UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB/A
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2006
[_] 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
------------------------ --------------------------
(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
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(Address of principal executive offices)
(305) 835-7400
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): YES [_] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of September 17, 2007:, the
Transfer Agent's records indicate that there are 28,372,922 shares outstanding.
Of these shares, a total of 21,803,335 shares were subject to an escrow
agreement referenced in later filings.
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
American Ammunition, Inc.
Form 10-QSB/A for the Quarter ended June 30, 2006
Table of Contents
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements 3
ITEM 2 - Management's Discussion and Analysis or Plan of Operation 25
ITEM 3 - Controls and Procedures 30
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 30
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
ITEM 3 - Defaults Upon Senior Securities 33
ITEM 4 - Submission of Matters to a Vote of Security Holders 33
ITEM 5 - Other Information 33
ITEM 6 - Exhibits 33
SIGNATURES 33
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The June 30, 2006 and 2005 financial statements have been restated to account
for the derivative liability that was incurred in connection with the common
stock conversion features and the warrants issued with certain notes payable.
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2006
(Unaudited)
(Restated)
June 30, 2006
-------------
ASSETS
Current Assets
Cash on hand and in bank $ 250,413
Accounts receivable - trade,
net of allowance for doubtful accounts of $10,000 241,954
Inventory 426,676
Prepaid interest 226,169
Prepaid expenses 55,324
-------------
Total Current Assets 1,200,536
-------------
Property and Equipment - at cost -
-------------
Other Assets 294,424
-------------
TOTAL ASSETS $ 1,494,960
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Notes payable to stockholders $ 1,075,000
Convertible debenture 226,365
Working capital advance 200,000
Customer deposits 188,020
Accounts payable - trade 804,847
Accrued salaries and wages 337,648
Accrued interest payable 30,162
Accrued dividends payable 71,221
Derivative liability from note conversion features 3,229,770
-------------
Total Current Liabilities 6,163,033
-------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value 20,000,000 shares authorized.
2,072,902 shares and outstanding 2,072
Common stock - $0.001 par value. 300,000,000 shares authorized.
5,122,931 shares issued and outstanding 5,123
Additional paid-in capital 26,039,482
Accumulated other comprehensive loss (2,652,018)
Accumulated deficit (27,887,732)
-------------
(4,493,073)
Stock subscription receivable (175,000)
-------------
Total Stockholders' Equity (Deficit) (4,668,073)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,494,960
=============
The accompanying notes are an integral part
of these consolidated financial statements.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Six and Three months ended June 30, 2006 and 2005
(Unaudited)
(Restated) (Restated) (Restated) (Restated)
Six months Six months Three months Three months
ended ended ended ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Revenues $ 1,379,497 $ 1,855,010 $ 669,386 $ 684,693
------------- ------------- ------------- -------------
Cost of Sales
Materials, direct Labor
and other direct costs 2,012,170 2,502,842 665,089 1,153,511
Depreciation 31,024 382,311 - 195,062
------------- ------------- ------------- -------------
Total Cost of Sales 2,043,194 2,885,153 665,089 1,348,573
------------- ------------- ------------- -------------
Gross Profit (663,697) (1,030,143) 4,297 (676,300)
------------- ------------- ------------- -------------
Operating Expenses
Research and development expenses - 1,611 - 6,474
Selling and marketing expenses 74,075 111,752 18,258 130,875
Other operating expenses 852,390 832,023 477,482 339,425
Interest expense 302,789 14,694 152,460 5,070
Depreciation and amortization 27,569 30,203 13,784 1,893
------------- ------------- ------------- -------------
Total Operating Expenses 1,256,823 990,283 661,984 483,737
------------- ------------- ------------- -------------
Loss from Operations (1,920,520) (2,020,626) (657,687) (1,160,037)
Other Income (Expense)
Interest and other income 189,492 6,232 147,935 167
------------- ------------- ------------- -------------
Loss before Income Taxes (1,731,028) (2,014,394) (509,752) (1,159,870)
Provision for Income Taxes - - - -
------------- ------------- ------------- -------------
Net Loss (1,731,028) (2,014,394) (509,752) (1,159,870)
Other Comprehensive Income (Loss)
Change in derivative related
to note conversion (2,694,571) 783 54,379 783
------------- ------------- ------------- -------------
Comprehensive Loss $ (4,425,599) $ (2,013,611) $ (455,373) $ (1,159,087)
============= ============= ============= =============
Preferred Stock Dividends (43,492) (27,221) (31,440) (13,610)
------------- ------------- ------------- -------------
Net Loss available to
Common Shareholders $ (1,774,520) $ (2,041,615) $ (541,192) $ (1,172,697)
============= ============= ============= =============
Loss per weighted-average share of
common stock outstanding,
computed on net loss -
basic and fully diluted $ (0.39) $ (0.59) $ (0.11) $ (0.33)
============= ============= ============= =============
Weighted-average number of
common shares outstanding 4,537,640 3,472,930 4,797,286 3,557,402
============= ============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
4
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 2006 and 2005
(Unaudited)
(Restated) (Restated)
Six months Six months
ended ended
June 30, 2006 June 30, 2005
------------- -------------
Cash flows from operating activities
Net loss for the period $ (1,731,028) $ (2,014,394)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 311,731 417,077
Bad debt expense 14,153 -
Operating expenses paid with common stock 20,186 -
Consulting expense related to common stock sales at less than "fair value" 139,373 200,502
(Increase) Decrease in
Accounts receivable 315,320 446,589
Inventory 133,414 363,808
Prepaid expenses, deposits and other 1,465 2,464
Increase (Decrease) in
Accounts payable - trade (41,770) (250,630)
Other accrued expenses 91,719 37,522
Accrued interest payable 40,494 -
Customer deposits (44,670) -
------------- -------------
Net cash used in operating activities (749,613) (797,062)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment (31,024) (98,400)
------------- -------------
Net cash used in investing activities (31,024) (98,400)
------------- -------------
Cash flows from financing activities
Cash advanced on loans from stockholders 100,000 150,000
Cash received on working capital advance 50,000 -
Cash received from the sale of preferred stock 500,000 -
Cash received from sale of common stock - 436,606
Cash paid to acquire capital (50,000) (10,000)
------------- -------------
Net cash provided by financing activities 600,000 576,606
------------- -------------
Increase (Decrease) in Cash (180,637) (318,856)
Cash at beginning of year 431,050 805,465
------------- -------------
Cash at end of period $ 250,413 $ 486,609
============= =============
Supplemental disclosure of interest and income taxes paid
Interest paid for the period $ 9,157 $ 10,131
============= =============
Income taxes paid for the period $ - $ -
============= =============
Supplemental disclosure of non-cash investing and financing activities
Conversion of debt and/or accrued interest payable
into common stock $ 36,720 $ 25,000
============= =============
Common stock issued in payment for costs of raising capital $ - $ -
============= =============
Common stock issued in payment of accrued dividends
on Preferred Stock - Series A and Series B $ - $ 9,171
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
5
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
June 30, 2006 and 2005
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.
On January 9, 2006, 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 that date. 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
6
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note B - Preparation of Financial Statements - Continued
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2005. The information presented within these interim financial
statements may not include all disclosures required by generally accepted
accounting principles and the users of financial information provided for
interim periods should refer to the annual financial information and footnotes
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2006.
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. and its wholly-owned subsidiaries, F&F Equipment, Inc.
and Industrial Plating Enterprise Co. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
"Company".
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts receivable and Revenue Recognition
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United
States. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
7
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note C - Summary of Significant Accounting Policies - Continued
2. Accounts receivable and Revenue Recognition - continued
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.
In limited situations, 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
against 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 June 30, 2006 and 2005, the deferred tax asset and deferred tax
liability accounts, as recorded when material to the financial statements,
are entirely the result of temporary differences. Temporary differences
represent differences in the recognition of assets and liabilities for tax
and financial reporting purposes, primarily accumulated depreciation and
amortization, allowance for doubtful accounts and vacation accruals.
As of June 30, 2006 and 2005, respectively, 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, these carryforwards
began to expire in 2005.
8
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note C - Summary of Significant Accounting Policies - Continued
6. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common stockholders 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 June 30, 2006 and 2005, 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 - Correction of an Error
On August 22, 2007, our management concluded that the financial statements
included in our Forms 10-QSB for June and September 2005, the calendar year 2006
and for the period ending March 31, 2007, and the Forms 10-KSB for the periods
ending December 31, 2005 and December 31, 2006, all of which have been
previously filed with the Securities and Exchange Commission, need to be
restated, due to the failure to include the beneficial conversion feature
discount on unsecured convertible indebtedness.
Management discovered such changes needed to be made after consulting with
Pollard-Kelley Auditing Services, our independent registered public accounting
firm as of June 26, 2007, who have concurred with management as to the
reexamination of the above mentioned issues.
The Company has entered into certain notes payable to shareholders and other
affiliated parties with embedded conversion features and warrant issues. The
appropriate accounting is governed by EITF 98-5: "Accounting for convertible
securities with beneficial conversion features or contingency adjustable
conversion" and EITF No. 00-27: "Application of issue No 98-5 to certain
convertible instruments". Conversion features determined to be beneficial to the
holder are valued at fair value and recorded to additional paid in capital. The
fair value is determined to be ascribed to the detachable warrants issued with
9
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note D - Correction of an Error - Continued
the convertible debentures utilizing the Black-Scholes method. Any discount
derived from determining the fair value to the debenture conversion features and
warrants is amortized to financing cost over the life of the debenture. The
unamortized discount, if any, upon the conversion of the debentures is expensed
to financing cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be embedded
derivatives and are accountable in accordance with FASB 133; "Accounting for
Derivative Instruments and Hedging Activities". The fair value of the embedded
derivative is recorded to derivative liability. This liability is required to be
marked each reporting period. The resulting discount on the debt is amortized to
interest expense over the life of the related debt.
The errors discovered by management relate directly to the accounting for and
recording various conversion features and warrants as follows:
Six months Six months
ended ended
June 30, 2006 June 30, 2005
-------------- ---------------
Net Loss, as previously reported $ (1,504,860) $ (2,009,831)
Effect of the correction of an error
(Increase) Decrease in Net Loss by financial statement line item:
Operating expenses: Interest expense recognized
from beneficial conversion discount feature on
notes payable to shareholders and other affiliates (226,168) (4,563)
-------------- ---------------
Total effect of changes on Loss from Operations and Net Loss (226,168) (4,563)
-------------- ---------------
Net Loss, as restated $ (1,731,028) $ (2,014,394)
============== ===============
Net loss available to common stockholders,
as previously reported $ (1,548,352) $ (2,037,052)
Effect of the correction of an error
Total effect as shown above (226,168) (4,563)
-------------- ---------------
Net Loss available to common stockholders, as restated $ (1,774,520) $ (2,041,615)
============== ===============
Earnings per share, as previously reported $ (0.34)$ (0.59)
Total effect of changes (0.05) (0.00)
-------------- ---------------
Earnings per share, as restated $ (0.39) $ (0.59)
============== ===============
10
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note D - Correction of an Error - Continued
In light of the restatements to the financial statements disclosed above,
caused, in part, by a failure in the Company's internal control over financing
reporting due to the limitations in the Company's accounting resources to
identify and react in a timely manner to non-routine, complex and/or
transactions originated by other parties on the Company's behalf, as well as
gaining an adequate understanding of the disclosure requirements relating to
these types of transactions, we feel that the existing controls and procedures
were and remain effective. Because of said controls, which resulted in the
review, discovery and disclosure by amendment of filings to adequately disclose
required information, management also concludes that by requiring supplemental
reviews of financing transactions that its existing controls and procedures will
be more effective.
Note E - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note F - Inventory
As of June 30, 2006, inventory, as valued using the lower-of-cost or market,
consisted of the following components:
June 30,
2006
----------
Raw materials $ 398,511
Work in process 19,313
Finished goods 8,852
----------
Totals $ 426,676
==========
11
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note G - Property and Equipment
Property and equipment consist of the following components:
June 30, Estimated
2006 useful life
------------- ---------------
Manufacturing equipment $ 7,939,335 3-10 years
Office furniture and fixtures 69,889 3- 7 years
Leasehold improvements 190,277 8-20 years
-------------
8,199,501
Accumulated depreciation (5,575,782)
Impairment of recoverability
of carrying value (2,623,719)
-------------
Net property and equipment $ -
=============
Total depreciation expense charged to operations for the six month periods ended
June 30, 2006 and 2005, respectively, was approximately $31,024 and $409,880.
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 H - Loans from Shareholders
June 30, June 30,
2006 2005
--------- --------
Notes payable to three separate shareholders. Interest at
8.0%, payable monthly. Principal due at maturity on December
31, 2006. Shareholder/lender has the option to convert the
principal amount into common stock of the Company at the
lesser of 66-2/3% of the average closing bid and ask price
on the date of conversion or $0.07 per share. Each note is
unsecured. $1,075,000 $ -
========== ========
Note I - 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.
12
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note I - Convertible Debenture - Continued
As of June 30, 2006, 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 June 30, 2006 $ 226,365 2,263,650
========== ==========
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 June 30, 2006, 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.
13
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note I - Convertible Debenture - Continued
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.
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.
14
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note I - Convertible Debenture - Continued
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 June 30, 2006, 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 J - Derivative Liability arising from Warrants
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be embedded
derivatives and are accountable in accordance with FASB 133; "Accounting for
Derivative Instruments and Hedging Activities". The fair value of the embedded
derivative is recorded to derivative liability. This liability is required to be
marked each reporting period. The resulting discount on the debt is amortized to
interest expense over the life of the related debt.
Note K - Preferred Stock Transactions
Preferred stock consists of the following as of June 30, 2006 and 2005,
respectively:
June 30, 2006
-------------------
# shares value
--------- ----------
Series A Cumulative Convertible Preferred Stock 12,000 $ 60,000
Series B Cumulative Convertible Preferred Stock 55,020 275,100
Series C Convertible Preferred Stock 1,905,882 324,000
Series E 8% Convertible Preferred Stock 100,000 500,000
--------- ----------
2,072,902 $1,159,100
========= ==========
15
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note K - Preferred Stock Transactions - Continued
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.
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.
16
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note K - Preferred Stock Transactions - Continued
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 66,810 post-reverse split shares
of restricted, unregistered common stock.
On March 31 and June 30, 2006, respectively, the holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares (9,170 shares per conversion) of Series B Preferred Stock for
415,706 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 stockholder 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.
Series E 8% Convertible Preferred Stock
On March 1, 2006, the Company issued a Private Placement Memorandum offering up
to 200,000 shares of 8% Convertible Preferred Stock at an offering price of
$5.00 per share on a "best efforts" basis through an unrelated placement agent.
The Series E 8% Convertible Preferred Stock provides for cumulative dividends at
the rate of 8% per year, payable quarterly, 50% in cash and 50% in shares or
100% in cash at the Company's election. In the event the Company elects to pay
such dividends in shares of the Company's Common Stock, the number of shares to
be issued shall be based on the average of the closing prices of the Company's
Common Stock, as reported on the NASDAQ Over the Counter Bulletin Board (or such
other market on which the Company's Common Stock is then traded) for the 10
consecutive trading days preceding the record date for each such dividend, with
such record date being the 14th day preceding the end of each calendar quarter.
17
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note K - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
Each share of Series E Convertible Preferred Stock shall be convertible into
shares of the Company's Common Stock at any time after March 1, 2007. The number
of shares to be issued on a conversion shall be based on 80% of the average
closing price of the Common Stock of the Company; as reported on the NASDAQ OTC
Bulletin Board (or such other market on which such stock is traded) for ten (!0)
consecutive trading days preceding the date the Company received notice of such
conversion. Subject to certain restrictions, the Series E 8% Convertible
Preferred Stock shall automatically convert into shares of the Company's Common
Stock upon any of the following events: (I) the sale by the Company of all or
substantially all of its assets; (ii) the consummation of a merger or a
consolidation in which the Company is not the survivor; or (iii) the sale or
exchange of all or substantially all of the outstanding shares of the Company's
common stock (including by way of merger, consolidation, or other similar
action).
In the event of the liquidation, dissolution or winding up of the Company, the
holders of Series E Convertible Preferred Stock shall have a liquidation
preference over holders of common stock and shares junior to the Series E 8%
Convertible Preferred Stock equal to $5.50 per share. Additionally, the Company
shall not impose or allow any additional liens on it's existing fixed assets in
excess of $1,000,000; provided that at such time as total gross proceeds from
the offering equal or exceed $2,000,000, the Company shall satisfy such existing
liens on its existing fixed assets and shall not impose or allow any additional
liens on its existing fixed assets unless subordinated to the interest of the
Series E 8% Convertible Preferred Stock, with such preference on the fixed
assets equal to the fixed asset value, as determined in accordance with the
United States Generally Accepted Accounting Principles ("GAAP"), of 150% of the
stated value of the aggregate of the outstanding shares of Series E Convertible
Preferred Stock except for fixed assets of the Company that were otherwise
purchased pursuant to a security interest.
The Series E 8% Convertible Preferred Stock shall be redeemable, at the option
of the Company, for cash in the amount of $5.50 per share of Series E
Convertible Preferred Stock or for shares of the Company's Common Stock in
accordance with the Conversion Rate, at any time after March 1, 2007, or in the
event the closing sale price of the Company's Common Stock, as reported on the
NASDAQ Over the Counter Bulletin Board (or such other market on which the
Company's Common Stock is then traded), is greater than or equal to $7.00 after
March 1, 2007 for any consecutive five trading days. In addition, the Series E
8% Convertible Preferred Stock shall be redeemable, at the option of the holder,
at any time for shares of the Company's Common Stock in accordance with the
Conversion Rate. At any time after March 1, 2007, at the option of the holder,
the Series E 8% Convertible Preferred Stock shall be redeemable for cash in the
amount of $5.10 per share of Series E Convertible Preferred Stock or for shares
of the Company's Common Stock in accordance with the Conversion Rate. After such
18
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note K - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
date, if redemption is for cash, shares will be redeemed at the rate of 1/10 of
such aggregate shares per quarterly period for any 10 consecutive quarters
commencing after March 1, 2007. Any redemption by either the Company or the
holder shall be subject to 15 days written notice.
The Company warrants and agrees that if, at any time within the period
commencing on the date of the final closing of the Offering and expiring on the
5th anniversary of the date thereof, the Company should file a registration
statement with the SEC under the Securities Act (other than in connection with a
merger or other business combination transaction or pursuant to Form S-8), it
will give written notice at least 30 calendar days prior to the filing of each
such registration statement to the holders of the Series E 8% Convertible
Preferred Stock and the holders of the shares of the Common Stock issued upon
the conversion or redemption of the shares of Series E Convertible Preferred
Stock, or their permitted assigns (Holders) of its intention to do so. If the
Holders notify the Company within 30 calendar days after receipt of any such
notice of its or their desire to include any such shares of Common Stock issued
or issuable upon the conversion or redemption of the Series E 8% Convertible
Preferred Stock in such proposed registration statement, the Company shall use
its "best efforts" to have any such shares of Common Stock is issued or issuable
upon the conversion or redemption of the Series E 8% Convertible Preferred Stock
registered under such registration statement.
Notwithstanding the foregoing, the Company shall have the right at any time
after it shall have given written notice (irrespective of whether a written
request for inclusion of any such securities shall have been made) to elect not
to file any such proposed registration statement, or to withdraw the same after
the filing but prior to the effective date thereof. If the managing underwriter
of an offering to which the above "piggyback registration rights" apply, in good
faith and for valid business reasons, objects to such rights, such objection
shall preclude such inclusion. All expenses incurred by the Company in
registration of the shares of Common Stock issued or issuable upon the
conversion or redemption of The Series E 8% Convertible Preferred Stock,
including with out limitation all registration and filing fees, listing fees,
printing expenses, fees and disbursements of all independent accounts, or
counsel for the Company and the expense of any special audits incident to or
required by any such registration and the expenses of complying with the
securities or blue sky laws of any jurisdiction shall be paid by the Company.
The Company has agreed to pay the Placement Agent a cash commission equal to 10%
of the aggregate Purchase Price of the shares of Series E Convertible Preferred
Stock sold by the Placement Agent in the Offering (Placement Agent Fee). The
Company shall also pay the Placement Agent reasonable expenses associated with
the Offering, which expenses shall not exceed $50,000 (Expense Allowance). In
addition, the Company shall issue to the Placement Agent 500 warrants for each
$50,000 of Series E Convertible Preferred Stock sold by the Placement Agent in
the Offering (Placement Agent Warrants), each warrant entitling the holder to
purchase 1 share of the Company's Common Stock at an exercise price of $0.90 per
share exercisable at any time for a period of 3 years from date of issuance.
Upon completion of the Maximum Offering, the Company will receive net proceeds
of approximately $900,000.00. The Company intends to use the net proceeds for
potential acquisitions, working capital, general corporate purposes and
repayment of outstanding debt.
19
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note K - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
The Company and the Placement Agent shall have discretion to increase the
Maximum Offering to $2,000,000.00, without notice to investors..
As of June 30, 2006, the Company has sold 100,000 shares in a two separate
transactions under this Private Placement Memorandum and has received the gross
sales proceeds of $500,000 and has paid an aggregate of $50,000 to the Placement
Agent for the 10% fees due on these transactions.
Note L - Common Stock Transactions
On January 9, 2006, 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 (1 for 20) 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 that date.
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 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.
In 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.
20
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note L - Common Stock Transactions
Calendar 2005 Transactions - continued
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
stockholder 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.
Calendar 2006 Transactions
In February 2006, the Company issued approximately 41,666 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
$17,500, 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 2006, the Company issued approximately 226,065 shares of restricted,
unregistered common stock, valued at approximately $18,325, to an existing
stockholder as for payment of accrued interest associated with approximately
$875,000 short-term working capital loans to the Company and reimbursement of
direct public relation expenses. 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. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "compensation expense related to
the issuance of common stock at less than "fair value" in the amount of
approximately $70,080 on this transaction.
In May 2006, the Company issued approximately 266,511 shares of restricted,
unregistered common stock, valued at approximately $21,054, to an existing
stockholder as for payment of accrued interest associated with approximately
$975,000 short-term working capital loans to the Company and reimbursement of
direct public relation expenses. 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. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "compensation expense related to
the issuance of common stock at less than "fair value" in the amount of
approximately $69,293 on this transaction.
21
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note M - Rental Commitments
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long-term operating lease agreement. The lease
requires a monthly payment of approximately $5,735, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on December 1, 2009 and contains a clause that upon
expiration, the Company and the controlling stockholder 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.
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 three lease agreements.
[Balance of this page intentionally left blank.]
22
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note N - Income Taxes
The components of income tax (benefit) expense for the six month periods ended
June 30, 2006 and 2005, respectively, are as follows:
Six months Six months
ended ended
June 30, June 30,
2006 2005
-----------------------------
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 began 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 six month periods ended June
30, 2006 and 2005, respectively, differed from the statutory federal rate of 34
percent as follows:
Six months Six months
ended ended
June 30, June 30,
2006 2005
----------------------
Statutory rate applied to loss before income taxes $(512,000) $(683,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 512,000 683,000
--------- ---------
Income tax expense $ - $ -
========= =========
23
American Ammunition, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - Continued
June 30, 2006 and 2005
Note N - 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).
[Balance of this page intentionally left blank.]
24
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this Registration Statement including,
without limitation, statements containing the words "believes", "anticipates",
"expects" and words of similar import, constitute forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national
and local general economic and market conditions: demographic changes; the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions; raw material costs
and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Quarterly Report on Form
10-QSB/A and investors in our equity securities 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.
Restatement issues
The June 30, 2006 and 2005 financial statements have been restated to
account for the derivative liability that was incurred in connection with the
common stock conversion features and the warrants issued with certain notes
payable (see Notes I and J to the accompanying consolidated financial
statements).
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be
embedded derivatives and are accountable in accordance with FASB 133;
"Accounting for Derivative Instruments and Hedging Activities". The fair value
of the embedded derivative is recorded to derivative liability. This liability
is required to be marked each reporting period. The resulting discount on the
debt is amortized to interest expense over the life of the related debt.
General
American Ammunition, Inc. is a holding company with two operating
subsidiaries: F&F Equipment, Inc. and Industrial Plating Enterprise Co.
25
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
Six months ended June 30, 2006 compared with the six months ended June 30, 2005.
During the six months ended June 30, 2006, we experienced aggregate net
revenues of approximately $1,379,000 ($669,000 in the current quarter), as
compared to approximately $1,855,000 during the first six months of Calendar
2005. The decline in sales was attributable to our curtailing of production
during January 2006 to improve the operating efficiency of our manufacturing
equipment and better automate select machines so we can rely upon lower labor
requirements in future periods.
In 2004, the Company initiated a direct solicitation program for it's
"dealer direct" sales program. This endeavor has received a very positive
initial response from the qualified retail resellers of the Company's product.
We are realizing that the existence of previously announced contracts with
various U. S. Governmental agencies and orders from foreign governments are
becoming more erratic in their order placements. Accordingly, management is
realizing that a consistent demand from the U. S. retail segment will be our
best source of consistent sales. Further, we have identified certain production
issues which has inhibited the full realization of existing product demands and
management believes that the necessary steps are being taken to remedy any
production deficiencies.
We experienced costs of goods sold of approximately $2,043,000 for the six
months ended June 30, 2006 as compared to approximately $2,885,000 for the first
six months of Calendar 2005. Through June 30, 2006, and subsequent thereto, we
continue to experience negative trends with relation to our calculated standard
production costs for material and labor due to excess labor capacity due to
anticipated governmental orders which did not materialize as management was led
to believe from the various U. S. Governmental agencies contracting officers.
Management remains of the opinion that the production labor force is stable and
able to maintain a constant standard of quality in future periods. We experience
variable costs in the area of material consumption and direct labor. In the
second quarter of 2006, management took drastic steps to reduce excess labor
capacity through the elimination of the 2nd shift, which was never able to reach
full utilization. This action is not expected to have any adverse impact on our
ability to meet our existing and future product demands.
For the six month periods ended June 30, 2006 and 2005, we generated a
(negative) gross profit of approximately $(664,000), or (48.11%), and
approximately $(1,030,000), or (55.53%).
We experienced nominal research and development expenses of approximately
$-0- and $1,600, respectively, during the respective six month periods ended
June 30, 2006 and 2005.
During the six months of Calendar 2006 and 2005, we expended approximately
$74,000 and $112,000, respectively, in advertising and marketing expenses,
principally in developing and promoting our retail dealer direct program. We
26
anticipate to continue our marketing efforts in this area in future periods;
however, the volume and frequency of our expenditures may fluctuate as
management allocates available capital to these efforts.
Other general and administrative expenses increased nominally from
approximately $663,000 for the six months ended June 30, 2006 as compared to
approximately $631,000 for the six months ended June 30, 2005. Management is of
the opinion that these costs are relatively stable and should not experience
significant increases except for inflationary pressures caused principally by
increases in energy costs which are affecting all businesses in all sectors of
the U. S. economy. We also incurred non-cash charges to operations for the
difference between the selling price of our common stock on certain transactions
during both Calendar 2006 and 2005 and the fair value of the securities sold as
determined by the quoted closing price of our common stock on the date(s) of
each respective transaction. Through June 30, 2006 and 2005, respectively, we
charged approximately $139,000 and $201,000 to operations for this differential.
We recognized a net loss of approximately $(1,731,000) and $(2,014,000) for
the respective six month periods ended June 30, 2006 and 2005, respectively, or
$(0.39) and $(0.59) per share. We call to the reader's attention that the loss
per share calculation for the six months ended June 30, 2006 and 2005 includes
the effect of our 1 for 20 reverse stock split on January 9, 2006.
Liquidity And Capital Resources
As of June 30, 2006, December 31, 2005 and June 30, 2005, respectively, we
had working capital of approximately $(4,962,000), $(885,000) and $(265,000).
Our working capital position continues to fluctuate based on collections on our
trade accounts receivable and investments from the mandatory exercise of our
outstanding warrant related to our convertible debenture. We anticipate that we
have sufficient inventory levels to support our order demand and have access to
raw material suppliers that will enable us to receive raw materials for future
periods. We also note that we have approximately $1,075,000 in short-term notes
payable to existing stockholders which may or may not be renegotiated, repaid in
common stock of the Company or otherwise reclassified prior to their maturity on
December 31, 2006. This amount is a contributing factor to our negative working
capital position at June 30, 2006 and December 31, 2005.
We have used cash in operating activities of approximately $(750,000) and
$(797,000) during the six month periods ended June 30, 2006 and 2005,
respectively. Due to our history of operating losses, our resources for
additional working capital are becoming more scarce. Additionally, LaJolla Cove
Investors, the holder of our mandatorily convertible debenture and related
warrant, is in default on their agreement to provide us with additional working
capital. On March 1, 2006, the Company issued a Private Placement Memorandum
offering up to 200,000 shares of 8% Convertible Preferred Stock at an offering
price of $5.00 per share on a "best efforts" basis through an unrelated
placement agent. As of June 30, 2006, the Company has sold an aggregate of
100,000 shares for gross proceeds of $500,000 in two separate transactions
pursuant to this Private Placement Memorandum. Management continues to undertake
all prudent measures to assure that the Company can be self-supporting.
We anticipate that our liquidity position will continue to improve as
management is of the opinion that, with the current changes to our production
capacity, the Company will be in a position to better support all existing
orders and accept existing and future inquiries.
During the six months ended June 30, 2006 and 2005, respectively, we added
approximately $31,000 and $98,000 in new equipment. Any equipment to be added in
future periods is fully dependent upon the Company's cash position, the
27
availability of either new equity or debt capital and the ultimate realization
of communicated future product sales demand. However, we may not be able to
obtain additional funding or, that such funding, if available, will be obtained
on terms favorable to or affordable by us.
Convertible Debenture
The Company entered into a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. ("La Jolla") on October 4, 2002 for the sale of (I) $250,000 in
convertible debentures and (ii) warrants to buy 30,000,000 shares of our common
stock. On March 13, 2003 and May 6, 2003, La Jolla advanced an aggregate of
$350,000 to our company which such funding was allocated towards the principal
balance of our convertible debentures.
As of June 30, 2006, 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 June 30, 2006 $ 226,365 2,263,650
========== ==========
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 June 30, 2006, 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.
28
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.
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 June 30, 2006, this amount remains unpaid.
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.
LaJolla is in default on their contractual agreements to redeem the
outstanding warrant(s) and convert the outstanding debenture as of June 30,
2006.
ITEM 3 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (Exchange Act), for the quarter ended June 30, 2006. As of the
end of the period covered by this report, management, including the chief
executive officer and chief financial officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon and
as of the date of that evaluation, our CEO and CFO concluded that the disclosure
controls and procedures were effective
(b) Changes in Internal Controls
There were no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls
over financial reporting that occurred during the quarter ended June 30, 2006
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
The Company may become involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds
On March 31 and June 30, 2006, respectively, the holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares (9,170 shares per conversion) of Series B Preferred Stock for
415,706 shares of restricted, unregistered common stock.
In May 2006, the Company issued approximately 266,511 shares of restricted,
unregistered common stock, valued at approximately $21,054, to an existing
stockholder as for payment of accrued interest associated with approximately
$975,000 short-term working capital loans to the Company and reimbursement of
direct public relation expenses. The Company relied upon Section 4(2) of the
30
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "compensation expense related to
the issuance of common stock at less than "fair value" in the amount of
approximately $69,293 on this transaction
Series E 8% Convertible Preferred Stock
On March 1, 2006, the Company issued a Private Placement Memorandum
offering up to 200,000 shares of 8% Convertible Preferred Stock at an offering
price of $5.00 per share on a "best efforts" basis through an unrelated
placement agent.
The Series E 8% Convertible Preferred Stock provides for cumulative
dividends at the rate of 8% per year, payable quarterly, 50% in cash and 50% in
shares or 100% in cash at the Company's election. In the event the Company
elects to pay such dividends in shares of the Company's Common Stock, the number
of shares to be issued shall be based on the average of the closing prices of
the Company's Common Stock, as reported on the NASDAQ Over the Counter Bulletin
Board (or such other market on which the Company's Common Stock is then traded)
for the 10 consecutive trading days preceding the record date for each such
dividend, with such record date being the 14th day preceding the end of each
calendar quarter.
Each share of Series E Convertible Preferred Stock shall be convertible
into shares of the Company's Common Stock at any time after March 1, 2007. The
number of shares to be issued on a conversion shall be based on 80% of the
average closing price of the Common Stock of the Company; as reported on the
NASDAQ OTC Bulletin Board (or such other market on which such stock is traded)
for ten (!0) consecutive trading days preceding the date the Company received
notice of such conversion. Subject to certain restrictions, the Series E 8%
Convertible Preferred Stock shall automatically convert into shares of the
Company's Common Stock upon any of the following events: (I) the sale by the
Company of all or substantially all of its assets; (ii) the consummation of a
merger or a consolidation in which the Company is not the survivor; or (iii) the
sale or exchange of all or substantially all of the outstanding shares of the
Company's common stock (including by way of merger, consolidation, or other
similar action).
In the event of the liquidation, dissolution or winding up of the Company,
the holders of Series E Convertible Preferred Stock shall have a liquidation
preference over holders of common stock and shares junior to the Series E 8%
Convertible Preferred Stock equal to $5.50 per share. Additionally, the Company
shall not impose or allow any additional liens on it's existing fixed assets in
excess of $1,000,000; provided that at such time as total gross proceeds from
the offering equal or exceed $2,000,000, the Company shall satisfy such existing
liens on its existing fixed assets and shall not impose or allow any additional
liens on its existing fixed assets unless subordinated to the interest of the
Series E 8% Convertible Preferred Stock, with such preference on the fixed
assets equal to the fixed asset value, as determined in accordance with the
United States Generally Accepted Accounting Principles ("GAAP"), of 150% of the
stated value of the aggregate of the outstanding shares of Series E Convertible
Preferred Stock except for fixed assets of the Company that were otherwise
purchased pursuant to a security interest.
The Series E 8% Convertible Preferred Stock shall be redeemable, at the
option of the Company, for cash in the amount of $5.50 per share of Series E
Convertible Preferred Stock or for shares of the Company's Common Stock in
accordance with the Conversion Rate, at any time after March 1, 2007, or in the
event the closing sale price of the Company's Common Stock, as reported on the
31
NASDAQ Over the Counter Bulletin Board (or such other market on which the
Company's Common Stock is then traded), is greater than or equal to $7.00 after
March 1, 2007 for any consecutive five trading days. In addition, the Series E
8% Convertible Preferred Stock shall be redeemable, at the option of the holder,
at any time for shares of the Company's Common Stock in accordance with the
Conversion Rate. At any time after March 1, 2007, at the option of the holder,
the Series E 8% Convertible Preferred Stock shall be redeemable for cash in the
amount of $5.10 per share of Series E Convertible Preferred Stock or for shares
of the Company's Common Stock in accordance with the Conversion Rate. After such
date, if redemption is for cash, shares will be redeemed at the rate of 1/10 of
such aggregate shares per quarterly period for any 10 consecutive quarters
commencing after March 1, 2007. Any redemption by either the Company or the
holder shall be subject to 15 days written notice.
The Company warrants and agrees that if, at any time within the period
commencing on the date of the final closing of the Offering and expiring on the
5th anniversary of the date thereof, the Company should file a registration
statement with the SEC under the Securities Act (other than in connection with a
merger or other business combination transaction or pursuant to Form S-8), it
will give written notice at least 30 calendar days prior to the filing of each
such registration statement to the holders of the Series E 8% Convertible
Preferred Stock and the holders of the shares of the Common Stock issued upon
the conversion or redemption of the shares of Series E Convertible Preferred
Stock, or their permitted assigns (Holders) of its intention to do so. If the
Holders notify the Company within 30 calendar days after receipt of any such
notice of its or their desire to include any such shares of Common Stock issued
or issuable upon the conversion or redemption of the Series E 8% Convertible
Preferred Stock in such proposed registration statement, the Company shall use
its "best efforts" to have any such shares of Common Stock is issued or issuable
upon the conversion or redemption of the Series E 8% Convertible Preferred Stock
registered under such registration statement. Notwithstanding the foregoing, the
Company shall have the right at any time after it shall have given written
notice (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof. If the managing underwriter of an offering to which
the above "piggyback registration rights" apply, in good faith and for valid
business reasons, objects to such rights, such objection shall preclude such
inclusion. All expenses incurred by the Company in registration of the shares of
Common Stock issued or issuable upon the conversion or redemption of The Series
E 8% Convertible Preferred Stock, including with out limitation all registration
and filing fees, listing fees, printing expenses, fees and disbursements of all
independent accounts, or counsel for the Company and the expense of any special
audits incident to or required by any such registration and the expenses of
complying with the securities or blue sky laws of any jurisdiction shall be paid
by the Company.
The Company has agreed to pay the Placement Agent a cash commission equal
to 10% of the aggregate Purchase Price of the shares of Series E Convertible
Preferred Stock sold by the Placement Agent in the Offering (Placement Agent
Fee). The Company shall also pay the Placement Agent reasonable expenses
associated with the Offering, which expenses shall not exceed $50,000 (Expense
Allowance). In addition, the Company shall issue to the Placement Agent 500
warrants for each $50,000 of Series E Convertible Preferred Stock sold by the
Placement Agent in the Offering (Placement Agent Warrants), each warrant
entitling the holder to purchase 1 share of the Company's Common Stock at an
exercise price of $0.90 per share exercisable at any time for a period of 3
years from date of issuance.
Upon completion of the Maximum Offering, the Company will receive net
proceeds of approximately $900,000.00. The Company intends to use the net
proceeds for potential acquisitions, working capital, general corporate purposes
and repayment of outstanding debt.
32
The Company and the Placement Agent shall have discretion to increase the
Maximum Offering to $2,000,000.00, without notice to investors..
ITEM 3 - Defaults on Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
Exhibit Descriptions
-------- -----------------------
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) The following sets forth the Company's reports on Form 8-K that have
been filed during the quarter for which this report is filed:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Dated: October 19,2007 /s/ Andres F. Fernandez
------------------- -----------------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
33