several years.
We sell our products to both retail consumers and governmental agencies
domestically and principally to governmental agencies internationally for
military use.
During Calendar 2005, 2004 and 2003, our sales were approximately 79.42%, 78.06%
and 93.77% in domestic markets and approximately 20.58%, 21.94% and 6.23%
internationally, respectively. We continue to anticipate the international
governmental portion of our business to grow in future periods; however, we do
not anticipate our international business to outgrow our domestic sales.
Our principal executive offices are located at 3545 NW 71st Street, Miami,
Florida 33147 and our telephone number is (305) 835-7400.
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Equipment and Production Line Capabilities
We own all the equipment necessary to take the raw material, consisting
primarily of brass, lead, primer and powder, to the finished product, a loaded
round of ammunition. The process of manufacturing diverse calibers of ammunition
is extremely complex and requires very tight tolerances to be maintained
throughout the process. Our technology and equipment enable us to produce a
large variety of handgun and rifle ammunition. We have a machine shop and
maintain our own testing and quality assurance equipment and program. Ammunition
is a performance-based product. Therefore, after the manufacturing process is
complete, the ammunition must comply with specific protocols such as velocity,
accuracy, and pressure. We purchase raw materials in bulk and strive to take
advantage of prepayment discounts to produce significant savings in the
manufacturing process. There are and have been instances when discounts have
been and may be missed due to cash flow restrictions. We continue to evaluate
the addition of several products to our existing production lines, including the
addition of high speed projectile forming machines to supplement the existing
casting machines. This addition would effectively double or triple projectile
production capacity, while improving projectile quality and performance. We also
are making provisions to increase other aspects of production capacity, which
would complement long term goals of both production volume and product
diversity.
In prior years, we acquired equipment which will allowed us to expand our
production capacity in areas which they have traditionally been slower than
other areas of our manufacturing process. The acquisition of additional presses,
for example, has helped us to balance out our assembly line process so that all
portions of our projectiles are manufactured in time with each other. We hope
this will cut our manufacturing and labor costs and as a result, make us more
efficient at producing small arms ammunition.
Business Strategy
We are an autonomous manufacturer of ammunition, with the technology and
equipment to take advantage of the growing small-arms ammunition market. The
barrier to entry into the ammunition market is extremely high, however, we are
an established small arms munitions manufacturer, with an existing distribution
network. We manufacture our ammunition utilizing purchased raw materials to
fabricate the necessary components in our own production facility. In
management's opinion, the consumer and governmental ammunition market has grown
each year and it appears that supply is not keeping up with demand, thus
allowing for companies like American Ammunition to make a significant impact in
sales through our dealer direct program, established in the first quarter of
2004, and our historically strong relationships with various domestic and
foreign governmental agencies.
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We continue to seek the necessary working capital to allow us to enlarge our
operations to take advantage of our technological capacities, equipment and the
existing marketplace.
Marketing and Sales Distribution
In first quarter 2004, we launched our Dealer Direct Program. In doing so, we
completely revamped the way we distribute and sell our products domestically.
This program allowed us to eliminate the "middle man" distributor by offering
our products directly to and soliciting orders directly from the 66,000 licensed
dealers in the United States. In doing this, we may offer our products to
dealers cheaper than dealers would otherwise obtain them from distributors,
while increasing our profit margins as well. It also eliminates a second freight
charge from the distributor to the dealer, as product is shipped directly from
our facility to the ultimate seller of our products.
Our marketing strategy consists of several key features to attract dealers
directly to our company, rather than to a distributor. First, we are offering
"net 60" day credit terms to smaller dealers, who would ordinarily be forced to
pay for product up front. We have developed a screening process for qualifying
these smaller dealers on an individual basis. Although offering net 60 credit
terms to dealers results in increased risk to our company in our account
receivables as compared to payment in advance, we have exponentially diversified
our receivables (and therefore our credit risk) from 13 main distributors to
potentially thousands of individual dealers. Secondly, we now offer free freight
(shipping) to dealers on certain orders which exceed a specified dollar volume.
Shipping of small arms ammunition has always been a large portion of the cost
passed to consumers as the product is considered "dense" by shipping companies,
such as UPS, and requires extra care in shipping. We have determined that we can
ship our products at a reduced rate in quantity and can offer free shipping as
an incentive on qualified orders. As previously explained, a second freight
charge has also been avoided by eliminating the distributor from the
transaction. Additionally, our increasing automation and dealer direct program
have considerably sped up the time we take to provide a dealer with demanded
product. Our management has become aware of an unfulfilled need of dealers to be
provided with almost instant gratification when demand at retail establishments
increases. Many dealers have communicated with our company complaining that we
took their distributors too long to provide them with additional product supply
when demand dictated. We believe that our new distribution strategy complimented
with recent automation has cut the time it takes a dealer to receive our
products by more than half. We only recently upgraded our website to include
e-commerce capacity, wherein licensed dealers who are pre-registered with our
company can order online direct from us. Sales in this manner have been slow to
develop, primarily due to the documentation requirements for pre-qualification
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of dealers; however, management is hopeful that our dealers will begin to take
advantage of the ease of use and time savings related to placing orders directly
via electronic means. We anticipate further automation in the way in which our
qualified dealers place product orders from our company. We plan to continue to
aggressively pursue new customers through promotions, advertising and trade
shows. We intend to solicit original equipment manufacturer subcontract work
from the three major domestic manufacturers; seek additional means of commercial
distribution; seek further Department of Defense and other governmental agency
contracts and new relationships; contracts; solicit further export sales and,
potentially, develop relationships with various mass merchandisers/chain stores.
We have been certified by the United States Small Business Administration as a
"qualified HUBZone small business concern." Under this program, small businesses
can qualify for special set-aside contracts, get up to a 10% edge in competitive
contract bidding or even be the sole-source bidder in some cases. The program's
name signifies the effort to promote businesses in "historically underutilized
business zones,", generally located in "blighted" areas (as defined) and a
primary purpose is to create jobs for those who live in such areas. We are
marketing our manufacturing flexibility to numerous Department of Defense and
commercial munitions manufacturers as subcontractors allowing prime contractors
to reap the benefits of our "HUBZone certification", thereby allowing such prime
contractors to comply with Federal Acquisition Requirements for the use of
"small and under-utilized minority business" in fulfilling government contracts.
The Small Business Reauthorization Act of 1997 increased the overall government
agencies' procurement goals for small business to 23% and called for HUBZone
contracts to increase from 1.5% of these procurements to 3% by 2003.
Pricing and Value
We have been able to price our products competitively at a price lower than any
of the three major domestic manufacturers: Remington, ATK, and Winchester. We
strive to capitalize on the fact that these three competitors have very large
corporate infrastructures and, in management's opinion, have to pay much higher
labor costs to their manufacturing plant personnel. We believe that our
production cost structure and, accordingly, our pricing strategy permits our
customers to purchase our product and sell it at a retail price that is lower
than competitive distribution channels for our competitors' products.
Advertising & Promotion
We intend to gear our advertising towards magazine and print media, focused on
the gun and ammunition, handgun and shooting markets. We believe that such
advertising will result in greater name recognition among individual consumers.
Currently, our sales are generated with very little advertising and we believe
that advertising could significantly improve retail/mass merchandiser sales and
increase market share.
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Status of Publicly Announced Products and Services Israeli Military Industries
Ltd
We have developed a relationship with Israeli Military Industries Ltd. ("IMI"),
whereby we work together on individual projects. To date, we have primarily
focused their cooperation on federal contracts and on our dealer direct program.
In such contracts, projectiles manufactured by IMI have been assembled by our
company under IMI's strict quality control requirements. The joint venture has
benefitted our company in several ways. First and foremost, IMI has a distinct
following as a result of offering very high quality products of the course of
many years. Associating our name with IMI's history has added value to our brand
and reputation in the small arms ammunition industry. Second, IMI manufactures
different calibers and products than us, thereby increasing the catalogue of
items we may offer to our dealers. IMI produces commercial ammunition, similar
to our company. However, we also specialize in the production of law enforcement
and military grade ammunition, which we currently do not have the production
capability to produce on our own. Lastly, on past and current cooperation
initiatives, IMI has shipped projectiles and materials for future assembly on a
consignment basis, thereby saving us the time value of such costs were we to
have produced such items or purchased such raw materials ourselves. During 2005,
we saw a downturn in this relationship and we are focusing more on internally
developed and manufactured products.
Triton
On February 10, 2004, we executed a non-binding letter of intent to acquire the
assets of Triton Ammunition Corporation ("Triton"). This transaction closed on
October 19, 2004, with the issuance of 1,111,112 shares of restricted,
unregistered common stock valued at $500,000.
The assets acquired consisted of various pieces of manufacturing machinery, raw
materials and finished inventory and various intellectual property rights.
Triton conveyed the sole usage patent right agreements and various related
licenses for the Hi-Vel and Quik-Shok lines of ammunition.
The allocation of the purchase price was as follows: Manufacturing equipment -
approximately $134,000; Raw materials and finished inventory - approximately
$89,500; and Patents and a Covenant not-to-compete - approximately $276,500. As
the assigned patents, related licenses and the covenant-not-to-compete have a
combined remaining life and/or initial term of approximately 5 years, the
Company will amortize the approximate $276,500 to operations over a 60-month
period, commencing on the closing date of the acquisition transaction.
We believe that with the acquisition of certain Triton specialty ammunition and
our cooperative relationship with IMI on certain ventures, we allow us to offer
an increased product line to our dealers.
9
ECO-AMMOTM
We are now manufacturing and distributing ECO-AMMO(TM). This product utilizes a
lead-free projectile with reduced lead pollutants sometimes referred to as
"green" ammo. ECO-AMMO(TM) is ideal for indoor ranges since it disintegrates
upon impact and, therefore, does not ricochet. We have been acquiring and
developing technology to market this environmentally friendly ammunition for
some time. The advent of the dealer direct program enables the product to be
distributed at a lower cost and should open up the market to more consumers.
Frangible Aircraft Bullet
We were assigned a serial number (60/325,046) from the U.S. Patent and Trademark
Office for our provisional patent application filed on September 26, 2001 for a
projectile that will not pierce an aircraft fuselage but will penetrate human
soft tissue. The product has been specifically designed for use inside the cabin
of a commercial aircraft; however, we have additional applications for use in
other environments with similar containment issues, such as security at nuclear
power plants, hazardous materials storage facilities, and for consumer home
defense. We departed completely from standard ballistics for the design of this
projectile to meet what American Ammunition perceives as a growing and unfilled
need. Two of the basic design criteria in ballistics are penetration and
expansion of the projectile. In this design, these two factors have been
controlled to meet the specific requirements of weapons discharged inside a
confined space while ensuring the integrity of the surrounding environment. This
design is a new concept in close quarter ammunition: a bullet capable of
incapacitating an assailant without damaging surrounding structure. Design and
material selection allows for the inverted expansion and aft internal collapse
of the projectile mass. Our initial testing, using test sections of a commercial
airliner fuselage, has revealed that upon impact with the aircraft fuselage, the
bullet internally collapses; therefore not allowing for the transfer of kinetic
energy forward or penetration above that required for soft tissue penetration.
Further, our testing has been successful in ballistic testing using both
ordinance gelatin and bovine tissue. This performance criterion is accomplished
without sacrificing the standard velocity and accuracy of the caliber being
used. A video of those tests can be viewed on our website at www.a- merc.com in
the New Product Section. We believe that these research and development efforts
will provide a new product to the public safety and security marketplace.
Industrial Plating Enterprise Company
Industrial Plating Enterprise Company (IPE), a wholly owned subsidiary of the
Company, is a high volume "barrel plating" facility currently operating at below
50.0% of its designed capacity. IPE is meeting all of our projectile plating
needs at this time. As our projectile plating requirement grows, IPE has the
10
surplus capacity to increase production to meet that need. IPE's innovative
hazardous materials and hazardous waste management and treatment system is fully
capable of meeting increased production requirements. IPE's management, intends
to explore adding additional metallization and coating processes to diversify
its services to the parent company as well as offering its services to other
industries with the eventual goal of generating revenue to our company of which
there are no guarantees.
Competition
The market for small arms ammunition is extremely competitive. Companies such as
Remington, Federal and Winchester are all better equipped, more experienced and
better financed than us. For years, the large manufacturers have supplied the
component parts of the manufacturing process to smaller companies to assemble
and distribute. A company making its own components, can produce and market a
quality lower cost product. This concept, coupled with technology and
progressive and environmentally sound manufacturing practices (i.e. cans and
recycled plastic packaging), has resulted in a quality, affordable product
reaching the marketplace.
Management undertook a study of the production process and our equipment
utilization during December 2004 and the first quarter of 2005. As a result of
this study, our management continues to believe that we can our production
capacity through the renovation and restructuring of our plant flow utilizing
our existing equipment and increasing only labor, material and other incidental
costs.
Sources and Availability of Raw Materials
We manufacture our ammunition by creating most of the components ourselves. The
materials needed to produce our ammunition products are widely available from
numerous third parties. While we believe that no critical shortages of our key
raw material components, such as brass, lead and powder. We are cognizant of
recent press related to the availability of lead as no new mines have opened in
many years due to environmental regulations. We have experienced limited,
infrequent delays in receiving lead; however, we have always been able to meet
our production requirements from our normal sources. Current demand for our raw
material components in the domestic and international markets, principally
driven by international military conflicts, may work to our advantage in our
contracts and relationships with various domestic and foreign governmental
agencies. However, we cannot state with any certainty that any disruption of
supply may or may not occur.
11
Research and Development
We believe that research and development is an important factor in our future
growth. The small arms ammunition industry is closely linked to the latest
technological advances. Therefore, we must continually invest in the technology
to provide the best quality product to the public and to effectively compete
with other companies in the industry. No assurance can be made that the Company
will have sufficient funds to purchase technological advances as they become
available.
Patents, Copyrights and Trademarks
We intend to protect our original intellectual property with patents, copyrights
and/or trademarks as appropriate. Our head stamp "A-MERC " was registered as a
trademark on May 10,1994.
We were assigned a serial number (60/325,046) from the U.S. Patent and Trademark
Office for our provisional patent application filed on September 26, 2001 for a
bullet that will not pierce an aircraft fuselage but will penetrate human soft
tissue.
Our October 2004 acquisition of certain intellectual technology property from
Triton Ammunition Corporation included the assignment of the following patents
related to the design and manufacture of certain fragmentable projectiles:
4,836,110, dated June 6, 1989; 4,882,822, dated November 28, 1989; and
4,947,755, dated August 8, 1990.
Governmental Regulation
In accordance with the provisions of Title 1, Gun Control Act of 1968, we are
required to be licensed to import firearms and manufacture ammunition for
firearms. Such licensing is subject to limitations in Chapter 44, Title 18,
United States Code. In the event such licenses are not renewed for any reason,
we would have to cease our operations. In accordance with these requirements, we
carry two licenses issued by the Department of Treasury, Bureau of Alcohol,
Tobacco and Firearms: * License No. 1-59-025-06-3D 69152 for "06 - Manufacturer
of Ammunition for Firearms", which license expires on April 1, 2007; and *
License No. 1-59-025-08-3D-69454 for "08-Importer of Firearm other than
Destructive Devices", which license expires on April 1, 2007. We are not aware
of any other license requirements or government regulation at a state or federal
level specific to their business and believe that we are in full compliance with
our existing licenses.
Effect of Probable Governmental Regulation on the Business
We are not aware of any pending legislation at either the State or Federal level
that would change the requirements under which it is licensed and is not aware
of any reason why the existing licenses cannot be renewed at their expiration
12
dates. There can be no assurance that legislation will not be proposed and
enacted at some time in the future that would preclude us from continuing our
operations. Should such legislation be enacted, and should we be precluded from
continuing our operations, it would have a materially adverse effect upon our
business and future.
Cost and Effects of Compliance with Environmental Laws
As a manufacturer, we are subject to general Local, State and Federal
regulations governing environmental concerns. We believe that we have always
been and continue to be in compliance with all such laws. Special precautions
have been taken us to ensure that adequate ventilation exists for the portion of
our operations that utilize lead and/or brass. Additionally, our gunpowder
supply is humidity and temperature controlled in a secure and environmentally
controlled facility
Employees
At April 6, 2006, we employ approximately 58 persons. None of our employees are
represented by a labor union for purposes of collective bargaining. We consider
our relations with our employees to be excellent. We may employ additional
personnel, as necessary, to accommodate future sales and production requirements
and believe that an ample supply of qualified labor exists in our geographic
area to facilitate any required growth.
Risk Factors
An investment in our common stock has a high degree of risk. Before you invest
you should carefully consider the risks and uncertainties described below and
the other information in this prospectus. If any of the following risks actually
occur, our business, operating results and financial condition could be harmed
and the value of our stock could go down. This means you could lose all or a
part of your investment.
Risks Relating to Our Business: We may never become profitable and continue as a
going concern because we have had losses since our inception. We may never
become profitable and continue as a going concern because we have incurred
losses and experienced negative operating cash flow since our formation. We have
incurred losses and experienced negative operating cash flow since our
formation. For our fiscal years ended December 31, 2005, 2004 and 2003, we had a
net loss of approximately $(5,941,669),$(3,361,000) and $(2,968,000),
respectively. We may continue to incur significant operating expenses as we
maintain our current line of small-arms ammunition and continue research and
13
development toward improving projectile quality and performance. We cannot
estimate exactly when our operating expenses will not outpace revenues and
result in significant losses in the near term. We may never be able to reduce
these losses, which will require us to seek additional debt or equity financing.
If such financing is available you may experience significant additional
dilution.
There may exist an uncertainty as to our continuation as a going concern: Our
audited financial statements for the fiscal years ended December 31, 2005, 2004
and 2003 reflect an accumulated deficit of approximately $(24,543,818),
$(19,989,875) and $(16,629,044) since our inception, working capital of
approximately $(885,000) $872,000 and $2,028,000, and stockholders' equity of
approximately $(762,399), $4,385,000 and $4,508,000. Our auditor issued a going
concern opinion on our financial statements for the year ended December 31, 2005
and 2004. Our ultimate survivability is dependent upon our being able to
generate sufficient cash flows from operations to support its daily operations
as well as provide sufficient resources to retire existing liabilities and
obligations on a timely basis. We anticipate that our available cash and future
commitments for equity placements will be sufficient to meet our operating
expenses and capital expenditures through 2006. If we continue to incur
operating losses, we may not be able to fund continuing business operations,
which could lead to the limitation or closure of some or all of our operations.
We may have to curtail our business if we cannot find adequate funding: We
currently have no legally binding commitments with any third parties to obtain
any fixed, material amount of additional equity or debt financing except La
Jolla. Our financing package with La Jolla, which was renegotiated in 2005 has
not generated additional funding since the third quarter 2005. We need immediate
funds and may not be able to obtain any additional financing in the amounts or
at the times that we may require the financing or, if we do obtain any
financing, that it would be on acceptable terms because of the following:
* we have no assets to pledge as security for the loan; and
* we are in poor financial condition where we maybe viewed as a high market
risk
As a result, we may not have adequate capital to implement future expansions,
maintain our current levels of operation or to pursue strategic acquisitions.
Our failure to obtain sufficient additional financing could result in the delay
or abandonment of some or all of our development, expansion and expenditures,
which could harm our business and the value of our common stock.
14
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunition.
Our competitive position may be harmed if we fail to respond to rapid changes in
the market for small arms ammunition. Our future success will depend
significantly on our ability to develop and market new products that keep pace
with technological developments and evolving industry standards for hand gun and
rifle ammunition. Our delay or failure to develop or acquire technological
improvements, adapt our products to technological changes or provide higher
quality product lines that appeals to our customers may cause us to lose
customers and may prevent us from generating revenue which could ultimately
cause us to cease operations.
Our revenues may decrease from production delays due to fire or explosive
incidents. Our revenues may decrease from production delays due to fire or
explosive incidents. Our ammunition products, involve the manufacture and/or
handling of a variety of explosive and flammable materials. This manufacturing
and/or handling may result in incidents that will temporarily shut down or
otherwise disrupt our manufacturing, causing production delays and resulting in
liability for workplace injuries and fatalities. We cannot assure you that we
will not experience these types of incidents in the future or that these
incidents will not result in production delays, which can lead to a reduction in
revenues.
We may incur substantial costs in complying with environmental laws and may be
subject to substantial liability resulting from the use of hazardous substances
or required cleanup of contaminated sites. Our operations and use of real
property are subject to a number of federal, state and local environmental laws
and regulations which, among other things, require us to obtain permits to
operate and to install pollution control equipment and regulate the generation,
storage, handling, transportation, treatment and disposal of hazardous and solid
wastes. Our operations, as well as historical operations at our sites, also
subject us to liability for the cleanup of releases of hazardous substances.
Environmental laws and regulations change frequently, and it is difficult to
predict whether and to what extent we may be subject to liability for compliance
with environmental laws and regulations.
Our business operations will be harmed if we are unable to obtain additional
funding. Our business operations will be harmed if we are unable to obtain
additional funding outside of the La Jolla financing. We believe that our
available short-term assets, investment income and financing arrangement with La
15
Jolla will be sufficient to meet our operating expenses and capital expenditures
through the end of fiscal year 2005. We do not know if additional financing will
be available when needed, or if it is available, if it will be available on
acceptable terms. Insufficient funds may prevent us from implementing our
business strategy or may require us to delay, scale back or eliminate certain
contracts for the provision of our technology and products.
Our competitors may misappropriate our intellectual property because we have
only one trademark and five patents.
We attempt to protect our limited proprietary property through trademark, trade
secret, nondisclosure and confidentiality measures. Such protections, however,
may not preclude competitors from developing similar technologies. Any inability
to adequately protect our proprietary technology could harm our ability to
compete.
Our future success and ability to compete depends in part upon our proprietary
technology and our trademark, which we attempt to protect with a combination of
trademark and confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and are time-consuming and expensive
to obtain and/or maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property.
Risks Relating to Our Current Financing Arrangement: There are a large number of
shares underlying our convertible debentures and warrants that may be available
for future sale and the sale of these shares may depress the market price of our
common stock.
As of April 6, 2006, we had 4,897,112 shares of common stock issued and
outstanding and convertible debentures outstanding that may be converted into
shares of common stock at current market prices, and outstanding warrants to
purchase shares of common stock. The number of shares of common stock issuable
upon conversion of the outstanding convertible debentures may increase or
decrease if the market price of our stock increases or decreases. All of the
shares, including all of the shares issuable upon conversion of the debentures
and upon exercise of our warrants, may be sold without restriction. The sale of
these shares may adversely affect the market price of our common stock.
The continuously adjustable conversion price feature of our convertible
debentures could require us to issue a substantially greater number of shares,
which will cause dilution to our existing stockholders.
16
Our obligation to issue shares upon conversion of our convertible debentures is
essentially limitless. The number of shares of common stock issuable upon
conversion of our convertible debentures will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
The continuously adjustable conversion price feature of our convertible
debentures may encourage investors to make short sales in our common stock,
which could have a depressive effect on the price of our common stock.
The convertible debentures are convertible into shares of our common stock at a
24% discount to the trading price of the common stock prior to the conversion.
The significant downward pressure on the price of the common stock as the
selling stockholder converts and sells material amounts of common stock could
encourage short sales by investors. This could place further downward pressure
on the price of the common stock. The selling stockholder could sell common
stock into the market in anticipation of covering the short sale by converting
their securities, which could cause the further downward pressure on the stock
price. In addition, not only the sale of shares issued upon conversion or
exercise of debentures, warrants and options, but also the mere perception that
these sales could occur, may adversely affect the market price of the common
stock.
The issuance of shares upon conversion of the convertible debentures and
exercise of outstanding warrants may cause immediate and substantial dilution to
our existing stockholders.
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their convertible debentures and/or exercise their warrants if
such conversion or exercise would cause them to own more than 9.9% of our
outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Convertible Debentures and Registered Pursuant To Our
Pending Prospectus May Not Be Adequate And We May Be Required to File A
Subsequent Registration Statement Covering Additional Shares. If The Shares We
17
Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required
To File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market price
as a result of the issuance of shares upon conversion of the convertible
debentures, we have made a good faith estimate as to the amount of shares of
common stock that we are required to register and allocate for conversion of the
convertible debentures. We have allocated and registered 42,861,322 shares to
cover the conversion of the convertible debentures. In the event that our stock
price decreases, the shares of common stock we have allocated for conversion of
the convertible debentures and are registering hereunder may not be adequate. If
the shares we have allocated to the registration statement are not adequate and
we are required to file an additional registration statement, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.
If We Are Required for any Reason to Repay Our Outstanding Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Convertible Debentures, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
We entered into a Securities Purchase Agreement with 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
April 6, 2006, $226,265 of the debenture remained outstanding. The convertible
debentures are due and payable, with 8% interest on June 30, 2006, unless sooner
converted into shares of our common stock. In addition, any event of default
could require the early repayment of the convertible debentures at a price equal
to 125% of the amount due under the debentures. We anticipate that the full
amount of the convertible debentures, together with accrued interest, will be
converted into shares of our common stock, in accordance with the terms of the
convertible debentures. If we are required to repay the convertible debentures,
we would be required to use our limited working capital and raise additional
funds. If we were unable to repay the debentures when required, the debenture
holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
18
Risks Relating to Our Common Stock: If We Fail to Remain Current on Our
Reporting Requirements, We Could be Removed From the OTC Bulletin Board Which
Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability
of Stockholders to Sell Their Securities in the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our directors and executive officers beneficially own approximately 37.4% of our
stock; their interests could conflict with yours; significant sales of stock
held by them could have a negative effect on our stock price; stockholders may
be unable to exercise control.
As of April 6, 2006, our executive officers and directors, which primarily
includes the Fernandez family, beneficially own approximately 23.5% of our
common stock. As a result, our executive officers and directors will have
significant influence to:
* elect or defeat the election of our directors;
* amend or prevent amendment of our articles of incorporation or bylaws;
* effect or prevent a merger, sale of assets or other corporate transaction;
and
* control the outcome of any other matte submitted to the stockholders for
vote.
As a result of their ownership and positions, our directors and executive
officers collectively are able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
19
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
* that a broker or dealer approve a person's account for transactions in
penny stocks; and
* the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
* obtain financial information and investment experience objectives of the
person; and
* make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
* sets forth the basis on which the broker or dealer made the suitability
determination; and
* that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
20
Item 2 - Description of Property
We lease our corporate office and manufacturing facility from our controlling
stockholder under a long-term operating lease agreement. The lease requires a
monthly payment of approximately $5,735, including applicable State sales taxes.
We are 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.
Our 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.
In May 2004, we entered into a long-term lease agreement for a warehouse
facility in close proximity to our primary office and manufacturing facility
with an unrelated third-party.. 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. We
are responsible for all utilities and maintenance expenses. This lease expires
on May 31, 2006. Further, we are 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
------------ ----------
2006 $117,244
2007 72,643
2008 68,815
2007 68,815
--------
Totals $317,517
=======
21
For the respective years ended December 31, 2005 and 2004, the Company paid an
aggregate of $175,552 and$131,804, respectively, for rent under these
agreements.
Item 3 - Legal Proceedings
The Company is a nominal defendant, stakeholder, and affected party in a civil
action styled Independent Banker's Bank v. Eduardo A. Godoy, et. al., Case
Number 2003 CA 002466, currently pending in the Circuit Court of the Fifteenth
Judicial Circuit In And For Palm Beach County, Florida. The action was filed by
a creditor of shareholders of the Company, and as Issuer of shares to other
Defendants in the action the Company is named as a stakeholder and affected
party in the action. Presently no monetary claim is asserted in this pending
action against the Company. The Company and its counsel believe that no such
monetary claims should be made, and if made, are without merit and defensible.
The Company will vigorously defend any such claim(s).
From time to time the Company is subject to various legal proceedings which are
incidental to the ordinary conduct of its business. The Company does not
consider any such proceedings to date, either individually or in the aggregate,
to be material to its business or likely to result in a material adverse effect
on its future operating results, financial condition, or cash flows.
Item 4 - Submission of Matters to a Vote of Security Holders
On June 27, 2005, pursuant to a Written Consent of Shareholder(s) Pursuant to
California General Corporation Law, shareholders holding approximately
69,111,256 shares (or approximately 61%) of the then issued and outstanding
shares approved the merger of an entity to be formed under Nevada Law with
American Ammunition, Inc. (a California corporation) for the sole purpose of
effecting the reincorporation and change in corporate domicile.
PART II
Item 5 - Market for Company's Common Stock and Related Stockholder Matters
Market for Trading
Our common stock of the Company currently is quoted on the NASDAQ Over the
Counter Bulletin Board since October 23, 2001. Our current symbol, as changed
for the January 2006 reverse stock split, is "AAMU". Prior to January 2006, our
common stock traded under symbol "AAMI". Our common stock, in prior years, was
approved for trading under the symbol "FBIB"; however, no trades were conducted
using this symbol.
22
The ask/high and bid/low information for each quarter since October 23, 2001 are
as follows:
Quarter Ask/High Bid/Low
----------------------- -------- -------
1/1/2002 - 3/31/2002 0.81 0.33
4/1/2002 - 6/30/2002 0.65 0.36
7/1/2002 - 9/30/2002 0.57 0.31
10/1/2002 - 12/31/2002 0.47 0.38
1/1/2003 - 3/31/2003 0.78 0.53
4/1/2003 - 6/30/2003 0.85 0.42
7/1/2003 - 9/30/2003 0.55 0.37
10/1/2003 - 12/31/2003 0.42 0.22
1/1/2004 - 3/31/2004 0.50 0.27
4/1/2004 - 6/30/2004 0.42 0.17
7/1/2004 - 9/30/2004 0.27 0.17
10/1/2004 - 12/31/2004 0.24 0.15
1/1/2005 - 3/31/2005 0.17 0.09
4/1/2005 - 6/30/2005 0.14 0.07
7/1/2005 - 9/30/2005 0.14 0.08
10/1/2005 - 12/31/2005 0.15 0.04
1/1/2006 - 3/31/2006 1.18 0.29
4/1/2006 - 4/6/2006 0.34 0.30
Please note that over-the-counter market quotations have been provided herein.
The quotations reflect inter-dealer prices, without retail markup, mark-down or
commission and may not represent actual transactions.
As of March 31, 2006, we had approximately 489 shareholders of record, exclusive
of our stockholders with their holdings in street name.
Common Stock
The holders of the issued and outstanding shares of common stock are entitled to
receive dividends when, as and if declared by our Board of Directors out of any
funds lawfully available therefore. The Board of Directors intends to retain
future earnings to finance the development and expansion of our business and
does not expect to declare any dividends in the foreseeable future. The holders
of the common stock have the right, in the event of liquidation, to receive pro
23
rata all assets remaining after payment of debts and expenses. The common stock
does not have any preemptive rights and does not have cumulative voting rights.
The issued and outstanding shares of common stock are fully paid and
nonassessable. Holders of shares of common stock are entitled to vote at all
meetings of such shareholders for the election of directors and for other
purposes. Such holders have one vote for each share of common stock held by
them.
Transfer Agent
Our independent stock transfer agent for our common and preferred stock is Atlas
Stock Transfer Corporation. Their mailing address and telephone number is 5899
South State Street, Salt Lake City, Utah 84107; (801) 266-7151.
Reports to Stockholders
The Company plans to furnish its stockholders with an annual report for each
fiscal year ending December 31 containing financial statements audited by its
registered independent public accounting firm. In the event the Company enters
into a business combination with another Company, it is the present intention of
management to continue furnishing annual reports to stockholders. Additionally,
the Company may, in its sole discretion, issue unaudited quarterly or other
interim reports to its stockholders when it deems appropriate. The Company
intends to maintain compliance with the periodic reporting requirements of the
Securities Exchange Act of 1934. Dividend policy
No dividends have been paid to date and the Company's Board of Directors does
not anticipate paying dividends in the foreseeable future. It is the current
policy to retain all earnings, if any, to support future growth and expansion.
Item 6 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
24
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-KSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
General
American Ammunition, Inc. is a holding company with two operating subsidiaries:
F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. (F&F) was incorporated on October 4, 1983 under the laws of
the State of Florida. F&F was formed to engage principally in the "import,
export, retail & wholesale of firearms equipment, ammunition & other devices and
for the purpose of transacting any and/or all lawful business." F&F conducts its
business operations under the assumed name of "American Ammunition."
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved 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.
Results of Operations
Year ended December 31, 2005 compared to Year ended December 31, 2004
During the year ended December 31, 2005, we experienced aggregate net revenues
of approximately $3,244,000, with approximately $1,010,000 being realized during
the 4th quarter, as compared to approximately $3,247,000 in total net revenues
for the year ended December 31, 2004.
We experienced costs of goods sold of approximately $4,592,000 for the year
ended December 31, 2005 as compared to approximately $4,621,000 for the year
ended December 31, 2004.
25
During 2005 and 2004, we experienced 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.
Management is of the opinion that the production labor force is stable and able
to maintain a constant standard of quality for future periods. We experience
variable costs in the area of material consumption and direct labor. We have
recognized depreciation expense on production equipment of approximately
$770,000 and $729,000, respectively, in the above cost of goods expense totals.
These depreciation levels are anticipated to fluctuate nominally in future
periods based upon either the full depreciation of older equipment and/or the
addition of new equipment to expand capacity.
In accordance with Statement of Financial Accounting Standards No. 144, due to
our lack of profitability and positive gross margins and the uncertainty of the
receipt of budgeted orders during future periods, management recognized a 4th
quarter adjustment to fully impair the undepreciated balance on all of our
property and equipment. This action resulted in a one-time non-cash charge to
operations of approximately $2,778,000.
For the year ended December 31, 2005 and 2004, respectively, we generated a
negative gross profit of approximately $(1,349,000), or (41.58%), and
approximately $(1,373,000), or (42.49%). While we have a backlog of orders and
future order commitments from governmental agencies, we anticipate that we
should be able to generate a positive gross profit in future periods; however,
there are no guarantees or any certainty that this will occur.
We experienced nominal research and development expenses of approximately $2,000
and $11,000, respectively, during the years ended December 31, 2005 and 2004,
principally related to the expansion of our product line.
Other general and administrative expenses increased by approximately $258,000
from approximately $1,825,000 for the year ended December 31, 2005 as compared
to approximately $1,567,000 for the year ended December 31, 2004. The most
significant increases relate to salaries and wages and interest expense on
working capital loans.
During 2005 and 2004, respectively, we experienced charges to operations of
approximately $257,000 and $382,000 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.
26
We recognized a net loss of approximately $(5,942,000) and $(3,318,000) for the
respective years ended December 31, 2005 and 2004, respectively, or $(1.53) and
$(0.94) per share.
Liquidity
As of December 31, 2005 and 2004, respectively, we had working capital of
approximately $(885,000) and $872,000. We have used cash in operating activities
of approximately $(1,802,000) and $(649,000) during the years ended December 31,
2005 and 2004, respectively.
Capital Requirements
During the years ended December 31, 2005 and 2004, respectively, we added
approximately $124,000 and $717,000 in new equipment. The equipment added in
2004 was related to 1) the expansion of our production line; 2) the addition of
computerized quality control inspection processes and 3) the automation of our
packaging line.
Depending on future demand for our products, we may need to further increase our
production capability and management is of the opinion that adequate equipment,
either new or used, will be available to facilitate any future expansion.
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 December 31, 2005, the outstanding balance on the convertible debenture is
approximately $226,365 and we have approximately 2,263,650 warrants outstanding.
The debentures bear interest at 8%, mature on June 31 [sic], 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
27
number of shares into which the debenture may be converted. However, in the
event that our market price is less than $0.30, 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 December 31, 2005, the warrant is exercisable into 2,263,650
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.
In May 2005, we entered into an additional addendum to the convertible debenture
and warrant whereby the Company agreed to the following:
* The Company shall deposit 4,000,000 unregistered shares in the name of
LaJolla with the Company's Escrow Agent and, upon confirmation of receipt,
LaJolla will wire the Company $150,000 as an advance on the $400,000 amount
that LaJolla was obligated to fund pursuant to the December 2004 Addendum.
In the event that the Company's Registration Statement was not declared
effective within nine (9) months of the date of this Addendum, the
4,000,000 shares in escrow will be released to LaJolla and sold by LaJolla
pursuant to Rule 144. If LaJolla sells these shares for net sales proceeds
of more than $150,000 (without interest accruing on this amount), the
excess over $150,000 will be refunded to the Company.
* The maturity date of the convertible debenture and warrant was extended to
June 31, [sic], 2007.
* All other terms and conditions remain in full force and effect.
28
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.
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.
29
On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate $40,000, through 4 separate transactions, in
outstanding Debenture principal into registered common stock. This election
caused the Company to issue 5,872,048 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 400,000
shares of the Company's common stock for gross proceeds of $400,000.
Item 7 - Index to Financial Statements
The required financial statements begin on page F-1 of this document.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
Item 8A - 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 management, including the Company's President
and Chief Executive Officer and the Company's Chief Financial Officer. Based
upon that evaluation, the Company's President and Chief Executive Officer and
the Company's 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,
30
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.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The directors and executive officers serving the Company are as follows:
Name Age Position Held and Tenure
-------------------- --- -------------------------------
J. A. Fernandez, Sr. 68 Chairman of the Board and Director of Sales
Andres F. Fernandez 40 President and Chief Executive Officer
Emilio D. Jara 40 Vice-President of Operations, Secretary and Director
Maria A. Fernandez 45 Director
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualify. Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary to perform their responsibilities as executive officers and/or
directors of the Company.
Family Relationships
J. A. Fernandez, Sr. is the father of Andres and Maria Fernandez. There are no
other family relationships between or among the executive officers and directors
of our company.
Business Experience
J. A. Fernandez, Sr. currently serves as the Chairman of the Board and Director
or Sales. He has been employed by us since our inception in 1983. Mr. Fernandez
is the founder F&F Equipment, which began as a family business, and is
responsible for our sales activities. Mr. Fernandez has over 40 years experience
in diverse industries including aerospace, advanced polymer manufacturing,
munitions, mining and processing of gemstones and metal ores and has utilized
such experience for the growth and development of the Company. He is fluent in
Spanish.
31
Andres Fernandez currently serves as President and Chief Executive Officer. Mr.
Fernandez has served in each of these capacities since September 2001. He has
been employed by our company for over a decade. Mr. Fernandez is responsible for
day to day operations. He studied physics and calculus at St. Thomas University,
FL and at the University of Miami, FL. He is a licensed pilot, having graduated
from the American Institute of Aeronautics, FL, and received his certificate as
a private pilot (fixed wing) as well as private helicopter (rotary)in 1989. In
1989, Mr. Fernandez graduated from the Institute of Public Service (Pan Am), GA
as a tactical rappel instructor. In 1990, he graduated from Omni Explosives, TN
with a specialty in tactical explosives. Mr. Fernandez was certified by the
Florida Department of Law Enforcement Academy in special operations/entry
techniques in 1990. He has served as a tactical advisor to U.S. Treasury
Department, Bureau of Alcohol, Tobacco and Firearms, U.S. Customs Service and
the Florida Department of Law Enforcement. He has received numerous
commendations and letters of appreciation. He also served on the Board of
Veterans Affairs (Hialeah, FL) from 1990 to 1991. He is fluent in Spanish.
Emilio Jara currently serves as Vice President of Operations, Corporate
Secretary and a Director. Mr. Jara has served in each of these capacities since
September 2001. He has been employed with our company since 1988. He has been an
integral part of our technological growth. His abilities have contributed to our
research and development and subsequent increase in the number of production
lines. Mr. Jara is extremely well versed in metallurgical and ballistic issues.
He studied business administration at Miami- Dade Community College (1984/1985).
In 1989, he graduated from the Institute of Public Service (Pan Am), GA as a
Tactical Rappel Instructor. In 1990, Mr. Jara graduated from Omni Explosives, TN
with a specialty in Tactical Explosives. He is fluent in Spanish.
Maria A. Fernandez currently serves as a Director. Mrs. Fernandez has served as
a Director since September 2001. She has been the managing partner at Fernandez
Friedman Grossman & Kohn PLLC, a Louisville, KY law firm, since May 1998. Prior
to that date, she was a partner at Taustine Post Sotsky Berman Fineman & Kohn.
She concentrates her legal practice in the areas of estate planning, probate and
administration. She also practices in the areas of Medicaid and disability
planning, corporate and individual taxation and corporate law, with an emphasis
in closely held corporations. She is a graduate of the University of Miami, FL
(Bachelor of Business Administration and Master of Professional Accounting) and
the Brandeis School of Law at the University of Louisville, KY. Ms. Fernandez is
licensed to practice in Kentucky and Florida. She has lectured in the areas of
estate planning and probate, Medicaid planning and elder law. She is a member of
the Louisville, Florida, Kentucky and American Bar Associations and is fluent in
Spanish. Ms. Fernandez is the past President of the Women Lawyers Association of
Jefferson County, Kentucky and current Board Member of the Louisville Bar
Association. A Graduate of the Kentucky Women's Leadership Network, she is
active in various civic organizations and is on the board of several non-profit
corporations.
32
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
certain officers and persons holding 10% or more of our common stock to file
reports regarding their ownership and regarding their acquisitions and
dispositions of the Registrant's common stock with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish our
company with copies of all Section 16(a) forms they file. Based solely upon a
review of Forms 3 and 4 and amendments thereto furnished to us under Rule
16a-3(d) during fiscal 2003, and certain written representations from executive
officers and directors, we are unaware that any required reports that have not
been timely filed.
Code of Ethics
We have adopted a code of ethics which has been filed as an exhibit to this
report.
Committees of the Board of Directors
We presently have not established an audit committee, compensation committee,
nominating committee, an executive committee of our board of directors, stock
plan committee or any other committees. Our Board of Directors, as defined in
Sarbanes-Oxley Act of 2002, is the defacto composition of any and all
committees.
Terms of Office
Our directors are appointed for a one year term to hold office until the next
annual general meeting of the holders of our Common Stock or until removed from
office in accordance with our by-laws. Our officers are appointed by our Board
of Directors and hold office until removed by our Board of Directors.
Conflicts of Interest
We know of no identified or disclosed conflicts of interest among our officers
or directors and the affairs of the Company.
Indemnification for Securities Act Liabilities
The Company's By-Laws provide for the indemnification of its, directors,
officers, employees, and agents, under certain circumstances, against attorney's
fees and other expenses incurred by them in any litigation to which they become
33
a party arising from their association with or activities on behalf of the
Company. The Company will also bear the expenses of such litigation for any of
its directors, officers, employees, or agents, upon such persons promise to
repay the Company therefor if it is ultimately determined that any such person
shall not have been entitled to indemnification. This indemnification policy
could result in substantial expenditures by the Company, which it may be unable
to recoup.
Item 10 - Executive Compensation
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued in excess of $100,000 by the Company to each of the
Company's executive officers for services rendered to the Company during the
Company's fiscal years ended December 31, 2005, 2004 and 2003 and all plan and
non-plan compensation awarded to, earned by or paid to certain designated
executive officers.
Long-Term
Compensation
Annual Compensation Awards Payouts
-------------------------- ------------------- -------
Other Restricted Securities All
Salary/ Annual Stock Underlying LTIP Other
Name/Title Year Bonus Compensation Awards Options/SARs Payouts Compensation
---------- ---- -- ------ ------------ ------ ------------ ------- ------------
J. A. Fernandez, Sr. 2005 $104,000 $-0- $-0- $-0- $-0- $-0-
Chairman and Vice President 2004 $104,000 $-0- $-0- $-0- $-0- $-0-
of Sales 2003 $104,000 $-0- $-0- $-0- $-0- $-0-
Andres F. Fernandez 2005 $132,600 $-0- $-0- $-0- $-0- $-0-
President and Chief 2004 $132,600 $-0- $-0- $-0- $-0- $-0-
Executive Officer 2003 $132,600 $-0- $-0- $-0- $-0- $-0-
Compensation of Directors
We have no existing arrangements for compensating our directors for their
attendance at meetings of the Board of Directors. Depending upon market forces
and regulatory mandates, we may find it necessary to implement a formal
compensation plan in future periods to obtain and retain qualified members of
our Board of Directors.
34
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the date of this Registration Statement,
the number of shares of Common Stock owned of record and beneficially by
executive officers, directors and persons who hold 5% or more of the outstanding
Common Stock of the Company. Also included are the shares held by all executive
officers and directors as a group.
% of Class
Name and address Number of Shares Beneficially Owned
---------------- ---------------- ------------------
Andres F. Fernandez 5.7% 277,932
J. A. Fernandez, Sr. 12.4% 605,439
Amelia C. Fernandez 4.4% 214,095
Maria A. Fernandez * 13,000
Emilio D. Jara * 2,713
Total securities held by
officers and directors
as a group (5 people) 23.5% 1,113,179
-----------------------------
* Less than 1%
The contact address for each of our officers and directors is 3545 NW 71st
Street, Miami, FL 33147.
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of January 5, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. J. A. Fernandez,
Sr. is the father of Andres and Maria Fernandez. The table above does not
include the 19,225 shares Maria Fernandez holds as a Trustee for an Irrevocable
Trust in which neither she nor any of the other Officers or Directors is the
beneficial owner.
35
Item 12 - Certain Relationships and Related Transactions
We lease our corporate office and manufacturing facility from our controlling
stockholder under a long-term operating lease agreement. The lease requires a
monthly payment of approximately $5,735, including applicable State sales taxes.
We are 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.
Item 13 - Exhibits
---------------------------
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.
Item 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal
years to it's principal accountant, S. W. Hatfield, CPA of Dallas, Texas.
Year ended Year ended
December 31, December 31,
2005 2004
----------------------------------
1. Audit fees $35,663 $35,663
2. Audit-related fees - -
3. Tax fees 4,725 4,725
4. All other fees - -
---------- ----------
Totals $40,388 $40,388
====== ======
We have considered whether the provision of such non-audit services is
compatible with S. W. Hatfield, CPA maintaining its independence and determined
that these services do not compromise their independence.
Financial Information System Design and Implementation: S. W. Hatfield, CPA did
not charge the Company any fees for financial information system design and
implementation fees.
36
The Company has no formal audit committee. However, the entire Board of
Directors (the "Board") is the Company's defacto audit committee. In discharging
its oversight responsibility as to the audit process, the Board obtained from
the independent auditors a formal written statement describing all relationships
between the auditors and the Company that might bear on the auditors'
independence as required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." The Board discussed with the
auditors any relationships that may impact their objectivity and independence,
including fees for non-audit services, and satisfied itself as to the auditors'
independence. The Board also discussed with management, the internal auditors
and the independent auditors the quality and adequacy of the Company's internal
controls.
The Company's principal accountant, S. W. Hatfield, CPA, did not engage any
other persons or firms other than the principal accountant's full-time,
permanent employees.
[Balance of this page intentionally left blank]
37
SIGNATURES
In accord with Section 13 or 15(d) of the Securities Act of 1933, as amended,
the Company caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
American Ammunition, Inc.
Dated: April 17, 2006 By: /s/ Andres F. Fernandez
-------------- -----------------------------------
Andres F. Fernandez
Chief Executive Officer,
Chief Financial Officer and Director
In accordance with the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date as indicated.
Dated: April 17, 2006 By: /s/ Andres F. Fernandez
-------------- -----------------------------------
Andres F. Fernandez
President, Chief Executive Officer,
Chief Financial Officer and Director
Dated: April 17, 2006 By: /s/ J. A. Fernandez, Sr.
-------------- ------------------------------------
J. A. Fernandez, Sr.
Chairman, Director of Sales, and Director
Dated: April 17, 2006 By: /s/ Emilio D. Jara
-------------- ------------------------------
Emilio D. Jara.
Vice President - Operations,
Corporate Secretary and Director
Dated: April 17, 2006 By: /s/ Maria A. Fernandez
-------------- ----------------------------------
Maria A. Fernandez,
Director
38
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONTENTS
Page
Report of Registered Independent Certified Public Accounting Firm F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of December 31, 2005 and 2004 F-3
Consolidated Statement of Operations and Comprehensive Loss
for the years ended December 31, 2005 and 2004 F-5
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 2005 and 2004 F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-9
F-2
Letterhead of S. W. Hatfield, CPA
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
American Ammunition, Inc.
We have audited the accompanying consolidated balance sheets of American
Ammunition, Inc. (a Nevada corporation) and Subsidiaries (Florida corporations)
as of December 31, 2005 and 2004 and the related consolidated statements of
operations and comprehensive loss, changes in stockholders' equity and cash
flows for each of the two years ended December 31, 2005 and 2004, respectively.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Ammunition, Inc. and Subsidiaries as of December 31, 2005 and 2004 and
the results of their consolidated operations and consolidated cash flows for
each of the two years ended December 31, 2005 and 2004, respectively, in
conformity with accounting principles generally accepted in the United States of
America.
/s/S. W. HATFIELD, CPA
S. W. HATFIELD, CPA
Dallas, Texas
April 6, 2006
F-3
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
December 31, December 31,
2005 2004
-------------- -------------
ASSETS
Current Assets
Cash on hand and in bank $ 431,050 $ 805,465
Accounts receivable - trade,
net of allowance for doubtful accounts
of $12,463 and $-0-, respectively 571,427 639,444
Inventory 560,090 912,424
Prepaid expenses 56,789 58,847
-------------- -------------
Total Current Assets 1,619,356 2,416,180
-------------- -------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 8,095,110 7,976,248
Office furniture and fixtures 69,889 69,889
Leasehold improvements 190,277 184,939
-------------- -------------
8,355,276 8,231,076
Accumulated depreciation (5,577,447) (4,801,695)
Impairment of recoverability of carrying value (2,777,829) -
-------------- -------------
Net Property and Equipment - 3,429,381
-------------- -------------
Other Assets
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately
$64,328 and $9,190, respectively 211,362 266,500
Loan costs and fees, net of accumulated amortization
of approximately $11,309 and $-0-, respectively 53,941 -
Deposits and other 83,660 83,660
-------------- -------------
Total Other Assets 348,963 350,160
-------------- -------------
TOTAL ASSETS $ 1,968,319 $ 6,195,721
============== =============
- Continued -
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2005 and 2004
December 31, December 31,
2005 2004
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to shareholders $ 975,000 $ -
Working capital advance 150,000 -
Customer deposits 232,690 440,906
Accounts payable - trade 846,617 936,885
Accrued salaries and wages 245,929 135,970
Accrued interest payable 26,388 15,000
Accrued dividends payable 27,729 15,989
-------------- -------------
Total Liabilities 2,504,353 1,544,660
-------------- -------------
Commitments and Contingencies
Mandatory Convertible Debenture 226,365 266,365
-------------- -------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A
91,700 shares allocated to Series B
1,905,882 shares allocated to Series C 1,990 2,010
Common stock - $0.001 par value.
300,000,000 shares authorized.
4,172,983 and 3,743,121shares issued and outstanding 4,173 3,743
Additional paid-in capital 25,394,235 24,543,818
Accumulated deficit (25,987,797) (19,989,875)
-------------- -------------
(587,399) 4,559,696
Stock subscription receivable (175,000) (175,000)
-------------- -------------
Total Stockholders' Equity (762,399) 4,384,696
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,968,319 $ 6,195,721
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 2005 and 2004
Year ended Year ended
December 31, December 31,
2005 2004
-------------- -------------
Revenues $ 3,243,633 $ 3,247,368
-------------- -------------
Cost of Sales
Materials 2,001,076 2,383,198
Direct Labor 1,193,259 836,386
Other direct costs and expenses 627,813 671,787
Depreciation 770,062 729,295
-------------- -------------
Total Cost of Sales 4,592,210 4,620,666
-------------- -------------
Gross Profit (1,348,577) (1,373,298)
-------------- -------------
Operating Expenses
Research and development expenses 2,251 11,457
Marketing and promotion expenses 184,566 440,248
Salaries, wages and related expenses 583,000 365,633
Other operating expenses 681,969 718,610
Bad debt expense 12,463 -
Interest expense 42,467 16,005
Depreciation expense 5,691 6,009
Amortization of intangibles 55,138 9,190
Compensation expense related to common stock
issuances at less than "fair value" 257,213 381,902
-------------- -------------
Total Operating Expenses 1,824,758 1,949,054
-------------- -------------
Loss from Operations (3,173,335) (3,256,352)
Other Income (Expense)
Other income (expense) 9,495 4,279
Impairment charge against carrying value of property and equipment (2,777,829) -
-------------- -------------
Loss before Income Taxes (5,941,669) (3,318,073)
Provision for Income Taxes - -
-------------- -------------
Net Loss (5,941,669) (3,318,073)
Other Comprehensive Income - -
-------------- -------------
Comprehensive Loss (5,941,669) (3,318,073)
Preferred Stock Dividends (56,253) (42,758)
-------------- -------------
Net Loss available to Common Shareholders $ (5,997,922) $ (3,360,831)
============== =============
Loss per weighted-average share of common stock outstanding,
computed on net loss - basic and fully diluted $ (1.53) $ (0.94)
============== =============
Weighted-average number of common shares outstanding 3,907,499 3,590,725
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2005 and 2004
Mandatory Convertible
Preferred Stock Common Stock Additional
--------------------- ------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
---------------------------------------------------------------------------------------
Balances at January 1, 2004 62,700 $ 104 3,345,217 $3,345 $21,652,340 $(16,629,044) $5,026,745
Issuance of preferred stock for cash 1,905,882 1,906 - - 322,094 - 324,000
Issuance of common stock for
Cash - - 75,000 75 1,499,925 - 1,500,000
Less subscription receivable - - - - - - (150,000)
Conversion of debenture - - 245,000 245 505,755 - 506,000
Less subscription receivable - - - - - - (25,000)
Payment of costs to acquire capital - - 15,000 15 59,985 - 60,000
Less cost of capital - - - - (36,000) - (36,000)
Acquisition of assets - - 55,556 56 499,944 - 500,000
Payment of preferred stock dividends - - 7,348 7 39,775 - 39,782
Dividends declared on Preferred Stock - - - - - (42,758) (42,758)
Net loss for the year - - - - - (3,318,073) (3,318,073)
---------------------------------------------------------------------------------------
Balances at December 31, 2004 2,009,582 2,010 3,743,121 3,743 24,543,818 (19,989,875) 4,384,696
Conversion of Preferred Stock into
Common Stock (19,420) (19) 66,810 67 (47) - -
Issuance of common stock for
Cash - - 293,603 294 476,312 - 436,607
Compensation expense for value of
common stock sold at less than
"fair value" - - - 257,213 - 257,213
Less cost of capital - - - (10,000) - (10,000)
Loan fees and costs - - 37,500 38 65,212 - 65,250
Employee bonus - - 8,334 8 17,325 - 17,333
Payment of preferred stock dividends - - 23,615 24 44,400 - 44,424
Dividends declared on Preferred Stock - - - - - (56,253) (56,253)
Net loss for the year - - - - - (5,941,669) (5,941,669)
---------------------------------------------------------------------------------------
Balances at December 31, 2004 1,990,162 $1,990 4,172,983 $4,173 $25,394,233 $(25,987,797) $ (762,399)
=======================================================================================
Stock subscription receivable at December 31, 2005 and 2004 $(175,000)
========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2005 and 2004
Year ended Year ended
December 31, December 31,
2005 2004
-------------- -------------
Cash flows from operating activities
Net loss for the year $(5,941,669) $(3,318,073)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 842,200 744,494
Bad debt expense 12,463 85,490
Acquisition of inventory with common stock - 89,510
Payment of expenses with common stock 17,333 -
Compensation expense related to common stock
issuances at less than "fair value" 257,213 381,902
(Increase) Decrease in
, Accounts receivable 55,554 (204,099)
Inventory 352,334 200,332
Prepaid expenses, deposits and other 2,057 (24,258)
Increase (Decrease) in
Accounts payable and other accrued liabilities (90,269) 808,023
Accrued payroll payable 109,959 135,970
Accrued interest payable 11,388 15,000
Customer deposits (208,216) 436,806
-------------- -------------
Net cash provided by (used in) operating activities (1,801,824) (648,903)
-------------- -------------
Cash flows from investing activities
Cash received on sale of equipment - -
Purchase of property and equipment (124,198) (717,462)
-------------- -------------
Net cash used in investing activities (124,198) (717,462)
-------------- -------------
Cash flows from financing activities
Proceeds from loans from stockholders 975,000 -
Amount funded on working capital advance 150,000 -
Principal paid on long-term capital leases - (7,841)
Cash received on sale of Preferred Stock - 324,000
Cash received on issuance of Mandatory Convertible Debenture 436,607 1,350,000
Cash paid to acquire capital (10,000) -
-------------- -------------
Net cash provided by financing activities 1,551,607 1,666,159
-------------- -------------
INCREASE (DECREASE) IN CASH (374,415) 299,794
Cash at beginning of year 805,465 505,671
-------------- -------------
Cash at end of year $ 431,050 $ 805,465
============== =============
- Continued -
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 2004 and 2003
Year ended Year ended
December 31, December 31,
2005 2004
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 19,770 $ 1,005
============== =============
Income taxes paid for the period $ - $ -
============== =============
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt into common stock $ 40,000 $ 125,000
============== =============
Payment of accrued dividends on preferred
stock with common stock $ 44,424 $ 37,878
============== =============
Acquisition of equipment and intangibles
with common stock $ - $ 410,490
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
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.
In 2005, by written consent in lieu of meeting, a majority of the Company's
stockholders approved a recommendation by the Company's Board of Directors to
effect a one share for twenty shares reverse stock split of our common stock,
par value $.001 per share, with fractional shares rounded up to the nearest
whole share. The reverse split became effective on January 9, 2006. As a result
of the reverse split, the total number of issued and outstanding shares of the
Company's common stock decreased from 92,576,839 to 4,629,381shares, after
giving effect to rounding for fractional shares. The effect of this action is
reflected in the Company's financial statements as of the first day of the first
period presented.
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
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".
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company follows the policy of evaluating all property and equipment as of
the end of each reporting quarter. At December 31, 2005, pursuant to the
requirements of this accounting standard, management recorded an impairment
for the future recoverability of these assets of approximately $2,777,829.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At December 31, 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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Summary of Significant Accounting Policies - Continued
5. Income Taxes - continued
As of December 31, 2005 and 2004, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. In the event
that these carryforwards were not fully utilized, they will began to expire
in 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 December 31, 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.
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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - Inventory
As of December 31, 2005 and 2004, inventory consisted of the following
components:
December 31, December 31,
2005 2004
--------------- -------------------
Raw materials $522,524 $522,585
Work in process 30,103 306,360
Finished goods 7,463 83,479
--------- ---------
Totals $560,090 $912,424
======= =======
Note F - Property and Equipment
Property and equipment consist of the following components:
December 31, December 31, Estimated
2005 2004 useful life
------------ ------------------------
Manufacturing equipment $8,095,110 $7,745,112 3-10 years
Office furniture and fixtures 69,889 69,889 3- 7 years
Leasehold improvements 190,277 184,939 8-20 years
---------- ----------
8,355,276 7,999,940
Accumulated depreciation (5,577,447) (4,762,074)
Impairment of recoverability
of carrying value (2,777,829) -
--------- ----------
Net property and equipment $3,237,866 $3,237,866
========= =========
Total depreciation expense charged to operations for the years ended December
31, 2005 and 2004 was approximately $775,753 and$717,349, respectively.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
follows the policy of evaluating all property and equipment as of the end of
each reporting quarter. At December 31, 2005, pursuant to the requirements of
this accounting standard, management recorded an impairment for the future
recoverability of these assets of approximately $2,777,829.
Note G - 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 December 31, 2005, the outstanding balance on the convertible debenture is
approximately $226,365 and we have approximately 2,263,650 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 (125,000) (1,250,000)
2005 redemptions (40,000) (400,000)
--------- ----------
Balances outstanding
at December 31, 2005 $246,365 2,233,650
======= =========
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note G - Convertible Debenture - continued
The debentures bear interest at 8%, mature on June 31 [sic], 2007, and are
convertible into the Company's common stock, at the selling stockholder's
option. The convertible debentures are convertible into the number of the
Company's 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 $0.30 per share, the
Company 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 December 31, 2005, the warrant is exercisable
into 2,263,650 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.
In May 2005, we entered into an additional addendum to the convertible debenture
and warrant whereby the Company agreed to the following:
* The Company shall deposit 4,000,000 unregistered shares in the name of
LaJolla with the Company's Escrow Agent and, upon confirmation of receipt,
LaJolla will wire the Company $150,000 as an advance on the $400,000 amount
that LaJolla was obligated to fund pursuant to the December 2004 Addendum.
In the event that the Company's Registration Statement was not declared
effective within nine (9) months of the date of this Addendum, the
4,000,000 shares in escrow will be released to LaJolla and sold by LaJolla
pursuant to Rule 144. If LaJolla sells these shares for net sales proceeds
of more than $150,000 (without interest accruing on this amount), the
excess over $150,000 will be refunded to the Company.
* The maturity date of the convertible debenture and warrant was extended to
June 31, [sic], 2007. * All other terms and conditions remain in full force
and effect.
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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note G - 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 $175,000 from the
Debenture Holder. As of December 31, 2005, this amount remains unpaid.
On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate $40,000, through 4 separate transactions, in
outstanding Debenture principal into registered common stock. This election
caused the Company to issue 5,872,048 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 400,000
shares of the Company's common stock for gross proceeds of $400,000.
Note H - Preferred Stock Transactions
Preferred stock consists of the following as of December 31, 2005 and 2004,
respectively:
December 31, 2005 December 31, 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 73,360 366,800 91,700 458,500
Series C Convertible Preferred Stock 1,905,882 324,000 1,905,882 324,000
--------- ------- --------- --------
1,991,242 $750,800 2,009,582 $842,500
========= ======= ========= ========
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.
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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Preferred Stock Transactions - Continued
Series A Convertible Preferred Stock - continued
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.
In September and December 2004, respectively, the Holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 1,336,200 shares of restricted,
unregistered common stock.
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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Common Stock Transactions
In 2005, by written consent in lieu of meeting, a majority of the Company's
stockholders approved a recommendation by the Company's Board of Directors to
effect a one share for twenty shares reverse stock split of our common stock,
par value $.001 per share, with fractional shares rounded up to the nearest
whole share. The reverse split became effective on January 9, 2006. As a result
of the reverse split, the total number of issued and outstanding shares of the
Company's common stock decreased from 92,576,839 to 4,629,381shares, after
giving effect to rounding for fractional shares. The effect of this action is
reflected in the Company's financial statements as of the first day of the first
period presented.
In conjunction with the above discussed reverse stock split, all share
references in the following paragraphs reflect the January 9, 2006 reverse split
action.
Calendar 2004 transactions
During the period from February 13, 2004 through June 4, 2004, the Company
issued an aggregate 207,500 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 50,000 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 1,902 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 1,263 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 15,000 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 1,487 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 55,556 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 2,695 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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note I - Common Stock Transactions - Continued
Calendar 2005 Transactions
On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate $40,000, through 4 separate transactions, in
outstanding Debenture principal into registered common stock. This election
caused the Company to issue 293,602 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 400,000
shares of the Company's common stock for gross proceeds of $400,000.
In September and December 2004, respectively, the Holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 66,810 shares of restricted,
unregistered common stock.
Jn July 2005, the Company issued approximately 8,333 shares of unregistered,
restricted common stock to Paul Goebel, the Company's Director of Domestic
Sales, as an employee bonus. These shares were valued at approximately $17,166,
which approximated the market value of the shares 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 February, August, September and December 2005, the Company issued an
aggregate 23,615 shares of restricted, unregistered common stock in payment of
approximately $44,124 in accrued dividends payable on the Company's outstanding
Series B Preferred Stock for the quarters ended December 31, 2004, March 31,
2005, June 30, 2005, September 30, 2005 and December 31, 2005, respectively. 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, November and December 2005, respectfully, the Company issued an
aggregate 37,500 shares of restricted, unregistered common stock to an existing
shareholder as payment of various fees and costs associated with the funding of
approximately $875,000 short-term working capital loans to the Company. 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 J - 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.
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.
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Rental Commitments - Continued
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------ ----------
2006 $117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $327,517
=======
For the respective years ended December 31, 2005 and 2004, the Company paid an
aggregate of $158,947 and $131,804 in rent under these agreements.
Note M - Income Taxes
The components of income tax (benefit) expense for the years ended December 31,
2005 and 2004, respectively, are as follows:
Year ended Year ended
December 31,December 31,
2005 2004
-------------- ----------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
====== ======
As of December 31, 2005, the Company has a net operating loss carryforward of
approximately $12,000,000 to offset future taxable income. Subject to current
regulations, components of this carryforward will begin to expire in 2005. The
amount and availability of the net operating loss carryforwards may be subject
to limitations set forth by the Internal Revenue Code. Factors such as the
number of shares ultimately issued within a three year look-back period; whether
there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
The Company's income tax expense (benefit) for the years ended December 31, 2005
and 2004, respectively, differed from the statutory federal rate of 34 percent
as follows:
Year ended Year ended
December 31, December 31,
2005 2004
-------------- ----------------
Statutory rate applied to loss before income taxes $(2,020,000) $(1,128,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Non-deductible items
Impairment of recoverability of carrying
value of fixed assets 944,000 -
Compensation expense related to common
stock issuances at less than "fair value" 87,000 130,000
Impairment charge for
Other, including reserve for deferred tax asset 989,000 998,000
----------- ----------
Income tax expense $ - $ -
========== ==========
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Income Taxes - Continued
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, 2005 and 2004, respectively:
Year ended Year ended
December 31, December 31,
2005 2004
-------------- ----------------
Deferred tax assets - long-term
Net operating loss carryforwards $4,080,000 $2,669,000
Deferred tax liabilities - long-term
Statutory depreciation differences (525,000) (690,000)
--------- ---------
3,555,000 1,979,000
Less valuation allowance (3,555,000) (1,979,000)
--------- ---------
Net Deferred Tax Asset $ - $ -
========= ==========
During the years ended December 31, 2005 and 2004, respectively, the valuation
allowance increased (decreased) by approximately $1,576,000 and $(671,000).
Note N - Revenue Concentrations
The Company sells to both commercial and governmental customers, in both
domestic and foreign markets. The following table shows the Company's gross
revenue composition:
Year ended Year ended
December 31, 2005 December 31, 2003
----------------- -----------------
Amount % of total Amount % of total
-------- ---------- --------- ----------
Domestic
Commercial
Customer A $ 222,272 6.85 $ 190,390 5.86
Others 958,813 29.56 1,636,715 50.40
-------- ---------- ---------- ----------
1,181,085 46.41 1,827,104 56.26
-------- ---------- ---------- ----------
Private Label 407,063 12.55 - -
-------- ---------- ---------- ----------
Governmental
Customer B 541,392 16.69 698,976 21.52
Customer C 399,860 12.33 - -
Others 44,963 1.39 8,905 0.28
-------- ---------- ---------- ----------
986,215 30.41 707,881 21.80
-------- ---------- ---------- ----------
Foreign
Governmental
Customer D 644,180 19.86 684,340 21.07
Others 25,090 0.77 28,043 6.23
-------- ---------- ---------- ----------
669,270 20.63 712,383 21.94
-------- ---------- ---------- ----------
Totals $3,243,633 100.00 $3,247,368 100.00
======== ========== ========== ==========
AMERICAN AMMUNITION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note O - Selected Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2005 and 2004, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended
March 31, June 30, September 30, December 31, December 31,
--------------- ---------------- ------------- ------------ ------------
Calendar 2003
Revenues - net $ 1,170,317 $ 684,693 $ 378,326 $ 1,010,297 $ 3,243,633
Gross profit $ (366,263) $ (676,300) $ (757,023) $ 451,009 $ (1,348,577)
Net earnings after
provision for
income taxes $ (786,044) $(1,155,474) $ (1,118,089) $ (2,882,062) $ (5,941,669)
Basic and fully diluted
earnings per share $ (0.21) $ (0.32) $ (0.29) $ (0.70) $ (1.52)
Weighted average
number of shares
issued and outstanding 3,742,585 3,557,402 3,812,069 4,126,366 3,907,499
Calendar 2004
Revenues - net $ 281,507 $ 568,785 $ 861,988 $ 1,535,088 $ 3,247,368
Gross profit $ (423,626) $ (676,300) $ 377,181 $ (650,553) $ (1,373,298)
Net earnings after
provision for
income taxes $(1,188,358) $(1,155,307) $ 9,552 $ (983,960) $ (3,318,073)
Basic and fully diluted
earnings per share $ (0.35) $ (0.32) $ 0.00 $ (0.26) $ (0.92)
Weighted average
number of shares
issued and outstanding 3,388,458 3,557,402 3,683,671 3,730,807 3,590,725