U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange act of 1934 for the transition period from __________ to
______________.
Commission File No. 33-13674-LA
CIRTRAN CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 68-0121636
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4125 South 6000 West, West Valley City, Utah 84128
(Address of principal executive offices)
(801) 963-5112
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock,
Par Value $0.001
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $1,215,245
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of March 25, 2004, was $6,263,563.
As of March 25, 2004, the Registrant had outstanding 389,913,214 shares of
Common Stock, par value $0.001.
Documents incorporated by reference: None
The purpose of this amendment to our annual report on Form 10-KSB is to clarify
certain matters related to promissory notes and the functioning of our equity
line of credit, together with the reclassification of offering costs and
interest expense.
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Description of Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 15
Part II
5. Market for Common Equity and Related Stockholder Matters 15
6. Management's Discussion and Analysis or Plan of Operation 17
7. Financial Statements 23
8. Changes in and Disagreements with Accountants on 23
Accounting and Financial Disclosure
8A. Controls and Procedures 23
Part III
9. Directors, Executive Officers, Promoters and Control 23
Persons; Compliance with Section 16(a) of the Exchange Act
10. Executive Compensation 25
11. Security Ownership of Certain Beneficial Owners and Management 27
12. Certain Relationships and Related Transactions 29
13. Exhibits and Reports on Form 8-K 30
14. Principal Accountant Fees and Services 32
Signatures 34
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CirTran Corporation ("We" or the "Company") is a full-service contract
electronics manufacturer servicing original equipment manufactures ("OEMs") in
the following industries: communications, networking, peripherals, gaming, law
enforcement, consumer products, telecommunications, automotive, medical, and
semi-conductor. We conduct our operations through two main divisions: circuit
board manufacturing and assembly, and Ethernet card design and manufacture.
Industry Background
The contract electronics manufacturing industry specializes in providing the
program management, technical and administrative support and manufacturing
expertise required to take an electronic product from the early design and
prototype stages through volume production and distribution. The goal is to
provide a quality product, delivered on time and at the lowest cost, to the OEM.
This full range of services gives the OEM an opportunity to avoid large capital
investments in plant, inventory, equipment and staffing and to concentrate
instead on innovation, design and marketing. By using our contract electronics
manufacturing services, our customers have the ability to improve the return on
their investment with greater flexibility in responding to market demands and
exploiting new market opportunities.
We believe two important trends have developed in the contract electronics
manufacturing industry. First, we believe OEMs increasingly require contract
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis where the OEM supplies all
materials and the contract manufacturer supplies only labor. Turnkey contracts
involve design, manufacturing and engineering support, the procurement of all
materials, and sophisticated in-circuit and functional testing and distribution.
The manufacturing partnership between OEMs and contract manufacturers involves
an increased use of "just-in-time" inventory management techniques that minimize
the OEM's investment in component inventories, personnel and related facilities,
thereby reducing costs.
We believe a second trend in the industry has been the increasing shift from
pin-through-hole, or PTH, to surface mount technology, or SMT, interconnection
technologies. Surface mount and pin-through-hole printed circuit board
assemblies are printed circuit boards on which various electronic components,
such as integrated circuits, capacitors, microprocessors and resistors are
mounted. These assemblies are key functional elements of many types of
electronic products. PTH technology involves the attachment of electronic
components to printed circuit boards with leads or pins that are inserted into
pre-drilled holes in the boards. The pins are then soldered to the electronic
circuits. The drive for increasingly greater functional density has resulted in
the emergence of SMT, which eliminates the need for holes and allows components
to be placed on both sides of a printed circuit. SMT requires expensive, highly
automated assembly equipment and significantly more operational expertise than
PTH technology. We believe the shift to SMT from PTH technology has increased
the use of contract manufacturers by OEMs seeking to avoid the significant
capital investment required for development and maintenance of SMT expertise.
3
Electronics Assembly and Manufacture
Approximately 85% of our revenues are generated by our electronics assembly
activities, which consist primarily of the placement and attachment of
electronic and mechanical components on printed circuit boards and flexible
(i.e., bendable) cables. We also assemble higher-level sub-systems and systems
incorporating printed circuit boards and complex electromechanical components
that convert electrical energy to mechanical energy, in some cases manufacturing
and packaging products for shipment directly to our customers' distributors. In
addition, we provide other manufacturing services, including refurbishment and
remanufacturing. We manufacture on a turnkey basis, directly procuring any of
the components necessary for production where the OEM customer does not supply
all of the components that are required for assembly. We also provide design and
new product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more value-added
services, and price-sensitive, high-volume production. Our goal is to offer
customers significant competitive advantages that can be obtained from
manufacturing outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management and increased
purchasing power.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation ("Racore"), we design,
manufacture, and distribute Ethernet cards. These components are used to connect
computers through fiber optic networks. In addition, we produce private label,
custom designed networking products and technologies on an OEM basis. Our
products serve major industrial, financial, and telecommunications companies
worldwide. We market our products through an international network of
distributors, value added resellers, and systems integrators who sell, install,
and support our entire product catalogue.
Additionally, we have established, and continue to seek to establish, key
business alliances with major multinational companies in the computing and data
communications industries for which we produce private label, custom designed
networking products and technologies on an OEM basis. These alliances generally
require that Racore either develop custom products or adapt existing Racore
products to become part of the OEM customer's product line. Under a typical
contract, Racore provides a product with the customer's logo, packaging,
documentation, and custom software and drivers to allow the product to appear
unique and proprietary to the OEM customer. Contract terms generally provide for
a non-recurring engineering charge for the development and customization
charges, together with a contractual commitment for a specific quantity of
product over a given term.
In June 2001, Racore received a $225,000 order for specially-designed Ethernet
cards for a federal law enforcement agency. In September 2001, Racore submitted
a bid for business with the same agency that, if accepted, would have resulted
in a contract valued at over $2.0 million over three years. This bid was
ultimately not accepted, but Racore remains committed to actively pursuing
government contracts for its Ethernet card technology. These contracts are
generally awarded in September of each year, the last month of the government's
fiscal year. In February of 2003, Racore received additional orders from GTSI
for another government agency in the amount of $40,000. The final part of this
order was shipped the first week in April 2003 and finally payment was made in
May 2003. Further, Racore received additional orders through 2003 that totaled
over $44,000 and expects to receive additional orders throughout 2004.
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and reliance
upon, the use of manufacturing specialists by many electronics OEMs. We believe
4
the trend towards outsourcing manufacturing will continue. OEMs utilize
manufacturing specialists for many reasons including the following:
o To Reduce Time to Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and, therefore, have a growing need to reduce the time required
to bring a product to market. We believe OEMs can reduce their time to
market by using a manufacturing specialist's manufacturing expertise and
infrastructure.
o To Reduce Investment. The investment required for internal manufacturing
has increased significantly as electronic products have become more
technologically advanced and are shipped in greater unit volumes. We
believe use of manufacturing specialists allows OEMs to gain access to
advanced manufacturing capabilities while substantially reducing their
overall resource requirements.
o To Focus Resources. Because the electronics industry is experiencing
greater levels of competition and more rapid technological change, many
OEMs are focusing their resources on activities and technologies which add
the greatest value to their operations. By offering comprehensive
electronics assembly and related manufacturing services, we believe
manufacturing specialists allow OEMs to focus on their own core
competencies such as product development and marketing.
o To Access Leading Manufacturing Technology. Electronic products and
electronics manufacturing technology have become increasingly sophisticated
and complex, making it difficult for OEMs to maintain the necessary
technological expertise to manufacture products internally. We believe OEMs
are motivated to work with a manufacturing specialist to gain access to the
specialist's expertise in interconnect, test and process technologies.
o To Improve Inventory Management and Purchasing Power. Electronics industry
OEMs are faced with increasing difficulties in planning, procuring and
managing their inventories efficiently due to frequent design changes,
short product life-cycles, large required investments in electronic
components, component price fluctuations and the need to achieve economies
of scale in materials procurement. OEMs can reduce production costs by
using a manufacturing specialist's volume procurement capabilities. In
addition, a manufacturing specialist's expertise in inventory management
can provide better control over inventory levels and increase the OEM's
return on assets.
An important element of our strategy is to establish partnerships with major and
emerging OEM leaders in diverse segments across the electronics industry. Due to
the costs inherent in supporting customer relationships, we focus our efforts on
customers with which the opportunity exists to develop long-term business
partnerships. Our goal is to provide our customers with total manufacturing
solutions for both new and more mature products, as well as across product
generations.
Another element of our strategy is to provide a complete range of manufacturing
management and value-added services, including materials management, board
design, concurrent engineering, assembly of complex printed circuit boards and
other electronic assemblies, test engineering, software manufacturing, accessory
packaging and post-manufacturing services. We believe that as manufacturing
technologies become more complex and as product life cycles shorten, OEMs will
increasingly contract for manufacturing on a turnkey basis as they seek to
reduce their time to market and capital asset and inventory costs. We believe
that the ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it serves. In
addition, we believe that due to the difficulty and long lead-time required to
change manufacturers, turnkey projects generally increase an OEM's dependence on
its manufacturing specialist, which can result in a more stable customer base.
5
Suppliers; Raw Materials
Our sources of components for our electronics assembly business are either
manufacturers or distributors of electronic components. These components include
passive components, such as resisters, capacitors and diodes, and active
components, such as integrated circuits and semi-conductors. Our suppliers
include Siemens, Muriata-Erie, Texas Instruments, Fairchild, Harris and
Motorola. Distributors from whom we obtain materials include Avnet, Future
Electronics, Arrow Electronics, Digi-key and Force Electronics. Although we have
experienced shortages of various components used in our assembly and
manufacturing processes, we typically hedge against such shortages by using a
variety of sources and, to the extent possible, by projecting our customer's
needs.
Research and Development
During 2003 and 2002, CirTran Corporation spent approximately $52,200 and
$43,272, respectively, on research and development of new products and services.
The costs of that research and development were paid for by our customers. In
addition, during the same periods, our subsidiary, Racore, spent approximately
$45,244 and $45,000, respectively. None of Racore's expenses were paid for by
its customers. We remain committed, particularly in the case of Racore, to
continuing to develop and enhance our product line as part of our overall
business strategy.
Beginning 2004, Racore started working more aggressively on marketing existing
products by simplifying ordering and sales processing to existing customers. We
are also working towards some cost reduced versions of existing product line and
adding new sales channels. We are also in the process of expanding the current
product line, adding new product categories to existing sales channels, along
with products with reduced development costs, quicker time to market, higher
profit margins, greatly reduced support costs, less pressure from competitors
and shorter sales cycles. We are currently developing one new product that is
unique in the market and one new product that will provide us with a more
complete product line.
In the coming months Racore will introduce several new products that will
include not only cost reduced versions of existing products, but also similar
yet unique products that will satisfy market needs which currently have no
deliverable or affordable solutions. These products will realize reduced
development costs, quicker time to market, higher profit margins, greatly
reduced support costs, less pressure from competitors, and shorter sales and
delivery cycles. These products will leverage our expertise in the areas of
fiber optics, security, and portability.
Sales and Marketing
We are working aggressively to market existing products through current sales
channels. We will also add major new conduits to deliver products and services
directly to end users, as well as motivate our distributors, partners, and other
third party sales mechanisms. We continue to simplify and improve the sales,
order, and delivery process.
Historically, we have had substantial recurring sales from existing customers,
though we continue to seek out new customers to generate increased sales. We
treat sales and marketing as an integrated process involving direct salespersons
and project managers, as well as senior executives. We also use independent
sales representatives in certain geographic areas.
6
During the sale process, a customer provides us with specifications for the
product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
In 2003, 96% of our net sales were derived from pre-existing customers, whereas
during the year ended December 31, 2002, over 94% of our net sales were derived
from customers that were also customers during 2001. Historically, a small
number of customers accounted for a significant portion of our net sales. In
2003 our three largest customers accounted for approximately 60% of our total
sales compared to 2002 where our three largest customers accounted for
approximately 45% of our total sales. However in 2001 no single customer
accounted for more than 10% of our total sales.
During 2001 and 2002, we operated without a line of credit and many of our
vendors stopped credit sales of components used by us in the manufacturing of
products, thus hampering our ability to attract and retain turnkey customer
business. In addition, although our sales in 2002 were higher than 2001,
financial constraints experienced in 2001 and 2002 mandated a reduction in our
general work force, which experienced a 50% reduction in size. These factors, as
well as general economic conditions during the second half of 2002, resulted in
a significant decrease in sales during 2002. The year 2003 was devoted to
getting prepared for 2004 as is demonstrated by our back log. Although our sales
were down, we spent the last half of the year aggressively pursuing new
businesses, pricing new projects, and approaching new turnkey customers. Funds
became available from the equity line of credit as of June of 2003, which put us
in a position to be able to service turnkey customers along with our consigned
customers.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. At December 31, 2003, our backlog was
approximately $809,000. At December 31, 2002, our backlog was approximately
$450,000. As of March 25, 2004, our backlog has increased to $1,107,000.
In September and October 2001, we issued several press releases relating to:
- Our "partnership with an offshore Malaysian entity . . . expects to
commence bidding for multi-million dollar contracts through this entity in
the very near future" in our September 19, 2001 press release;
- InterMotive Products and the "two contracts for new products and the
vehicle orders that are "projected to blossom into a million dollar
contract manufacturing opportunity" for CirTran in our October 10, 2001
press release; and
- The "implementation of . . . [new] software . . . bring CirTran the
potential for multi- million dollar revenue relationships" in our October
16, 2001 press release.
We entered into the partnership with the Malaysian entity outlined in the
September 19, 2001, press release, to enable us to submit more competitive bids
for larger production contracts. The Company also implemented the software
referenced in the October 16, 2001, press release to enable us to bid more
competitively for larger contracts. Through December 31, 2002, in connection
with the relationship with the Malaysian entity, we bid on large-scale contracts
ranging from approximately $2 million to $4 million. Although we feel that our
relationship with the Malaysian entity will enable us to continue to bid
competitively for the larger contracts, to date we have been unsuccessful at
being selected as a supplier on any of the larger bids we submitted.
7
Nevertheless, management feels that the Company's continued involvement in these
relationships enables the Company to continue to bid competitively for these
larger bids.
In December 2002, CirTran and SVI, an independent electronic manufacturing
service company based in Thailand, announced a manufacturing accord. The two
companies will work together to support mutual customers from product design to
volume manufacturing. Under the agreement, both parties will work jointly as
each other's respective vendor and/or partner on pursuing business contracts in
the United States utilizing both parties' resources providing the contract
manufacturing of electronics.
With respect to the contracts with Intermotive, Inc. ("Intermotive"), referenced
in the October 10, 2001, press release, through December 31, 2002, we had
entered into purchase orders with Intermotive ranging from approximately $4,607
to $34,077. The Company's relationship with Intermotive remains productive, and
management believes that this relationship should continue to produce revenue
for the Company, although there can be no guarantee that Intermotive will
continue to order from us or that any future orders will be substantial. During
2003, we have done no business with Intermotive.
In the last quarter of 2001 and into 2002, we also took steps to increase our
sales volume by adding three new sales representatives, hiring a sales manager,
implementing software to access databases containing potential new customers and
sales opportunities, and continuing our efforts to improve our competitive
position by installing additional surface-mount technology equipment that had
previously been at our Colorado location and by seeking ISO (International
Organization for Standardization) 9002 certification, which we hoped to obtain
by the end of 2003. The certification process is longer than anticipated and we
now hope to obtain it by the end of the second quarter of 2004. This
certification would allow us to ensure to prospective customers that we comply
with internationally-recognized quality production standards.
In February 2003, CirTran received Certification Approval under the Joint
Certification Program ("JCP") from the United States/Canada Joint Certification
Office, Defense Logistics Information Service. Certification under the JCP
establishes the eligibility of a U.S. or Canadian contractor to receive
technical data governed, in the U.S. by Department of Defense ("DoD") directive
5230.25 and, in Canada, by the Technical Data Control Regulations ("TDCR"). We
feel JCP benefits the U.S. and Canadian defense and high technology industries
by facilitating their continued access to unclassified technical data disclosing
critical technology in the possession of, or under the control of the U.S. DoD
or the Canadian Department of National Defense ("DND"). This is an important
recognition for CirTran and is consistent with our efforts to expand our revenue
opportunities. Our approved access to technologies in the U.S. Department of
Defense and the Canadian Department of National Defense will allow us to support
the commercial activities of the broad range of manufacturers working with the
U.S. and Canadian governments.
In January and March 2004, we issued two press releases relating to:
"CirTran Corp., is pleased to announced it has issued a Letter of
Intent to purchase all the assets of a leading Contract Electronics Manufacturer
(CEM) of printed circuit board assemblies based in Orange County, California.
Under the terms of the Letter of Intent, CirTran will complete due diligence
over the next two months. Contingent upon the results of that due diligence and
the execution of a Definitive Purchase Agreement, the acquisition should close
within the next ninety days." January 21, 2004 press release
"CirTran Corp. (OTC BB: CIRT), a full-service contract electronics
manufacturer of printed circuit board assemblies, cables and harnesses, today
announced it is close to completing its due diligence on its intended
acquisition of a leading Southern California based Contract Manufacturer." March
2, 2004 press release
8
On January 22, 2004, CirTran announced that it had entered into a Letter of
Intent to purchase all the assets of a leading Contract Electronics Manufacturer
of printed circuit board assemblies based in Orange County, California.
CirTran's due diligence included the review of the Company's Financial
Statements and Records, Audit Facilities and Procedures, Interview Customers and
Key Employees. The LOI was expired on March 5th 2004 and no agreement has been
reached on a new extension.
In March 2004, we issued two press releases relating to:
"CirTran Corp., a full-service contract electronics manufacturer of
printed circuit board assemblies, cables and harnesses, today announced it has
signed a Letter of Intent (LOI) to acquire a minority ownership interest in a
leading manufacturer in the Digital Fiber Optic Cable Communications firm based
in Southern California." March 18, 2004 press release
"CirTran Corp., On behalf of the Board of Directors, Iehab J. Hawatmeh,
President and CEO of CirTran Corporation, wishes to alert the investment
community to the following significant events taking place." March 26, 2004
press release
The Company expects to finalize both agreements with a manufacture in Southern
California, the revenues of which would be a multiple of last year's total
revenue. This Strategic Alliance is highly significant is it reflects the
Company's current policy of pursuing long-term, multiple streams of revenues in
order to assure organic growth and enhance shareholder value. Once signed, both
agreements will be announced via press releases.
Under the terms of the agreement, CirTran performs exclusive "Turn-Key"
Manufacturing managing all manufacturing operations from Material Procurement to
complete finished Box-Build of all of the partner company's products. Based on
the company's current backlog and November 7, 2003 Private Placement Memorandum
they are projecting 2004 annual revenues of approximately $10,000,000 with
profitability of which 50-70% if that revenue would translate into new business
for CirTran.
The year 2003 was a challenging, yet critical year for CirTran Corporation and
as we look back on it years from now, we believe it will be viewed as the
pivotal year CirTran transitioned itself into a viable and leading technology
manufacturing firm. The most significant event for CirTran in 2003 was the
execution of our $5,000,000 Structured Equity Line with our investment banking
partner. This new influx of capital has enabled CirTran to invest in our future.
We have significantly increased our sales capacity with the addition of new
manufacturer / engineering representative firms almost doubling our sales staff,
we have invested much of ourselves in establishing and cementing our strategic
alliances with customers and we have set into place an aggressive debt
restructuring plan which should reduce our working capital deficit.
Material Contracts and Relationships
We generally use form agreements with standard industry terms as the basis for
our contracts with our customers. The form agreements typically specify the
general terms of our economic arrangement with the customer (number of units to
be manufactured, price per unit and delivery schedule) and contain additional
provisions that are generally accepted in the industry regarding payment terms,
risk of loss and other matters. We also use a form agreement with our
independent marketing representatives that features standard terms typically
found in such agreements.
9
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
Regulation
We are subject to typical federal, state and local regulations and laws
governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee safety laws and
regulations and labor practices laws and regulations. We are not required under
current laws and regulations to obtain or maintain any specialized or
agency-specific licenses, permits, or authorizations to conduct our
manufacturing services. Other than as discussed in "Item 3 - Legal Proceedings"
concerning delinquent payroll taxes, we believe we are in substantial compliance
with all relevant regulations applicable to our business and operations.
Employees
We employ 65 persons, 4 in administrative positions, 3 in engineering and
design, 56 in clerical and manufacturing, and 2 in sales.
Corporate Background
Our core business was commenced by Circuit Technology, Inc. ("Circuit"), in 1993
by our president, Iehab Hawatmeh. Circuit enjoyed increasing sales and growth in
the subsequent five years, going from $2.0 million in sales in 1994 to $15.4
million in 1998, leading to the purchase of two additional SMT assembly lines in
1998 and the acquisition of Racore Computer Products, Inc., in 1997. During that
period, Circuit hired additional management personnel to assist in managing its
growth, and Circuit executed plans to expand its operations by acquiring a
second manufacturing facility in Colorado. Circuit subsequently determined in
early 1999, however, that certain large contracts that accounted for significant
portions of our total revenues provided insufficient profit margins to sustain
the growth and resulting increased overhead. Furthermore, internal accounting
controls then in place failed to apprise management on a timely basis of our
deteriorating financial position. During the last several years, we have
experienced significant losses, including $2,933,084 in 2001, $2,149,810 in 2002
and $2,910,978 in 2003.
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until July 1, 2000, when we issued a total of 10,000,000 shares
of our common stock (150,000,000 of our shares as presently constituted) to
acquire, through our wholly-owned subsidiary, CirTran Corporation (Utah),
substantially all of the assets and certain liabilities of Circuit.
10
In 1987, Vermillion Ventures, Inc. filed an S-18 registration statement with the
United States Securities and Exchange Commission ("SEC") but did not at that
time become a registrant under the Securities Exchange Act of 1934 ("1934 Act").
From 1989 until 2000, Vermillion did not make any filings with the SEC under the
1934 Act. In July 2000, we commenced filing regular annual, quarterly, and
current reports with the SEC on Forms 10-KSB, 10-QSB, and 8-K, respectively, and
have made all filings required of a public company since that time. In February
2001, we filed a Form 8-A with the SEC and became a registrant under the 1934
Act. We may be subject to certain liabilities arising from the failure of
Vermillion to file reports with the SEC from 1989 to 1990, but we believe these
liabilities are minimal because there was no public market for the common shares
of Vermillion from 1989 until the third quarter of 1990 (when our shares began
to be traded on the Pink Sheets) and it is likely that the statute of
limitations has run on whatever public trades in the shares of our common stock
may have taken place during the period during which Vermillion failed to file
reports.
On August 6, 2001, we effected a 1:15 forward split and stock distribution which
increased the number of our issued and outstanding shares of common stock from
10,420,067 to 156,301,005. We also increased our authorized capital from
500,000,000 to 750,000,000 shares.
ITEM 2. DESCRIPTION OF PROPERTIES
We lease approximately 40,000 square feet of office and manufacturing space in
West Valley City, Utah, at a monthly lease rate of approximately $17,000. The
lease is renewable in December of 2013 for two additional ten-year periods. This
facility serves as our principal offices and manufacturing facility and is
leased from PFE Properties, LLC. We believe our lease for the facility is on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2003, the Company had accrued liabilities in the amount of
$2,107,930 for delinquent payroll taxes, including interest estimated at
$393,311 and penalties estimated at $230,927. Of this amount, approximately
$329,739 was due the State of Utah. During the first quarter of 2003, no
payments were made to the State of Utah. During the third and fourth quarter of
2003, partial payments were made to the State of Utah. Approximately $1,767,253
was owed to the Internal Revenue Service as of December 31, 2003. As discussed
below, the Company has reached an agreement with the Internal Revenue Service's
Appeals Office to allow the Company to file an offer in compromise to resolve
the Company's tax liability on a compromise basis. Further, the Utah State Tax
Commission has entered into an agreement to allow the Company to pay the
liability owing to the State of Utah in equal monthly installments over an
extended period of time, yet to be determined.
Approximately $10,939 was owed to the State of Colorado as of December
31, 2003.
We (as successor to Circuit Technology, Inc.) were a defendant in an
action in El Paso County, Colorado District Court, brought by Sunborne XII, LLC,
a Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Our liability in this action was
originally estimated to range up to $2.5 million, and we subsequently filed a
counter suit in the same court against Sunborne in an amount exceeding $500,000
for missing equipment. Effective January 18, 2002, we entered into a settlement
agreement with Sunborne with respect to the above-described litigation. The
settlement agreement required us to pay Sunborne the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the agreement, and the balance of
$225,000, together with interest at 8% per annum, was payable by July 18, 2002.
As security for payment of the balance, we executed and delivered to Sunborne a
11
Confession of Judgment and also issued to Sunborne 3,000,000 shares of our
common stock, which are held in escrow and have been treated as treasury stock
recorded at no cost. Because, 75% of the balance owing under the agreement was
not paid by May 18, 2002, we were required to prepare and file with the
Securities & Exchange Commission, at our expense, a registration statement with
respect to the shares that were escrowed. The payment was not made, nor was a
registration statement filed with respect to the escrowed shares.
Pursuant to a Termination of Sublease Agreement dated as of May 22,
2002 among the Company, Sunborne and other parties, the sublease agreement that
was the subject of our litigation with Sunborne was terminated and a payment of
approximately $109,000 was credited against the amount owed by the Company to
Sunborne under the Company's settlement agreement with them. Sunborne has filed
a claim that this amount was to be an additional rent expense rather than a
payment on the note payable. The Company disputes this claim and intends to
vigorously defend the action.
As of May 16, 2003, the Company was in default of its obligations under
the settlement agreement with Sunborne, i.e., the total payment due thereunder
had not been made, a registration statement with respect to the escrowed shares
was not filed, and the Company did not replace the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
Sunborne has filed the Confession of Judgment and proceeded with execution
thereon. The Company is continuing to negotiate with Sunborne in an attempt to
settle the remaining obligation.
We also assumed certain liabilities of Circuit Technology, Inc. in
connection with our transactions with that entity in the year 2000, and as a
result we are defendant in a number of legal actions involving nonpayment of
vendors for goods and services rendered. We have accrued these payables and have
negotiated settlements with respect to some of the liabilities, including those
detailed below, and are currently negotiating settlements with other vendors.
Advanced Component Labs adv. Circuit Technology Corporation Civil No.
990912318, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against the Company on or about December
8, 1999, under allegations that the Company owed $44,269.43 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Claims are asserted for breach of implied contract and unjust enrichment. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Initial discovery is beginning. No
trial date has been set.
Arrow Electronics adv. Circuit Technology Corporation, Civil No.
010406732, Third Judicial District Court, Sandy Department, Salt Lake County,
State of Utah. Suit was brought against the Company on or about June 28, 2001,
under allegations that the Company owes $41,486.26. Judgment was entered against
the Company on January 7, 2002. Subsequent to year end, this claim was purchased
by Abacas and recorded as an increase to the amount owed to Abacas under terms
of the bridge loan.
Contact East has notified the Company that it believes it has a claim
against the Company in the amount of $32,129.89 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
C/S Utilities has notified the Company that it believes it has a claim
against the Company in the amount of $32,472 regarding utilities services. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
Future Electronics Corp v. Circuit Technology Corporation,
Civil No. 000900296, Third Judicial District Court, Salt Lake County, State of
12
Utah. Suit was brought against the Company on or about January 12, 2000, under
allegations that the Company owed $646,283.96 for the cost of goods or services
provided to the Company for the Company's use and benefit. Claims were asserted
for breach of contract, fraud, negligent misrepresentation, unjust enrichment,
account stated and dishonored instruments. The Company answered the complaint,
admitting that it owed certain sums for conforming goods and services and
denying all other claims. Partial Summary Judgment was entered in the amount of
$646,783.96 as to certain claims against the Company. Negotiations for
settlement resulted in an agreement for settlement of all claims of Future
against the Company subject to performance by the Company under the agreement.
The Company also issued to Future 352,070 shares of its restricted common stock.
The Company did not perform its obligations under the settlement agreement, and
a Confession of Judgment was entered in January 2002 in the amount of
$519,052.00. The Company disputes the amount of the judgment entered. No
collection efforts have been made. The Company is negotiating settlement.
Christine Hindenes v. Racore Network, Inc., and CirTran
Corporation, Superior Court of California, County of Santa Clara, Civil No.
CV811051. Ms. Hindenes brought suit against the Company and Racore for unpaid
wages seeking $40,516.44. The parties reached a settlement agreement under which
the Company agreed to pay $10,000 in monthly installments of $1,000. The parties
also agreed to a confession of judgment in the amount of $52,961, less payments
made, which could be entered if the Company defaulted under its obligations
under the settlement agreement. The Company has made the required payments
through March, 2004.
John J. La Porta v. Circuit Technology, Inc. et al., Case No.
010900785, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Mr. La Porta filed suit on or about January 23, 2001,
seeking to recover the principal sum of $135,941 plus interest on a promissory
note given by Racore Technology Corp. Mr. La Porta claims that the Company is a
guarantor of the promissory note and the Company should be held liable because
of Racore's default on the note. The Company denies liability and will defend
the suit. The parties have engaged in settlement negotiations.
Molex has notified the Company that it believes it has a claim against
the Company in the amount of $90,000.00 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company is
reviewing its records in an effort to confirm the validity of the claims and has
been involved in settlement negotiations.
Signal Transformer Co., Inc., has notified the Company that it believes
it has a claim against the Company in the amount of $38,989 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Negotiations for settlement of this claim have resulted in an agreement in
principal whereby the Company will arrange for a cash payment to this creditor.
The parties are presently negotiating the terms of the settlement documents.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditor's claims will be settled nor that the terms will
be favorable to the Company.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No.
00L14505, Circuit Court of Cook County Department, Law Division, State of
Illinois. Suit was brought against the Company on or about December 23, 1999,
under allegations that the Company owed $213,717.70 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for breach of contract, unjust enrichment and account stated. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Judgment was subsequently entered
against the Company on May 29, 2002. The parties are presently negotiating the
terms of settlement documents, pursuant to which the Company will facilitate a
payment to this creditor a cash payment and issue a promissory note and shares
of its restricted common stock in satisfaction of the creditors' claims.
13
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditors claims will be settled nor that the terms will
be favorable to the Company.
University of Utah v. CirTran Corporation, Third District Court, Salt
Lake County, Civil No. 020900494 . The University of Utah filed a claim against
the Company on January 18, 2002, seeking $37,473.10 in damages. Summary judgment
was entered against the Company. The Company entered into a settlement agreement
on September 16, 2003, under which the Company is required to make monthly
payments of $5,185.47. The total settlement amount under the agreement is
$62,225.64. The Company is making payments pursuant to the settlement agreement.
Volt Temporary Services has notified the Company that it believes it
has a claim against the Company in the amount of $30,986 for the cost of goods
or services provided to the Company for the Company's use and benefit. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
Wells Fargo Equipment Finance adv. Circuit Technology Corporation,
Civil No. 901207 Third Judicial District Court, Salt Lake County, State of Utah.
Suit was brought against the Company on or about February 10, 2000, under
allegations that the Company owed $439,493.56 for a loan provided to the Company
for the Company's use and benefit. Claims are asserted for breach of contract,
breach of guarantee and replevin. The Company has answered, admitting that it
owed certain sums for conforming goods and services and denying all other
claims. Initial discovery is beginning. Judgment has been entered against the
Company and certain guarantors in the amount of $427,291.69 plus interest at the
rate of 8.61% per annum from June 27, 2000. The parties reached a settlement
agreement under which the Company agreed to pay approximately $12,000 per month
beginning in January 2003 to resolve this claim. The parties are presently
negotiating a settlement to supercede their prior agreements because the Company
did not perform all its obligations under the prior agreements.
Zion's First National Bank has notified the Company that it believes it
has a claim against the Company in the amount of $240,000.00 for loans made to
the Company for the Company's use and benefit. The Company has entered into a
Fifth Forbearance and Loan Modification Agreement, requiring monthly payments of
$20,000.00. The Company subsequently renegotiated a settlement with Zions Bank
under which the Company will pay approximately $12,000 per month beginning in
January 2003.
George M. Madanat, Civil No. KC 035616, Superior Court of the State of
California for the County of Los Angeles, East District. Suit was brought
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
under the settlement agreement, and judgment was entered against the Company. As
of March 24, 2004, the Company is not aware of any collection efforts.
Internal Revenue Service. The Internal Revenue Service has notified the
Company that the Company owes approximately $1.7 million in payroll taxes. The
Company, in response to collection notices, filed a due process appeal with the
Internal Revenue Service's Appeals Office. The appeal was resolved by an
agreement with the Appeals Office that allowed the Company to file an offer in
compromise of all federal tax liabilities owed by the Company based on its
ability to pay. The Company filed its offer in compromise with the IRS, which
has gone through the initial stages of consideration by the IRS and will now be
assigned to an IRS offer specialist for consideration.
Cardio Pulmonary Technologies, Inc., vs. Patrick M. Volz,
Peripheral Systems, Inc., and CirTran Corporation, Civil No. 03090501B, Third
14
Judicial District Court, Salt Lake County, State of Utah. On April 4, 2003, suit
was brought against the Company and two other named defendants by plaintiff
Cardio Pulmonary Technologies ("CPT"), alleging a breach of contract between CPT
and the other two named defendants. Plaintiff's claims against the Company arise
out of an alleged breach of an alleged agreement between the Company and
Peripheral Systems, Inc. The Company has answered the Complaint, and intends to
defend vigorously against these claims. The parties are also attempting to
negotiate settlement.
Howard Salamon, dba Salamon Brothers vs. CirTran Corporation,
Civil No. 2:03-00787, U.S. District Court, District of Utah. Howard Salamon
originally filed suit against the Company in the U.S. District Court, Eastern
District of New York, seeking finders fees, consisting of shares of the
Company's common stock valued at $350,000, allegedly owed in connection with
Salamon's introducing the Company to Cornell Capital Partners, L.P., the Equity
Line Investor. The Company disputes the claims in the complaint. The case was
dismissed in New York and refiled in Utah. The Company has filed its answer in
the Utah case and the lawsuit is proceeding. The Company is also currently
conducting settlement negotiations.
P R Newswire Association, Inc., v. CirTran, Superior Court of New Jersey,
DC-000359-04. On March 9, 2004, a judgment was entered against CirTran in the
amount of $5,106.28, with fees of $171.13. The Parties are presently negotiating
settlement of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded sporadically on the Pink Sheets under the symbol "CIRT"
from July 2000 to July 2002. Effective July 15, 2002, the NASD approved our
shares of common stock for quotation on the NASD Over-the-Counter Electronic
Bulletin Board. The following table sets forth, for the calendar years ending
December 31, 2003 and 2002, the prices of our common stock as reported and
summarized on the Pink Sheets. These prices are based on inter-dealer bid and
asked prices, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
Calendar Quarter Ended High Bid Low Bid
December 31, 2003 $0.03 $0.02
September 30, 2003 $0.03 $0.01
June 30, 2003 $0.04 $0.01
March 31, 2003 $0.04 $0.01
December 31, 2002 $0.12 $0.03
September 30, 2002 $0.16 $0.03
June 30, 2002 $0.07 $0.02
March 31, 2002 $0.08 $0.02
As of March 25, 2004, we had approximately 540 shareholders of record holding
389,913,214 shares of common stock.
15
We have not paid, nor declared, any dividends on our common stock since our
inception and do not intend to declare any such dividends in the foreseeable
future. Our ability to pay dividends is subject to limitations imposed by Nevada
law. Under Nevada law, dividends may be paid to the extent the corporation's
assets exceed its liabilities and it is able to pay its debts as they become due
in the usual course of business.
Recent Sales of Unregistered Securities
Pursuant to the Equity Line of Credit Agreement (discussed more fully below
under "Liquidity and Financing Arrangements"), we are entitled to put to the
Equity Line Investor, in lieu of repayment of amounts drawn on the Equity Line,
shares of the Company's common stock. Although the Company has filed a
registration statement to register the resale by the Equity Line Investor of the
shares put to it by the Company, the issuances of shares to the Company are made
in reliance on Section 4(2) of the Securities Act of 1933 as a transaction not
involving any public offering. No advertising or general solicitation was
employed in offering the securities, and the shares have been and will be issued
to only one investor which has represented that it is an "accredited investor"
as that term is defined in Regulation D promulgated pursuant to the Securities
Act of 1933. Through December 31, 2003, we issued 64,253,508 shares of common
stock to the Equity Line Investor in connection with draws on the Equity Line.
Subsequent to December 31, 2003, and through March 25, 2004, we drew an
additional $650,000 under the Equity Line Agreement, and issued 30,075,515
additional shares of common stock to the Equity Line Investor. The shares were
issued without registration under the 1933 Act in reliance on Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock in exchange
for cancellation of an aggregate amount of $1,500,000 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of $0.05
per share, for the aggregate amount of $1,500,000. The Company did not grant
registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock in exchange
for cancellation of an aggregate amount of $1,499,090 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of
$0.075 per share, for the aggregate amount of $1,500,000. The Company did not
grant registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
16
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
17
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material and overhead costs. Overhead costs are based on indirect
costs allocated among cost of sales, work-in-process inventory and finished
goods inventory. Indirect overhead costs have been charged to cost of sales or
capitalized as inventory based on management's estimate of the benefit of
indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
The Company typically orders inventory on a customer-by-customer basis. In doing
so the Company enters into binding agreements that the customer will purchase
any excess inventory after all orders are complete. Almost 80% of the total
inventory is secured by these agreements.
Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out more funds
than were in our accounts under existing lines of credit with those banks.
Subsequent to May 2000, when Abacas purchased our line of credit obligation, the
Company no longer had lines of credit with banks, and those loans were no longer
available or made to us. The Company acquired an equity line of credit effective
as of June of 2003.
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item 6
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Item 12 - Certain Relationships and Related Transactions."
Results of Operations - Comparison of Years Ended December 31, 2003 and 2002
Sales and Cost of Sales
Net sales decreased 47.2 % to $1,215,245 for the year ended December 31, 2003 as
compared to $2,299,668 for the year ended December 31, 2002. Due to a lack of
funds we could not pursue turnkey business. As a result our sales decreased
because we had to rely on pre-existing customers and more consigned business.
18
For CirTran Corporation, we had two pre-existing customers that have generated
approximately 51% of the sales for 2003.
Cost of sales for the year ended December 31, 2003 was $854,542, as compared to
$1,966,851 during the prior year. Those costs as a percentage of net sales were
70.3% during 2003 as compared to 85.5% during 2002. The improvement in the cost
of sales was attributed to the higher margin contracts the company completed and
additional consigned business, where the customer supplies all materials needed
and our costs are for direct labor only.
Additionally, improvement of inventory management and control has positively
affected our gross margins. We traditionally tracked inventory by customer
rather than by like-inventory item, and, as a result, we often purchased new
inventory to produce products for a new customer, when we likely had the
necessary inventory on hand under a different customer name. This prior practice
led to a reserve for obsolescence and excess inventory, which for the year 2003
was $700,207, as compared to $540,207 in 2002. However, because of the higher
margin sales, our cost of sales decreased. We have changed our method of
managing and controlling our inventory so that we can identify inventory by a
general part number, rather than a customer number, and we have instituted
monthly reviews to better update and control our inventory. We believe these
improvements have led to better inventory control and will contribute to
decreased cost of sales. If we are successful in decreasing our cost of sales
further, and if we are able to maintain and increase our levels of sales, we
believe we will be successful in generating sufficient gross profit to cover our
selling, general and administrative expenses.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our two main areas of operations, i.e., electronics assembly
and Ethernet technology, during 2002 and 2003; and (ii) comparisons during these
two years for each division between sales generated by pre-existing customers
and sales generated by new customers.
------------------ -------------- ------------------- ------------------ ----------------------
Year Sales Cost of Sales Gross Loss/Margin
------------------ -------------- ------------------- ------------------ ----------------------
Electronics 2003 1,050,090 929,800(1) 120,290
Assembly
------------------ -------------- ------------------- ------------------ ----------------------
2002 1,838,781 1,673,739 165,042
------------------ -------------- ------------------- ------------------ ----------------------
Ethernet 2003 165,155 84,742 80,413
Technology
------------------ -------------- ------------------- ------------------ ----------------------
2002 460,887 293,112 167,775
------------------ -------------- ------------------- ------------------ ----------------------
------------------ -------------- ------------------- ------------------ ----------------------
Year Total Pre-existing New
Sales Customers Customers
------------------ -------------- ------------------- ------------------ ----------------------
Electronics 2003 1,050,090 1,036,418 13,672
Assembly
------------------ -------------- ------------------- ------------------ ----------------------
2002 1,838,781 1,817,312 21,469
------------------ -------------- ------------------- ------------------ ----------------------
Ethernet 2003 165,155 127,040 38,115
Technology
------------------ -------------- ------------------- ------------------ ----------------------
2002 460,887 338,927 121,960
------------------ -------------- ------------------- ------------------ ----------------------
(1) Includes the writedown of carrying value of inventories of
$160,000
19
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
us to deliver products to customers in the quantities and time frame required.
This manufacturing technique requires us to maintain an inventory of component
parts to meet customer orders. Inventory at December 31, 2003 was $1,247,428, as
compared to $1,550,553 at December 31, 2002. The decrease is due to the increase
in the reserve of obsolete and slow moving inventory of $160,000 and increased
efforts to use inventory on hand.
Selling, General and Administrative Expenses
During the year ended December 31, 2003, selling, general and administrative
expenses were $2,402,968 versus $2,180,226 for 2002, a 10.2% increase. The
increase was due to an increase in the legal fees and financing fees for our
equity line of credit, along with our efforts to aggressively market our
products during a period of economic downturn.
Other Income and Expense
Interest expense for 2003 was $571,044 as compared to $437,074 for 2002, an
increase of 30.7%. This increase is primarily attributable to an increase in
interest for the accrued liabilities and in delinquent payroll tax liabilities,
the penalties on which were previously recorded as part of interest expense. As
of December 31, 2003 and 2002, the amount of our liability for delinquent state
and federal payroll taxes and estimated penalties and interest thereon was
$2,107,930 and $2,029,626, respectively.
As of December 31, 2002 there was a gain on the settlement of the sub-lease in
Colorado Springs of $152,500, which was the majority of the other income of
$159,673 for the year ending December 31, 2002.
As a result of the above factors, our overall net loss increased 35.4% to
$2,910,978 for the year ended December 31, 2003, as compared to $2,149,810 for
the year ended December 31, 2002.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses and our accumulated deficit was $18,141,280 at December 31, 2003 and was
$15,230,302 at December 31, 2002. Our net loss for the year ending December 31,
2003 was $2,910,978, compared to $2,149,810 for the year ending December 31,
2002. Our current liabilities exceeded our current assets by $5,529,244 as of
December 31, 2003 and $4,490,623 as of December 31, 2002. The increase in the
difference is mostly attributed to an increase in accrued liabilities. For the
years ended December 31, 2003 and 2002, we recorded negative cash flows from
operations of $1,123,818 and $1,142,148, respectively.
Cash
We had cash on hand of $54,135 at December 31, 2003 compared to $500 at December
31, 2002. The increase in cash on hand is due to a new cash management system
that was established during 2003.
Net cash used in operating activities was $1,123,818 for the fiscal year ended
December 31, 2003. During 2003, net cash used in operations was primarily
attributable to $2,910,978 in net losses from operations, partially offset by
increases in accrued liabilities of $901,718 and in decreases to inventories of
$143,125. The non-cash charge was for depreciation and amortization of $300,520.
20
Net cash used in investing activities during the fiscal year ended December 31,
2003, consisted of equipment purchases of $12,225.
Net cash provided by financing activities was $1,189,678 during the fiscal year
ended December 31, 2003. Principal sources of cash were proceeds from
stockholder notes payable of $41,500, proceeds of $1,605,847 from long-term
notes payable, proceeds from the exercise of options to purchase common stock of
$301,500 and proceeds from notes payable to related parties of $350,000.
Principal uses of cash during 2003 consisted of $1,099,786 principal payments of
notes payable and notes payable to related parties and stockholders and a
decrease to checks written in excess of cash in the bank of $9,908.
Accounts Receivable
At December 31, 2003, we had receivables of $89,187, net of a reserve for
doubtful accounts of $28,876, as compared to $37,464 at December 31, 2002, net
of a reserve of $37,037. The smaller reserve for doubtful accounts in 2003 is
attributable to increased efforts to improve the aging and quality of our
current receivables.
Accounts Payable
Accounts payable were $1,300,597 at December 31, 2003 as compared to $1,359,723
at December 31, 2002. This decrease is a very nominal amount.
Liquidity and Financing Arrangements
We sustained substantial losses from operations in 2003 and 2002. We had an
accumulated deficit of $18,141,280 and a total stockholders' deficit of
$4,915,251 at December 31, 2003. In addition, during 2003 and 2002, we have
used, rather than provided, cash in our operations. As of December 31, 2003, our
monthly operating costs and interest expenses averaged approximately $265,000
per month.
Since February 2000, we have operated without a line of credit. Abacas Ventures,
Inc., an entity whose shareholders include the Saliba Private Annuity Trust, one
of our major shareholders (see "Item 11 - Security Ownership of Certain
Beneficial Owners and Management") and a related entity, the Saliba Living
Trust, purchased our line of credit of $2,792,609, and this amount was converted
into a note payable to Abacas bearing an interest rate of 10%. As of December
31, 2001, a total of $2,405,507, plus $380,927 in accrued interest, was owed to
Abacas pursuant to this note payable. During 2002, we entered into agreements
with the Saliba Private Annuity Trust and the Saliba Living Trust to exchange
19,987,853 shares of our common stock for $1,499,090 in principal amount of this
debt and to issue an additional 6,666,667 shares to these trusts for $500,000
cash which was used for working capital for the Company. During December 2002,
an additional $1,020,154 of principal and $479,846 of accrued interest owed to
Abacas was converted to 30,000,000 shares of our common stock. We issued no
common stock to Abacas during 2003. During 2003 and 2002, the Company received
$350,000 and $845,000 of cash proceeds under the terms of a bridge loan from
Abacas. The Company made principal payments of $875,000 and 156,268 during 2003
and 2002, respectively, on the bridge loan. At December 31, 2003, the balance
owed on the bridge loan was $163,742. See "Item 12 - Certain Relationships and
Related Transactions."
During 2003 and 2002, we converted approximately $34,049 and $316,762,
respectively of trade payables into notes and stock. During January 2002, in
addition to the above-described transactions with the Saliba trusts, we issued
16,666,666 shares of restricted common stock at a price of $0.075 per share in
exchange for the cancellation of $1,250,000 of notes payable to various
stockholders. See "Item 12 - Certain Relationships and Related Transactions." We
21
continue to work with vendors in an effort to convert other trade payables into
long-term notes and common stock and to cure defaults with lenders with
forbearance agreements that we are able to service.
Despite our efforts to make our debt-load more serviceable, significant amounts
of additional cash will be needed to reduce our debt and fund our losses until
such time as we are able to become profitable. As at December 31, 2003, we were
in default of notes payable whose principal amount, not including the amount
owing to Abacas Ventures, Inc., exceeded $635,000. In addition, the principal
amount of notes that either mature in 2003 or are payable on demand exceed
$875,000 which includes $650,000 of notes to the equity line investor. The total
amount per month that we have committed to paying pursuant to various
settlements for outstanding debt, litigation and delinquent payroll taxes is
currently approximately $38,000, all of which is against accrued liabilities and
notes payable. None of these settlements, however, have resulted in the
forgiveness of any amounts owed, but have simply resulted in a restructuring in
the terms of the various debts.
Management believes that each of the related party transactions were as fair to
the Company as could have been made with unaffiliated third parties.
During 2003, we borrowed a total of $1,830,000 from Cornell Capital Partners,
LP, pursuant to nine unsecured promissory notes. The loans were made and the
notes were issued from June 2003 through December 2003. In lieu of interest, we
paid fees at closing to an affiliate of the lender, ranging from 5% to 10% of
the amount of the loan. These fees have been recorded as interest expense. The
fees were negotiated in each instance and agreed upon by us and by the lender
and its affiliate. The notes were repayable over periods ranging from 70 days to
131 days. Each of the notes stated that if we did not repay the notes when due,
a default interest rate of 24% would apply to the unpaid balance. Through
December 31, 2003, we directed the repayment of $1,180,000 of these notes from
proceeds generated under the Equity Line Agreement, discussed below. At December
31, 2003, the balance owing on these notes was $650,000. All notes were paid
when due or before, and at no time did we incur the 24% penalty interest rate.
Subsequent to December 31, 2003, Cornell loaned us an additional $500,000
pursuant to two additional unsecured promissory notes. The loans were made and
the notes were issued in January through March 2004, bringing the total
aggregate loans from Cornell to $2,330,000. As before, in lieu of interest, we
paid fees at closing to an affiliate of the lender, ranging from 4% to 5% of the
amount of the loan. The fees were negotiated in each instance and agreed upon by
us and by the lender and its affiliate. The notes were repayable over periods of
87 days and 88 days. Each of the notes stated that if we did not repay the notes
when due, a default interest rate of 24% would apply to the unpaid balance.
Subsequent to December 31, 2003, we directed the repayment of $650,000 on these
notes, consisting of the remaining $650,000 owing on the loans made in
2003, from proceeds generated under the Equity Line Agreement, discussed below.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors and are
seeking to replace our line of credit. It is unlikely that we will be able, in
our current financial condition, to obtain additional debt financing; and if we
did acquire more debt, we would have to devote additional cash flow to pay the
debt and secure the debt with assets. We may therefore have to rely on equity
financing to meet our anticipated capital needs. There can be no assurances that
we will be successful in obtaining such capital. If we issue additional shares
for debt and/or equity, this will serve to dilute the value of our common stock
and existing shareholders' positions.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
company by potential investors more attractive. These efforts consisted
22
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock was obtained in July 2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short- or the long-term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
In conjunction with efforts to improve the results of operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with Cornell Capital Partners, LP, a private
investor ("Cornell"). We subsequently terminated the Equity Line Agreement, and
on April 8, 2003, we entered into an amended equity line agreement (the "Amended
Equity Line Agreement") with Cornell. Under the Amended Equity Line Agreement,
we have the right to draw up to $5,000,000 from Cornell against an equity line
of credit (the "Equity Line"), and to put to Cornell shares of our common stock
in lieu of repayment of the draw. The number of shares to be issued is
determined by dividing the amount of the draw by the lowest closing bid price of
our common stock over the five trading days after the advance notice is
tendered. Cornell is required under the Amended Equity Line Agreement to tender
the funds requested by us within two trading days after the five-trading-day
period used to determine the market price.
During the year ended December 31, 2003, we drew an aggregate amount of
$1,180,000 under the Equity Line Agreement, pursuant to draws on the equity
line, net of fees of $47,200 and prior offering costs of $44,228, and issued a
total of 64,253,508 shares of common stock to Cornell under the Equity Line
Agreement. At our direction, Cornell retained the proceeds of the draws under
the Equity Line Agreement and applied them as payments on the notes to Cornell,
discussed above.
Pursuant to the Equity Line Agreement, in connection with each draw the Company
agreed to pay a fee of 4% of the amount of the draw to Cornell as consideration
for its providing the Equity Line. Total fees paid for the year ended December
31, 2003 were $73,200. Of these fees, $47,200 was offset against additional paid
in capital as shares were issued under the Equity Line Agreement and $26,000 was
classified as deferred offering costs at December 31, 2003. These deferred
offering costs were offset against additional paid in capital as shares were
issued under the Equity Line Agreement subsequent to December 31, 2003.
Subsequent to December 31, 2003, the Company drew an aggregate of $650,000 under
the Equity Line Agreement, net of deferred offering costs of $26,000, and issued
30,075,515 shares of common stock to Cornell under the Equity Line Agreement.
At our direction, Cornell retained the proceeds of the draws under the Equity
Line Agreement and applied them as payments on the notes to Cornell, discussed
above.
Forward-looking statements
All statements made in this prospectus, other than statements of historical
fact, which address activities, actions, goals, prospects, or new developments
that we expect or anticipate will or may occur in the future, including such
things as expansion and growth of operations and other such matters are
forward-looking statements. Any one or a combination of factors could materially
affect our operations and financial condition. These factors include competitive
pressures, success or failure of marketing programs, changes in pricing and
availability of parts inventory, creditor actions, and conditions in the capital
markets. Forward-looking statements made by us are based on knowledge of our
23
business and the environment in which we currently operate. Because of the
factors listed above, as well as other factors beyond our control, actual
results may differ from those in the forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements appear at the end of this report beginning with the
Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
chief executive officer and chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") as of December 31, 2003, has concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
adequate and designed to ensure that material information relating to the
Company and its subsidiaries would be made known to them by others within those
entities.
(b) Changes in Internal Controls. There were no significant changes in
the Company's internal controls, or, to the Company's knowledge, in other
factors that could significantly affect these controls subsequent to the
Evaluation Date.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Officers
The following sets forth the names, ages and positions of our directors and
officers and the officers of our operating subsidiary, CirTran Corporation
(Utah), along with their dates of service in such capacities.
Name Age Positions
Iehab J. Hawatmeh 37 President, Chief Financial Officer, Secretary and Director of
CirTran Corporation; President of CirTran Corporation (Utah).
Served since July 2000.
Raed Hawatmeh 39 Director since June 2001.
Trevor Saliba 29 Director since June 2001. Senior Vice-President, Sales
and Marketing since January 2002.
24
Iehab J. Hawatmeh. Mr. Hawatmeh is our President and Secretary and a member of
our Board of Directors. Mr. Hawatmeh served as the President and Chief Executive
Officer of Circuit Technology, Inc. from 1993 until we acquired it in July 2000.
In this position, he was responsible for all operational, financial, marketing
and sales activities of Circuit Technology. He now performs similar functions
for us and our operating subsidiary, CirTran Corporation (Utah). Mr. Hawatmeh is
the brother of Shaher Hawatmeh.
Raed Hawatmeh. Raed Hawatmeh, who is not related to Iehab and Shaher Hawatmeh,
has served as a director since June 2001. Mr. Hawatmeh has been a self-employed
investor and venture capitalist for the past five years, specializing in
financing start-up companies in the electronics industry.
Trevor Saliba. Mr. Saliba has served as a director since June 2001 and was
appointed Senior Vice-President, Sales and Marketing in January 2002. In 1997,
Mr. Saliba founded Saliba Corporation, a San Francisco construction company, and
has served as its president from the founding through June 2002. Prior to 1997,
Mr. Saliba was employed as a project engineer for Tutor-Saliba Corporation.
At this time, the Company does not have an audit committee. The
Company's Board of Directors acts as the Company's audit committee. Similarly,
the Company's Board of Directors has determined that the Company does not have
an audit committee financial expert as defined under Securities and Exchange
Commission rules.
In June 2002 Mr. Saliba filed for personal bankruptcy in the U.S.
Bankruptcy Court in Los Angeles, California, which has not yet been discharged.
The bankruptcy was unrelated to Mr. Saliba's involvement in CirTran.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors, and persons who beneficially own more than 10% of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% shareholders are required by regulation of the
Securities and Exchange Commission to furnish us with copies of all Section
16(a) forms which they file. Based solely on its review of the copies of such
forms furnished to us during the fiscal year ended December 31, 2003, we are
aware of the following untimely filings:
In April 2003, Iehab Hawatmeh exchanged a total of 15,333,333 shares of
the Company's common stock which he held directly in exchange for forgiveness of
personal debt. The transaction should have been reported on a Form 4. It will be
reported on a Form 5 to be filed. Additionally, in February, May, and November
2003 and January 2004, Mr. Iehab Hawatmeh exercised options to purchase shares
of the Company's stock and sold the shares received upon exercise of the
options. The transactions should have been reported on Forms 4. They will be
reported on a Form 5 to be filed.
In January, March, June, September, and December 2003, Mr. Saliba
exercised options to purchase shares of the Company's stock and sold the shares
received upon exercise of the options. The transactions should have been
reported on Forms 4. They will be reported on a Form 5 to be filed.
In February 2003 and January 2004, Raed Hawatmeh exercised options to
purchase shares of the Company's stock and sold the shares received upon
exercise of the options. The transactions should have been reported on Forms 4.
They will be reported on a Form 5 to be filed.
25
Code of Ethics. The Company has not yet adopted a code of ethics. The Board of
Directors anticipates that it will adopt a code of ethics during the second
quarter of 2004, and that we will file the code of ethics as an exhibit to our
second quarterly report.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2003, 2002,
and 2001, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
Annual Compensation Long-Term Compensation Awards
Restricted
Stock Stock
Name and Salary Bonus Awards Options All Other
Principal Position Year ($) ($) ($) (#) Compensation
Iehab J. Hawatmeh 2003 175,000 - - 6,500,000 -
President, Secretary, 2002 175,000 - - 1,850,000 -
Treasurer and Director 2001 175,000 - - - -
2000 175,000 - - - -
Trevor M. Saliba 2003 127,000 - - 3,000,000 -
Sr. Vice President and 2002 118,000 - - 500,000 -
Director 2001 - - - - -
of CirTran Corporation 2000 - - - - -
2003 - - - 3,000,000 -
Raed S. Hawatmeh 2002 - - - 500,000 -
Director of CirTran 2001 - - - - -
Corporation 2000 - - - - -
26
Option/SAR Grants in the Year Ended December 31, 2003
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Number of Securities
Underlying % of Total Options
Options/SARs Granted to Employees Exercise or Base
Name in Fiscal Year Price ($/Sh) Expiration Date
Granted (#)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Iehab Hawatmeh 6,500,000 15.95% $0.02 - $0.03 Feb - Nov 2008
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Trevor Saliba 3,000,000 7.36% $0.02 - $0.03 Feb - Nov 2008
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Raed Hawatmeh 3,000,000 7.36% $0.02 - $0.03 Feb - Nov 2008
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Aggregated Option/SAR Exercises in the Year Ended
December 31, 2003 and December 31, 2003 Option/SAR Values
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at FY FY-End ($)
End (#) Exercisable/
Exercisable/ Unexercisable
Shares Acquired on Unexercisable
Name Exercise (#) Value Realized ($)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Iehab Hawatmeh 6,500,000 $140,000 - $ -
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Trevor Saliba 3,000,000 $65,000 - $ -
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Raed Saliba 500,000 $15,000 1,500,000/0 $30,000/0
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Employment Agreements
Iehab Hawatmeh entered into an employment agreement with Circuit in 1993 that
was assigned to us as part of the reverse acquisition of Circuit in July 2000.
This agreement, which is of indefinite term, provides for a base salary for Mr.
Hawatmeh, plus a bonus of 2% of our net profits before taxes, payable quarterly,
and any other bonus our board of directors may approve. The agreement also
provides that, if Mr. Hawatmeh is terminated without cause, we are obligated to
pay him, as a severance payment, an amount equal to five times his then-current
annual base compensation, in one lump-sum payment or otherwise, as Mr. Hawatmeh
may direct.
Trevor Saliba entered into an agreement with us in January 2002 pursuant to
which we retained Mr. Saliba as Senior Vice-President, Sales and Marketing. The
agreement provides for remuneration to Mr. Saliba of $6,000 per month, plus
reimbursement for all pre-approved business expenses. In addition, we agreed to
pay Mr. Saliba an amount equal to 5.0% of all gross investments made into our
company that are generated and arranged by Mr. Saliba. The agreement has an
initial term of one year, renewable upon agreement of the parties, but is
terminable by either party for any reason upon 90 days written notice to the
other party. In addition, we may terminate the agreement upon 30 days written
notice if Mr. Saliba fails to comply with the terms of the agreement.
2001 Stock Plan
The 2001 Stock Plan has been fully distributed.
27
2002 Stock Plan
The 2002 Stock Plan has been fully distributed.
2003 Stock Plan
In November 2003, our board approved and adopted our 2003 Stock Plan, or the
2003 Plan, subject to shareholder approval. An aggregate of 35,000,000 shares of
our common stock are subject to the 2003 Plan, which provides for grants to
employees, officers, directors and consultants of both non-qualified (or
non-statutory) stock options and "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended). The 2003 Plan
also provides for the grant of certain stock purchase rights, which are subject
to a purchase agreement between us and the recipient. The purpose of the 2003
Plan is to enable us to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to such
persons, and to promote the success of our business.
The 2003 Plan is administered by our board of directors, which designates from
time to time the individuals to whom awards are made under the 2003 Plan, the
amount of any such award and the price and other terms and conditions of any
such award. The 2003 Plan shall continue in effect until the date which is ten
years from the date of its adoption by the board of directors, subject to
earlier termination by our board. The board may suspend or terminate the 2003
Plan at any time.
The board determines the persons to whom options are granted, the option price,
the number of shares to be covered by each option, the period of each option,
the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the 2003 Plan for more than an aggregate of 15,000,000
shares in any given fiscal year. We do not receive any monetary consideration
upon the granting of options. Options are exercisable in accordance with the
terms of an option agreement entered into at the time of grant.
The board may also award our shares of common stock under the 2003 Plan as stock
purchase rights. The board determines the persons to receive awards, the number
of shares to be awarded and the time of the award. Shares received pursuant to a
stock purchase right are subject to the terms, conditions and restrictions
determined by the board at the time the award is made, as evidenced by a
restricted stock purchase agreement. As of March 25, 2004, 26,750,000 stock
purchase rights have been granted under the 2003 Plan.
ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of the 389,913,214
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of March 25, 2004, by (i) each
person who is currently a director, (ii) each executive officer, (iii) all
current directors and executive officers as a group and (iv) each person who, to
our knowledge, is the beneficial owner of more than 5% of our outstanding common
stock. None of the individuals listed below own any options or warrants to
purchase our common stock.
Except as otherwise indicated, the persons named in the table have sole voting
and dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable. Beneficial ownership is determined
according to the rules of the Securities and Exchange Commission, and generally
means that person has beneficial ownership of a security if he or she possesses
sole or shared voting or investment power over that security. Each director,
officer, or 5% or more shareholder, as the case may be, has furnished us
information with respect to beneficial ownership. Except as otherwise indicated,
28
we believe that the beneficial owners of the common stock listed below, based on
the information each of them has given to us, have sole investment and voting
power with respect to their shares, except where community property laws may
apply.
Name and Address Relationship Common Shares Percent of Class
Saliba Private Annuity Trust (1) 5% 52,173,990 13.38%
115 S. Valley Street Shareholder
Burbank, CA 91505
Roger Kokozyon 5% 27,715,620 7.11%
4539 Haskell Avenue Shareholder
Encino, CA 91436
Iehab J. Hawatmeh Director, 60,048,621(2) 14.29%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5% Shareholder
Raed Hawatmeh Director 27,790,530 7.13%
10989 Bluffside Drive & 5%
Studio City, CA 91604 Shareholder
Trevor Saliba (1) Director 1,750,000 *
13848 Valleyheart Drive
Sherman Oaks, CA 91423
All Officers and Directors as a Group 89,589,151 21.32%
(3 persons)
___________________
* Less than 1%.
(1) Includes 7,164,620 shares held by the Saliba Living Trust. Thomas L.
Saliba and Betty R. Saliba are the trustees of The Saliba Living Trust and
Thomas L. Saliba is the sole trustee of The Saliba Private Annuity Trust. These
persons control the voting and investment decisions of the shares held by the
respective trusts. Mr. Thomas L. Saliba is a nephew of the grandfather of Mr.
Trevor Saliba, one of our directors and officers. Mr. Trevor Saliba is one of
five passive beneficiaries of Saliba Private Annuity Trust and has no control
over its operations or management. Mr. Saliba disclaims beneficial control over
the shares indicated.
(2) Includes 30,288,465 shares issuable in connection with an agreement
between Mr. Hawatmeh and the Company for cancellation of debt owed to Mr.
Hawatmeh. As of the date of this report, the shares had not been issued.
Securities authorized for issuance under equity compensation plans
The following table sets forth information about the Company's equity
compensation plans, including the number of securities to be issued upon the
exercise of outstanding options, warrants, and rights; the weighted average
exercise price of the outstanding options, warrants, and rights; and the number
of securities remaining available for issuance under the specified plan through
March 25, 2004.
29
------------------------------ ---------------------------- --------------------------- ----------------------------
Number of securities
Number of securities to be Weighted average exercise remaining available for
issued upon exercise of price of outstanding future issuance under
outstanding options, options, warrants, and equity compensation plans
Plan Category warrants, and rights rights
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans
approved by shareholders 0 0 0
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans
not approved by shareholders 2001 Plan: 0 options 2001 Plan: 0 options * 2001 Plan: 0 options
2002 Plan: 537,500 options 2002 Plan: $0.09/share 2002 Plan: 0 options
2003 Plan:3,500,000 options 2003 Plan: $0.01/share 2003 Plan: 8,250,000 options
------------------------------ ---------------------------- --------------------------- ----------------------------
Total 4,037,500 $0.02/share 8,250,000
------------------------------ ---------------------------- --------------------------- ----------------------------
* All options issued under this plan to date have been exercised.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,499,090 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.075 per share, for the aggregate
amount of $1,500,000.
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,500,000 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.05 per share, for the aggregate
amount of $1,500,000.
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 2003 and 2002, the Company was advanced $350,000 and
$845,000, respectively, and made cash payments of $875,000 and $156,258,
respectively, for an outstanding balance on the bridge loan of $163,742 and
$688,742, respectively.
As of December 31, 2001, Iehab Hawatmeh had loaned us a total of $1,390,125. The
loans were demand loans, bore interest at 10% per annum and were unsecured.
Effective January 14, 2002, we entered into four substantially identical
agreements with existing shareholders pursuant to which we issued an aggregate
of 43,321,186 shares of restricted common stock at a price of $0.075 per share
for $500,000 in cash and the cancellation of $2,749,090 principal amount of our
debt. Two of these agreements were with the Saliba Private Annuity Trust, one of
our principal shareholders, and a related entity, the Saliba Living Trust. The
Saliba trusts are also principals of Abacas Ventures, Inc., which entity
purchased our line of credit in May 2000. (See "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Liquidity and Financing Arrangements.") Pursuant to the
Saliba agreements, the trusts were issued a total of 26,654,520 shares of common
stock in exchange for $500,000 cash and the cancellation of $1,499,090 of debt.
30
We used the $500,000 cash from the sale of the shares for working capital. As a
result of this transaction, the percentage of our common stock owned by the
Saliba Private Annuity Trust and the Saliba Living Trust increased from
approximately 6.73% to approximately 17.76%. Mr. Trevor Saliba, one of our
directors and officers, is a passive beneficiary of the Saliba Private Annuity
Trust. Pursuant to the other two agreements made in January, we issued an
aggregate of 16,666,666 shares of restricted common stock at a price of $0.075
per share in exchange for the cancellation of $1,250,000 of notes payable by two
shareholders, Mr. Iehab Hawatmeh (our president, a director and our principal
shareholder) and Mr. Rajai Hawatmeh. Of these shares, 15,333,333 were issued to
Iehab Hawatmeh in exchange for the cancellation of $1,150,000 in debt. As a
result of this transaction, the percentage of our common stock owned by Mr.
Hawatmeh increased from 19.9% to approximately 22.18%.
In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a
public company, Circuit Technology, Inc., while still a private entity, redeemed
680,145 shares (as presently constituted) of common stock held by Raed Hawatmeh,
who was a director of Circuit Technology, Inc. at that time, in exchange for
$80,000 of expenses paid on behalf of the director. No other stated or unstated
rights, privileges, or agreements existed in conjunction with this redemption.
This transaction was consistent with other transactions where shares were
offered for cash.
In 1999, Circuit entered into an agreement with Cogent Capital Corp., or
"Cogent," a financial consulting firm, whereby Cogent agreed to assist and
provide consulting services to Circuit in connection with a possible merger or
acquisition. Pursuant to the terms of this agreement, we issued 800,000
(pre-forward split) restricted shares (12,000,000 post-forward split shares) of
our common stock to Cogent in July 2000 in connection with our acquisition of
the assets and certain liabilities of Circuit. The principal of Cogent was
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
Also, as of December 31, 2003 the company owed I&R Properties, LLC, the previous
owner of our principal office and manufacturing facility, a total amount of
$374,001 in accrued rent. I&R Properties is a company owned and controlled by
individuals who are officers, directors and principal stockholders.
Management believed at the time of each of these transactions and continues to
believe that each of these transactions were as fair to the Company as could
have been made with unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Copies of the following documents are included as exhibits to this report
pursuant to Item 601 of Regulation S-B.
Exhibit No. Document
3.1 Articles of Incorporation (previously filed as Exhibit No. 2 to our
8-K dated July 1, 2000, Commission File No. 33-13674-LA, and
incorporated herein by reference).
3.2 Bylaws (previously filed as Exhibit No. 3 to our 8-K dated July 1,
2000, Commission File No. 33-13674-LA, and incorporated herein by
reference).
10. Material Contracts:
31
10.1 Lease Agreement dated 2 November 1996 between I & R Properties, LLC
and Circuit Technology, Inc. (previously filed as Exhibit No. 4 to our
8-K dated July 1, 2000, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.2 Financial Advisory Agreement dated 12 May 1999 between Circuit
Technology, Inc. and Cogent Capital Corp. (previously filed as Exhibit
No. 2 to our Annual Report filed on Form 10-KSB for the year ending
12/31/00, Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.3 Form of Product Representative Agreement between CirTran Corporation
and a Representative (previously filed as Exhibit No. 3 to our Annual
Report filed on Form 10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by reference).
10.4 Security and Loan Agreement dated April 6, 1998 between Imperial Bank
and Circuit Technology, Inc. (previously filed as Exhibit No. 4 to our
Annual Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.5 Line of Credit Purchase Agreement dated May 1, 2000 between Imperial
Bank and Abacas Ventures, Inc. (previously filed as Exhibit No. 5 to
our Annual Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.6 Assignment of Loan dated May 1, 2000 from Imperial Bank to Abacas
Ventures, Inc. (previously filed as Exhibit No. 6 to our Annual Report
filed on Form 10-KSB for the year ending 12/31/00, Commission File No.
33-13674-LA, and incorporated herein by reference).
10.7 Unsecured Promissory Note for $73,000.00 dated November 3, 2000 from
CirTran Corporation to Future Electronics Corporation (previously
filed as Exhibit No. 7 to our Annual Report filed on Form 10-KSB for
the year ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.8 Unsecured Promissory Note for $166,000.00 dated November 3, 2000 from
CirTran Corporation to Future Electronics Corporation (previously
filed as Exhibit No. 8 to our Annual Report filed on Form 10-KSB for
the year ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.9 Lock-Up Agreement dated November 3, 2000 between Iehab Hawatmeh and
Future Electronics Corporation (previously filed as Exhibit No. 9 to
our Annual Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.10Lock-Up Agreement dated November 3, 2000 between Raed Hawatmeh and
Future Electronics Corporation (previously filed as Exhibit No. 10 to
our Annual Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.11Lock-Up Agreement dated November 3, 2000 between Roger Kokozyon and
Future Electronics Corporation (previously filed as Exhibit No. 11 to
our Annual Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.12Registration Rights Agreement dated November 3, 2000 between CirTran
Corporation and Future Electronics Corporation (previously filed as
Exhibit No. 12 to our Annual Report filed on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA, and incorporated
herein by reference).
32
10.13Promissory Note and Confession of Judgment dated September 26, 2000
by Circuit Technology Corp. in favor of Arrow Electronics, Inc.
(previously filed as Exhibit No. 13 to our Annual Report filed on Form
10-KSB for the year ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.14Promissory Note and Confession of Judgment dated November 16, 2000 by
Circuit Technology Corp. in favor of Sager Electronics (previously
filed as Exhibit No. 14 to our Annual Report filed on Form 10-KSB for
the year ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.15Confession of Judgment dated November 3, 2000 by CirTran Corporation
and Iehab Hawatmeh in favor of Future Electronics Corporation
(previously filed as Exhibit No. 15 to our Annual Report filed on Form
10-KSB for the year ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.16Settlement Agreement and Release of Claims dated November 3, 2000
between CirTran Corporation, Iehab Hawatmeh and Future Electronics
Corporation (previously filed as Exhibit No. 16 to our Annual Report
filed on Form 10-KSB for the year ending 12/31/00, Commission File No.
33-13674-LA, and incorporated herein by reference).
10.17Sublease dated 30 November 1998 between Colorado Electronics
Corporation, LLC and Circuit Technology Corporation (previously filed
as Exhibit No. 10.17 to our Registration Statement on Form SB-2,
Amendment No. 1, dated October 29, 2001, and incorporated herein by
reference).
10.18Attornment Agreement dated 30 November 1998 among Sun Borne XII, LLC
et al, Colorado Electronics Corporation LLC and Circuit Technology
Corporation (previously filed as Exhibit No. 10.17 to our Registration
Statement on Form SB-2, Amendment No. 1, dated October 29, 2001, and
incorporated herein by reference).
10.19Form of Subscription Agreement entered into between CirTran
Corporation and various subscribers pursuant to a debt settlement and
private placement completed in January 2002 (previously filed as
Exhibit 10.2 to our Current Report on Form 8-K dated March 19, 2002,
and incorporated herein by this reference).
10.20Settlement Agreement entered into on January 18, 2002 among Sunborne
XII, LLC, CirTran Corporation et al. (previously filed as Exhibit 10.1
to our Current Report on Form 8-K dated March 19, 2002, and
incorporated herein by this reference).
21. Subsidiaries of the Registrant
31. Certification of President and Chief Financial Officer
32. Certification pursuant to 18 U.S.C. Section 1350
We did not file any reports on Form 8-K during the last quarter of 2002.
33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for the fiscal year ended December 31, 2003,
for professional services rendered by Hansen Barnett & Maxwell, for the audit of
the registrant's annual financial statements and review of the financial
statements included in the registrant's Form 10-QSB or services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for fiscal year 2003 and 2002 were $54,975 and $73,876,
respectively.
(2) AUDIT-RELATED FEES
The aggregate fees billed for the fiscal year ended December 31, 2003,
for assurance and related services by Hansen Barnett & Maxwell, that are
reasonably related to the performance of the audit or review of the registrant's
financial statements for fiscal year 2003 and 2002 were $0 and $0, respectively.
(3) TAX FEES
The aggregate fees billed for each of the fiscal years ended December
31, 2003 and 2002, for professional services rendered by Hansen Barnett &
Maxwell for tax compliance, tax advice, and tax planning, for those fiscal years
were $2,000 and $8,675, respectively. Services provided included preparation of
federal and state income tax returns.
(4) ALL OTHER FEES
The aggregate fees billed in each of the fiscal years ended December
31, 2003 and 2002, for products and services provided by Hansen Barnett &
Maxwell other than those services reported above, for those fiscal years were $0
and $0, respectively.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
Not applicable.
(6) If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees.
Not applicable.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRTRAN CORPORATION
Date: August 16, 2004 By: /s/ Iehab J. Hawatmeh, President
34
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: August 16, 2004 /s/ Iehab J. Hawatmeh
Iehab J. Hawatmeh
President, Chief Financial Officer and Director
Date: August 16, 2004 /s/ Raed Hawatmeh
Raed Hawatmeh, Director
Date: Augsut 16, 2004 /s/ Trevor Saliba
Trevor Saliba, Director
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of CirTran Corporation and related
notes thereto and auditors' report thereon are filed as part of this Form
10-KSB:
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2002 F-4
Consolidated Statement of Stockholders' Deficit for the Years Ended December 31, 2002
and 2003 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation Registered with the Public Company
CERTIFIED PUBLIC ACCOUNTANTS Accounting Oversight Board
AND
BUSINESS CONSULTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRM
To the Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board of the United States. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CirTran Corporation
and Subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit, has
suffered losses from operations and has negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 1, the accompanying 2003 consolidated financial statements
have been restated.
HANSEN, BARNETT & MAXWELL
/s/ Hansen, Barnett & Maxwell
Salt Lake City, Utah
March 11, 2004
F-2
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
------------- -------------
(AS RESTATED - NOTE 1)
ASSETS
Current Assets
Cash and cash equivalents $ 54,135 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $28,876 and $37,037, respectively 89,187 37,464
Inventory 1,247,428 1,550,553
Other 165,091 100,189
------------- -------------
Total Current Assets 1,555,841 1,688,706
------------- -------------
Property and Equipment, Net 577,603 865,898
Other Assets, Net 10,390 12,236
Deferred Offering Costs 26,000 13,475
------------- -------------
Total Assets $ 2,169,834 $ 2,580,315
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 9,623 $ 19,531
Accounts payable 1,300,597 1,359,723
Accrued liabilities 3,615,264 3,030,970
Current maturities of long-term notes payable 1,964,021 1,059,987
Notes payable to stockholders 31,838 20,376
Notes payable to related parties 163,742 688,742
------------- -------------
Total Current Liabilities 7,085,085 6,179,329
------------- -------------
Long-Term Notes Payable, Less Current Maturities - 295,083
------------- -------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 349,087,699 and 247,184,691
net of 3,000,000 shares held in treasury at no cost at
December 31, 2003 and 2002, respectively 349,088 247,185
Additional paid-in capital 12,876,941 11,089,020
Accumulated deficit (18,141,280) (15,230,302)
------------- -------------
Total Stockholders' Deficit (4,915,251) (3,894,097)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 2,169,834 $ 2,580,315
------------- -------------
The accompanying notes are an integral part of
these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003 2002
--------------------- --------------------
(AS RESTATED - NOTE 1)
Net Sales $ 1,215,245 $ 2,299,668
Cost of Sales (854,542) (1,966,851)
Writedown of carrying value of inventories (160,000) -
--------------------- --------------------
Gross Profit 200,703 332,817
--------------------- --------------------
Operating Expenses
Selling, general and administrative expenses 2,402,968 2,180,226
Non-cash employee compensation expense 137,500 25,000
--------------------- --------------------
Total Operating Expenses 2,540,468 2,205,226
--------------------- --------------------
Loss From Operations (2,339,765) (1,872,409)
--------------------- --------------------
Other Income (Expense)
Interest (571,044) (437,074)
Other, net (169) 159,673
--------------------- --------------------
Total Other Expense, Net (571,213) (277,401)
--------------------- --------------------
Net Loss $ (2,910,978) $ (2,149,810)
--------------------- --------------------
Basic and diluted loss per common share $ (0.01) $ (0.01)
--------------------- --------------------
Basic and diluted weighted-average
common shares outstanding 277,068,175 208,236,039
--------------------- --------------------
The accompanying notes are an integral part of
these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
Common Stock Additional
------------------------------
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
---------------- ------------- --------------- ---------------- --------------
Balance - December 31, 2001 160,951,005 $ 160,951 $ 5,977,164 $ (13,080,492) $ (6,942,377)
Shares issued for cash 6,666,667 6,667 493,333 - 500,000
Shares issued for conversion
of notes payable 36,654,519 36,654 2,712,436 - 2,749,090
Exercise of stock options
by employees 10,350,000 10,350 438,650 - 449,000
Shares issued for conversion
of notes payable and accrued
interest to related parties 30,000,000 30,000 1,470,000 - 1,500,000
Shares issued to placement
agent for equity line of credit 2,562,500 2,563 (2,563) - -
Net loss - - - (2,149,810) (2,149,810)
---------------- ------------- --------------- ---------------- --------------
Balance - December 31, 2002 247,184,691 $ 247,185 $ 11,089,020 $ (15,230,302) $ (3,894,097)
---------------- ------------- --------------- ---------------- --------------
Shares issued for accrued wages 500,000 500 9,500 - 10,000
Shares issued for to equity line
investor, net of fees (as
restated - Note 1) 64,253,508 64,254 1,024,318 - 1,088,572
Options granted to employees,
consultants and attorneys - - 239,227 - 239,227
Exercise of stock options
by directors and employees 33,900,000 33,900 517,600 - 551,500
Exercise of stock options by
consultants and attorneys 3,249,500 3,249 (2,724) - 525
Net loss (as restated Note 1) - - - (2,910,978) (2,910,978)
---------------- ------------- --------------- ---------------- --------------
Balance - December 31, 2003
(As restated - Note 1) 349,087,699 $ 349,088 $ 12,876,941 $ (18,141,280) $ (4,915,251)
---------------- ------------- --------------- ---------------- --------------
The accompanying notes are an integral part of
these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003 2002
----------------------- --------------------
(As restated - Note 1)
Cash flows from operating activities
Net loss $ (2,910,978) $ (2,149,810)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 300,520 470,849
Provision for loss on trade receivables (8,161) -
Provision for obsolete inventory 160,000 -
Cash paid for settlement of litigation - (25,000)
Non-cash compensation expense 137,500 25,000
Loan costs and fees in lieu of interest on notes payable 120,200 -
Note payable issued as settlement of litigation expense 62,226 -
Options issued to attorneys and consultants for services 101,727 -
Payments made on behalf of the Company
as settlement of a sublease agreement - (152,500)
Legal fees paid on behalf of lender - (120,000)
Changes in assets and liabilities:
Trade accounts receivable (43,562) 361,065
Inventories 143,125 194,056
Prepaid expenses and other assets (63,056) 2,498
Accounts payable (25,077) (513,786)
Accrued liabilities 901,718 765,480
----------------------- --------------------
Total adjustments 1,787,160 1,007,662
----------------------- --------------------
Net cash used in operating activities (1,123,818) (1,142,148)
----------------------- --------------------
Cash flows from investing activities
Purchase of property and equipment (12,225) (2,822)
----------------------- --------------------
Net cash used in investing activities (12,225) (2,822)
----------------------- --------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank (9,908) (140,433)
Proceeds from notes payable to stockholders 41,500 618,305
Payments on notes payable to stockholders (30,038) (738,054)
Proceeds from notes payable, net of cash paid for costs 1,605,847 845,000
Principal payments on notes payable (194,748) (363,848)
Proceeds from notes payable to related parties 350,000 -
Payment on notes payable to related parties (875,000) -
Proceeds from exercise of options and warrants to purchase
common stock 301,500 424,000
Exercise of options issued to attorneys and consultants
for services 525 -
Proceeds from issuance of common stock - 500,000
----------------------- --------------------
Net cash provided by financing activities 1,189,678 1,144,970
----------------------- --------------------
Net increase in cash and cash equivalents 53,635 -
Cash and cash equivalents at beginning of year 500 500
----------------------- --------------------
Cash and cash equivalents at end of year $ 54,135 $ 500
----------------------- --------------------
The accompanying notes are an integral part of
these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2003 2002
----------------------- --------------------
(As restated - Note 1)
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 54,531 $ 152,093
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 34,049 $ 316,762
Common stock issued for notes payable to stockholders $ - $ 1,250,000
Common stock issued for deferred offering costs $ - $ 205,000
Common stock issued for which the Company directed the
proceeds to be applied as payment of notes payable $ 1,134,000 $ -
Common stock issued for notes payable to related parties $ - $ 2,519,244
Common stock issued for accrued interest payable to
related parties $ - $ 479,846
Accrued and deferred offering costs $ - $ 13,475
Accrued interest converted to notes payable $ 57,424 $ 52,955
Stock options exercised for settlement of accrued interest
and accrued compensation $ 250,000 $ -
Common stock issued for accrued compensation $ 10,000 $ -
Loan costs included in notes payable $ 120,200 $ -
Fees withheld from notes payable for Equity Line Agreement $ 47,200 $ -
Deferred offering costs withheld from notes payable proceeds $ 26,000 $ -
The accompanying notes are an integral part of
these financial statements.
F-7
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Nature of Operations - CirTran Corporation (the "Company") provides turnkey
manufacturing services using surface mount technology, ball-grid array assembly,
pin-through-hole, and custom injection molded cabling for leading electronics
original equipment manufacturers ("OEMs") in the communications, networking,
peripherals, gaming, consumer products, telecommunications, automotive, medical,
and semiconductor industries. The Company also designs, develops, manufactures,
and markets a full line of local area network products, with emphasis on token
ring and Ethernet connectivity.
Principles of Consolidation--The consolidated financial statements include the
accounts of CirTran Corporation and its wholly owned subsidiary, Racore
Technology Corporation. All significant intercompany transactions have been
eliminated in consolidation.
Revenue Recognition--Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses experienced with such returns have not been
significant and have been recognized as incurred.
Cash and Cash Equivalents--The Company considers all highly-liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.
Inventories -- Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead costs. Overhead costs are
based on indirect costs allocated among cost of sales, work-in-process inventory
and finished goods inventory. Indirect overhead costs have been charged to cost
of sales or capitalized as inventory based on management's estimate of the
benefit of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
Property and Equipment --Depreciation is provided in amounts sufficient to
relate the cost of depreciable assets to operations over the estimated service
lives. Leasehold improvements are amortized over the shorter of the life of the
lease or the service life of the improvements. The straight-line method of
depreciation and amortization is followed for financial reporting purposes.
Maintenance, repairs, and renewals which neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in operating results.
Depreciation expense for the years ended December 31, 2003 and 2002 was $300,520
and $470,849.
Impairment of Long-Lived Assets --The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
F-8
occurred that indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
over their remaining life in measuring whether the assets are recoverable. As of
December 31, 2003, the Company does not consider any of its long-lived assets to
be impaired.
Checks Written in Excess of Cash in Bank--Under the Company's cash management
system, checks issued but not presented to banks frequently result in overdraft
balances for accounting purposes. These overdrafts are included as a current
liability in the balance sheets.
Stock-Based Compensation -- At December 31, 2003, the Company has one
stock-based employee compensation plan, which is described more fully in Note
12. The Company accounts for the plan under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. During the years ended
December 31, 2003 and 2002, the Company recognized compensation expense relating
to stock options and warrants of $137,500 and $25,000, respectively. The
following table illustrates the effect on net loss and basic and diluted loss
per common share as if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation:
Years Ended December 31,
-------------------------------------------
2003 2002
-------------------- --------------------
Net loss, as reported $ (2,910,978) $ (2,149,810)
Add: Stock-based employee compensation expense
included in net loss 137,500 25,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (292,247) (193,387)
-------------------- --------------------
Pro forma net loss $ (3,065,725) $ (2,318,197)
-------------------- --------------------
Basic and diluted loss per common share as reported $ (0.01) $ (0.01)
-------------------- --------------------
Basic and diluted loss per common share pro forma $ (0.01) $ (0.01)
-------------------- --------------------
Income Taxes --The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and the carryforward of operating losses and tax credits
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. An allowance against deferred tax
assets is recorded when it is more likely than not that such tax benefits will
not be realized. Research tax credits are recognized as utilized.
Use of Estimates --In preparing the Company's financial statements in accordance
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
F-9
Concentrations of Risk -- Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of trade accounts
receivable. The Company sells substantially to recurring customers, wherein the
customer's ability to pay has previously been evaluated. The Company generally
does not require collateral. Allowances are maintained for potential credit
losses, and such losses have been within management's expectations. At December
31, 2003 and 2002, this allowance was $28,876 and $37,037, respectively.
During the year ended December 2003, sales to two customers accounted for 29
percent and 11 percent of net sales. No individual customer account receivable
balance at December 31, 2003 created a concentration of credit risk.
During the year ended December 2002, sales to three customers accounted for 11
percent, 12 percent, and 13 percent, each, of net sales. No individual customer
account receivable balance at December 31, 2002 created a concentration of
credit risk.
Fair Value of Financial Instruments --The carrying value of the Company's cash
and cash equivalents and trade accounts receivable, approximates their fair
values due to their short-term nature. The carrying value of the Company's notes
payable also approximates fair value because notes are recorded at fair value
plus any default provisions.
Loss Per Share -- Basic loss per share is calculated by dividing loss available
to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted loss per share is similarly calculated,
except that the weighted-average number of common shares outstanding would
include common shares that may be issued subject to existing rights with
dilutive potential when applicable. The Company had 3,850,500 and zero in
potentially issuable common shares at December 31, 2003 and 2002, respectively.
The potentially issuable common shares at December 31, 2003 were excluded from
the calculation of diluted loss per share because the effects are anti-dilutive.
Reclassifications -- Certain 2002 amounts have been reclassified to conform
with the 2003 presentation. These reclassifications had no effect on the
previously reported net loss.
New Accounting Standards -- In May 2003 the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity", which requires that certain financial instruments be
presented as liabilities that were previously presented as equity or as
temporary equity. Such instruments include mandatory redeemable preferred and
common stock, and certain options and warrants. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and is
generally effective at the beginning of the first interim period beginning after
June 15, 2003. The Company adopted the requirements of SFAS 150 in the
accompanying financial statements.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 sets forth the disclosures
required by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Company adopted
the requirements FIN 45 in the accompanying financial statements.
Restatement of Financial Statements -- The Company has reclassified offering
F-10
costs related to the Equity Line of Credit from selling, general and
administrative expenses to additional paid-in capital and interest expense
related to notes payable to the Equity Line Investor related to selling, general
and administrative expenses (see Notes 5 and 10) for the year ended December
31, 2003. The effects of the restatement were as follows:
As Previously Effect of As
Reported Restatement Restated
--------------- ---------------- -------------------
For the Year Ended December 31, 2003
Selling, general and administrative expense $ 2,586,868 $ (183,900) $ 2,402,968
Loss from operations 2,523,665 (183,900) 2,339,765
Interest expense 460,344 110,700 571,044
Net loss 2,984,178 (73,200) 2,910,978
Basic and diluted loss per common share 0.01 - 0.01
As of December 31, 2003
Deferred offering costs $ - $ 26,000 $ 26,000
Total assets 2,143,834 26,000 2,169,834
Additional paid in capital 12,924,141 (47,200) 12,876,941
Accumulated deficit (18,214,480) 73,200 (18,141,280)
Total stockholders' deficit (4,941,251) 26,000 (4,915,251)
NOTE 2 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company sustained losses of $2,910,978 and $2,149,810 for the years
ended December 31, 2003 and 2002, respectively. As of December 31, 2003 and
2002, the Company had an accumulated deficit of $18,141,280 and $15,230,302,
respectively, and a total stockholders' deficit of $4,915,251 and $3,894,097,
respectively. In addition, the Company used, rather than provided, cash in its
operations in the amounts of $1,123,818 and $1,142,148 for the years ended
December 31, 2003 and 2002, respectively.
Since February of 2000, the Company has operated without a line of credit. Many
of the Company's vendors stopped credit sales of components used by the Company
to manufacture products, and as a result, the Company converted certain of its
turnkey customers to customers that provide consigned components to the Company
for production. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In addition, the Company is a defendant in numerous legal actions (see Note 8).
These matters may have a material impact on the Company's financial position,
although no assurance can be given regarding the effect of these matters in the
future.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
F-11
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit from the
lender. During 2002, the Company has entered into agreements whereby the Company
has issued common stock to certain principals of Abacas in exchange for a
portion of the debt. The Company's plans include working with vendors to convert
trade payables into long-term notes payable and common stock and cure defaults
with lenders through forbearance agreements that the Company will be able to
service. During 2003 and 2002, the Company successfully converted trade payables
of approximately $2,986 and $316,762, respectively, into notes. The Company
intends to continue to pursue this type of debt conversion going forward with
other creditors. As discussed in Note 10, the Company has entered into an equity
line of credit agreement with a private investor. Realization of any proceeds
under the equity line of credit is not assured.
NOTE 3 - INVENTORIES
Inventories consist of the following:
2003 2002
--------------- ----------------
Raw materials $ 1,114,445 $ 1,363,276
Work-in process 130,810 170,724
Finished goods 2,173 16,553
--------------- ----------------
$ 1,247,428 $ 1,550,553
--------------- ----------------
During 2003, write downs of $160,000 were recorded to reduce items considered
obsolete or slow moving to their fair market value.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2003 2002 in Years
--------------- ---------------- -------------------
Production equipment $ 3,146,488 $ 3,141,993 5-10
Leasehold improvements 958,939 958,940 7-10
Office equipment 639,375 631,645 5-10
Other 118,029 118,029 3-7
--------------- ----------------
4,862,831 4,850,607
Less accumulated depreciation
and amortization 4,285,228 3,984,709
--------------- ----------------
$ 577,603 $ 865,898
--------------- ----------------
F-12
NOTE 5 - NOTES PAYABLE
Notes Payable consist of the following:
Notes Payable
2003 2002
-------------------- --------------------
Notes payable to Equity Line Investor, no periodic interest,
matures 70 to 131 days after issuance, (See below). $ 650,000 $ -
Note payable to a company, interest at 8.00%, matured
August 2002, collateralized by 3,000,000 shares of
the Company's common stock currently held in
escrow, in default. 115,875 115,875
Note payable to a company, due in monthly installments
of $1,323, interest at 8.00%, matures May 2005,
unsecured. 23,549 -
Note payable to a company, due in monthly installments
of $5,185, interest at 8.00%, matures September 2004,
unsecured. 41,484 -
Note payable to a financial institution, due in monthly
installments of $9,462, interest at 8.61%, matures
April 2004, collateralized by equipment. 215,516 258,644
Note payable to a company, due in monthly installments
of $6,256, interest at 8.00%, matured July 2003,
collateralized by equipment, in default. 183,429 183,429
Note payable to a financial institution, due in monthly
installments of $9,000, interest at 13.50%, matures
December 2004, collateralized by equipment. 161,109 199,023
Note payable to an individual, due in monthly installments
of $12,748, matures February 2006, interest at 10.00%
unsecured, in default. 107,919 107,919
Note payable to a company, due in monthly installments
of $1,972, matures November 2005, interest at 8.00%,
unsecured, in default. 87,632 87,632
F-13
Note payable to an individual, due in monthly installments
of $5,000, interest at a rate of 9.5%, matured May
2000, collateralized by all assets of the Company,
in default. 85,377 85,377
Note payable to a finance corporation, due in monthly
installments of $4,127, interest at prime plus 3.00%
(7.25% at December 31, 2002), matures December
2004, collateralized by equipment. 93,832 92,097
Note payable to a company, due in 18 monthly installments
of $1,460 followed by six monthly installments of
$2,920, interest at 6.00%, matured April 2003,
unsecured, in default. 60,133 60,133
Note payable to a finance corporation, due in monthly
installments of $2,736, interest at 9.00%, matures
December 2004, collateralized by equipment and
trade accounts receivable. 55,831 60,005
Note payable to a finance corporation, due in monthly
installments of $562, interest at 9.00%, matures
December 2004, collateralized by equipment and
trade accounts receivable. - 12,252
Note payable to a finance corporation, due in monthly
installments of $637, interest at 9.00%, matures
December 2004, collateralized by equipment and
trade accounts receivable. - 13,949
Note payable to a bank, payable on demand, interest
at 10.00%, unsecured. 36,901 36,901
Note payable to a finance corporation, due in increasing
monthly installments of $50 to $5,443, interest at
12.00%, matures December 2004, collateralized by
equipment and trade accounts receivable. 45,434 41,834
-------------------- --------------------
Total Notes Payable 1,964,021 1,355,070
Less current maturities (1,964,021) (1,059,987)
-------------------- --------------------
Long-Term Notes Payable $ - $ 295,083
-------------------- --------------------
Certain of the Company's notes payable contain various covenants and
restrictions, including providing for the acceleration of principal payments in
F-14
the event of a covenant violation or a material adverse change in the operations
of the Company. The Company is out of compliance on several notes payable,
primarily due to a failure to make monthly payments. In instances where the
Company is out of compliance, these amounts have been shown as current.
Additionally, all default provisions have been accrued as part of the principal
balance of the related notes payable.
Notes Payable to Equity Line Investor -- During 2003, the Company borrowed a
total of $1,830,000 from Cornell Capital Partners, LP, pursuant to nine
unsecured promissory notes. The loans were made and the notes were issued from
June 2003 through December 2003. In lieu of interest, the Company paid fees to
the lender, ranging from 5% to 10%, of the amount of the loan. These fees have
been recorded as interest expense. The fees were negotiated in each instance and
agreed upon by the Company and by the lender and its affiliate. The notes were
repayable over periods ranging from 70 days to 131 days. Each of the notes
stated that if the Company did not repay the notes when due, a default interest
rate of 24% would apply to the unpaid balance. Through December 31, 2003, the
Company directed the repayment of $1,180,000 of these notes from proceeds
generated under the Equity Line Agreement, discussed in Note 10 below. At
December 31, 2003, the balance owing on these notes was $650,000. All notes were
paid when due or before, and at no time did the Company incur the 24% penalty
interest rate.
Subsequent to December 31, 2003, Cornell loaned the Company an additional
$500,000 pursuant to two additional unsecured promissory notes. The loans were
made and the notes were issued in January through March 2004, bringing the total
aggregate loans from Cornell to $2,330,000. As before, in lieu of interest, the
Company paid fees to the lender, ranging from 4% to 5%, of the amount of the
loan. The fees were negotiated in each instance and agreed upon by the Company
and by the lender and its affiliate. The notes were repayable over periods of 87
days and 88 days. Each of the notes stated that if the Company did not repay the
notes when due, a default interest rate of 24% would apply to the unpaid
balance. Subsequent to December 31, 2003, the Company directed the repayment of
$650,000 of these notes, consisting of the remaining $650,000 owing on the
loans made in 2003, from proceeds generated under the Equity Line Agreement,
discussed in Note 10 below.
NOTE 6 - LEASES
The Company conducts a substantial portion of its operations utilizing leased
facilities consisting of a warehouse and a manufacturing plant. The lease was
originally with a related party. In December of 2003, the related party sold the
facilities to an unrelated party. The Company entered into a new ten-year lease
agreement with an unrelated party.
The following is a schedule of future minimum lease payments under the operating
lease:
Year Ending December 31,
---------------
2004 $ 203,688
2005 203,688
2006 203,688
2007 203,688
2008 203,688
Thereafter 1,018,440
---------------
Total $ 2,036,880
---------------
The building lease provides for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
F-15
$200,492 and $200,992 for 2003 and 2002, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable --The Company had amounts due to stockholders from two
separate notes. The balance due to stockholders at December 31, 2003 and 2002,
was $31,838 and $20,376, respectively. Interest associated with amounts due to
stockholders is accrued at 10 percent. Unpaid accrued interest was $6,900 and
$2,378 at December 31, 2003 and 2002, respectively, and is included in accrued
liabilities. These notes are due on demand.
Related Party Notes Payable -- The Company had amounts due to Abacas Ventures,
Inc., a related party, under the terms of a note payable and a bridge loan.
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 2003 and 2002, the Company was advanced $350,000 and
$845,000, respectively, and made cash payments of $875,000 and $156,258,
respectively, for an outstanding balance on the bridge loan of $163,742 and
$688,742, respectively.
The balance due to Abacas related to the note payable was paid in full at
December 31, 2002. The note accrued interest at 10%. The amounts owed were due
on demand with no required monthly payments. This note was collateralized by
assets of the Company. As discussed in Note 10, a significant amount of the
Abacas note was converted to shares of the Company's common stock during 2002.
During the year ended December 31, 2002, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as capital leases.
The total of these obligations was $316,762. In addition, Abacas agreed to
deduct as an offset of the amount owed to Abacas of $120,000, constituting the
amounts paid by the Company as legal fees incurred by the Company as part of its
negotiations with the Company's vendors. The Company has recorded this
transaction as a $316,762 non-cash increase and a $120,000 non-cash payment to
the note payable owed to Abacas, pursuant to the terms of the Abacas agreement.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $163,742 and $688,742 as of December 31, 2003 and 2002,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $230,484 and $71,686 as of December 31, 2003 and 2002,
respectively, and is included in accrued liabilities.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation -- During January 2002, the Company settled a lawsuit
that had alleged a breach of facilities sublease agreement involving facilities
located in Colorado. The Company's liability in this action was originally
estimated to range up to $2.5 million. The Company had filed a counter suit in
the same court for an amount exceeding $500,000 for missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which are currently held in escrow and have been treated as treasury
F-16
stock recorded at no cost. The fair value of the 3,000,000 shares was less than
the carrying amount of the note payable. Because 75 percent of the balance had
not been paid by May 18, 2002, the Company was required to prepare and file with
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. The remaining balance has not
been paid, and the registration statement with respect to the escrowed shares
has not been declared effective and the Company has not replaced the escrowed
shares with registered free-trading shares pursuant to the terms of the
settlement agreement; therefore, the plaintiff filed the Confession of Judgment
and proceeded with execution thereon. The Company is currently negotiating with
the plaintiff to settle this obligation without the release of the shares held
in escrow.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which has been recorded as other income. The Company did not
receive cash from this settlement, but certain obligations of the Company were
paid directly. $109,125 of the principal balance of the note related to the
settlement mentioned above was paid. Also, $7,000 was paid to the Company's
legal counsel as a retainer for future services. The remaining $36,375 was paid
to the above mentioned plaintiff as a settlement of rent expense.
During September 2002, the plaintiff filed a claim that the $109,125 portion of
the payment was to be applied as additional rent expense rather than a principal
payment on the note payable. The Company estimates that the probability of the
$109,125 being considered additional rent expense is remote and disputes the
claim. The Company intends to vigorously defend the action.
Litigation - During 2000, the Company settled a lawsuit filed by a vendor by
issuing 5,281,050 shares of the Company's common stock valued at $324,284,
paying $83,000 in cash and issuing two notes payable totaling $239,000. During
2002, the vendor filed a confession of judgement claiming that the Company
defaulted on its agreement and claims the 2000 lawsuit was not properly
satisfied. At December 31, 2003, the Company owed $60,133 of principal under the
terms of the remaining note payable. The Company denies the vendor's claims and
intends to vigorously defend itself against the confession of judgement.
During 2003, an investment firm filed suit in the U.S. District Court, District
of Utah seeking finders fees, consisting of common stock valued at $350,000 for
allegedly introducing the Company to the Equity Line Investor. The case was
previously dismissed in a New York court. The Company estimates that the risk of
loss is remote, therefore no accrual has been made.
In December 1999, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $213,000 of punitive
damages from the Company related to the Company's non-payment for materials
provided by the vendor. Judgment was entered against the Company in May 2002 in
the amount of $213,718. The Company has accrued the entire amount due under the
judgment.
The Company has been a party to a lawsuit with a customer stemming from an
alleged breach of contract. In July 2002, the Company reached a settlement with
the customer in which the customer was to make payments from August 1, 2002,
through October 29, 2002, to the Company totaling $265,000. As part of the
settlement, the Company returned inventory valued at $158,010, settled
receivables from the customer of $287,277, settled payables owed to the customer
in the amount of $180,287 and sold inventory to a Company related to the
customer for $13,949. During 2002, the Company received the entire $265,000.
F-17
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and pursuant to the terms of a promissory note. The Company entered a
settlement agreement under which the Company is to pay $6,256 each month until
the obligation and interest thereon are paid. This did not represent the
forgiveness of any obligation, but rather the restructuring of the terms of the
previous agreement. At December 31, 2003, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. Subsequent to year end, this claim was purchased by Abacus
and recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2003, the Company had accrued the entire amount of the claim.
The Company is currently in settlement negotiations with the vendor.
In December 1999, a vendor of the Company filed a lawsuit that seeks payment in
the amount of $44,269 for the cost of goods provided to the Company. The Company
admits owing certain amounts to the vendor and has accrued the entire amount
claimed as of December 31, 2003. No trial date has been set and the Company is
currently negotiating a settlement of these claims.
During 2002, a vendor of the Company filed a lawsuit that seeks payment in the
amount of $31,745 for the cost of goods provided to the Company. The Company has
accrued the entire amount claimed. No trial date has been set. Subsequent to
year end, this claim was purchased by Abacus and recorded as an increase to the
amount owed to Abacus under the terms of the bridge loan.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. The parties are presently
negotiating settlement.
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. At December 31, 2003, the Company
owed $87,632 on this settlement agreement. The Company is currently in default
on this obligation and is currently negotiating a new settlement agreement.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has made payments to the
financial institution, reducing the obligation to $215,516 at December 31, 2003,
plus interest accruing from January 1, 2002. The Company is in default on this
obligation and is negotiating for settlement of the remaining claims.
Suit was brought against the Company during April 2001, by a former shareholder
alleging that the Company owed $121,825 under the terms of a promissory note. A
Stipulation for Settlement and for Entry of Judgment was executed by the parties
wherein the Company agreed to arrange for payment of a principal amount of
$145,000 in 48 monthly installments. The Company made seven payments and then
failed to make subsequent payments, at which time the shareholder obtained a
consent judgment against the Company. The Company is currently in settlement
negotiations with the former shareholder regarding the judgment.
F-18
Various vendors have notified the Company that they believe they have claims
against the Company totaling $193,604. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims and it is included in accounts payable.
The Company is the defendant in numerous legal actions, primarily resulting from
nonpayment of vendor invoices for goods and services received, that it has
determined the probability of realizing any loss is remote. The total amount of
these legal actions is $159,908. The Company has made no accrual for the legal
actions and is currently in the process of negotiating the dismissal of these
claims with the various vendors.
The Company is also the defendant in numerous immaterial legal actions primarily
resulting from nonpayment of vendors for goods and services received. The
Company has accrued the payables and is currently in the process of negotiating
settlements with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity during 2000, the Company has granted the holders of 5,281,050 shares of
common stock the right to include 50% of the common stock of the holders in any
registration of common stock of the Company, under the Securities Act for offer
to sell to the public (subject to certain exceptions). The Company has also
agreed to keep any filed registration statement effective for a period of 180
days at its own expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 11), the Company granted to the equity line
investor (the "Equity Line Investor") registration rights, in connection with
which the Company is required to file a registration statement covering the
resale of shares put to the Equity Line Investor under the equity line. The
Company is also required to keep the registration statement effective until two
years following the date of the last advance under the equity line. The Company
has not yet filed such registration statement.
Accrued Payroll Tax Liabilities -- As of December 31, 2003, the Company had
accrued liabilities in the amount of $2,107,930 for delinquent payroll taxes,
including interest estimated at $393,311 and penalties estimated at $230,927. Of
this amount, approximately $329,739 was due the State of Utah. During 2002, the
Company negotiated a monthly payment schedule of $4,000 to the State of Utah,
which did not provide for the forgiveness of any taxes, penalties or interest.
Approximately $1,767,253 was owed to the Internal Revenue Service as of December
31, 2003. During 2002, the Company negotiated a payment schedule with respect to
this amount, pursuant to which monthly payments of $25,000 were required. The
Company is currently renegotiating the terms of the payment schedule with the
Internal Revenue Service. Approximately $10,939 was owed to the State of
Colorado as of December 31, 2003.
As of December 31, 2002, the Company had accrued liabilities in the amount of
$2,029,626 for delinquent payroll taxes, including interest estimated at
$304,917 and penalties estimated at $229,285. Of this amount, approximately
$301,741 was due the State of Utah. Approximately $1,716,946 was owed to the
Internal Revenue Service as of December 31, 2002. Approximately $10,939 was owed
to the State of Colorado as of December 31, 2002.
NOTE 9 - INCOME TAXES
The Company has paid no federal or state income taxes. The significant
components of the Company's deferred tax assets and liabilities at December 31,
2003 and 2002, are as follows:
F-19
2003 2002
-------------------- --------------------
Deferred Income Tax Assets:
Inventory reserve $ 261,177 $ 216,305
Bad debt reserve 10,771 13,815
Vacation reserve 26,177 17,356
Research and development credits 26,360 17,979
Net operating loss carryforward 4,465,571 3,443,676
Intellectual property 130,067 144,553
-------------------- --------------------
Total Deferred Income Tax Assets 4,920,123 3,853,684
Valuation allowance (4,843,751) (3,795,179)
Deferred Income Tax Liability - depreciation (76,372) (58,505)
-------------------- --------------------
Net Deferred Income Tax Asset $ - $ -
-------------------- --------------------
The Company has sufficient long-term deferred income tax assets to offset the
deferred income tax liability related to depreciation. The long-term deferred
income tax assets relate to the net operating loss carryforward and the
intellectual property.
The Company has sustained net operating losses in both periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero and consequently, there is no income
tax provision or benefit presented for the years ended December 31, 2003 and
2002.
As of December 31, 2003, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $11,972,039. These net operating loss
carryforwards, if unused, begin to expire in 2019. Utilization of approximately
$1,193,685 of the total net operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate return limitation
rules and limitations on the carryforward of net operating losses after a change
in ownership.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2003 and 2001:
2003 2002
--------------- ----------------
Benefit at statuatory rate (34%) $ (989,733) $ (730,935)
Non-deductible expenses 37,225 39,752
Change in valuation allowance 1,048,572 762,129
State tax benefit, net of federal tax benefit (96,064) (70,946)
--------------- ----------------
Net Benefit from Income Taxes $ - $ -
--------------- ----------------
F-20
NOTE 10 - STOCKHOLDER'S EQUITY
Common Stock Issued for Cash and Debt - Effective January 14, 2002, the Company
entered into four substantially identical agreements with existing shareholders
pursuant to which the Company issued an aggregate of 43,321,186 shares of
restricted common stock at a price of $0.075 per share, the fair value of the
shares, for $500,000 in cash and the reduction of principal of $1,499,090 of
notes payable and $1,250,000 of notes payable to stockholders. No gain or loss
has been recognized on these transactions as the fair value of the stock issued
was equal to the consideration given by the shareholders. The Company used the
$500,000 cash as working capital.
Common Stock Issued for Conversion of Debt - Effective December 23, 2002, the
Company entered into four substantially identical agreements with existing
shareholders pursuant to which the Company issued an aggregate of 30,000,000
shares of restricted common stock at a price of $0.05 per share, the fair value
of the shares, for the reduction of principal of $1,020,154 of notes payable and
$479,846 of accrued interest. No gain or loss has been recognized on these
transactions as the fair value of the stock issued was equal to the
consideration given by the shareholders.
Common Stock Issuance -- During June 2003, the Company issued 500,000 shares of
restricted common stock to a relative of a director for $10,000 of accrued
compensation owed to the director. The $0.02 cost per share was equal to the
market value of the Company's stock on the date the shares were issued.
Equity Line of Credit Agreement - In conjunction with efforts to improve the
results of operations, discussed above, on November 5, 2002, the Company entered
into an Equity Line of Credit Agreement (the "Equity Line Agreement") with
Cornell Capital Partners, LP, a private investor ("Cornell"). The Company
subsequently terminated the Equity Line Agreement, and on April 8, 2003, the
Company entered into an amended equity line agreement (the "Amended Equity Line
Agreement") with Cornell. Under the Amended Equity Line Agreement, the Company
has the right to draw up to $5,000,000 from Cornell against an equity line of
credit (the "Equity Line"), and to put to Cornell shares of the Company's common
stock in lieu of repayment of the draw. The number of shares to be issued is
determined by dividing the amount of the draw by the lowest closing bid price of
our common stock over the five trading days after the advance notice is
tendered. Cornell is required under the Amended Equity Line Agreement to tender
the funds requested by the Company within two trading days after the
five-trading-day period used to determine the market price.
During the year ended December 31, 2003, the Company drew an aggregate amount of
$1,180,000 under the Equity Line Agreement, pursuant to draws on the equity
line, net of fees of $47,200 and prior offering costs of $44,228, and issued a
total of 64,253,508 shares of common stock to Cornell under the Equity Line
Agreement. At the Company's direction, Cornell retained the proceeds of the
draws under the Equity Line Agreement and applied them as payments on the notes
to Cornell, discussed in Note 5 above.
Pursuant to the Equity Line Agreement, in connection with each draw the Company
agreed to pay a fee of 4% of the amount of the draw to Cornell as consideration
for its providing the Equity Line. Total fees paid for the year ended December
31, 2003 were $73,200. Of these payments, $47,200 was offset against additional
paid in capital as shares were issued under the Equity Line Agreement and
$26,000 was classified as deferred offering costs at December 31, 2003. These
deferred offering costs were offset against additional paid in capital as shares
were issued under the Equity Line Agreement subsequent to December 31, 2003.
F-21
Subsequent to December 31, 2003, the Company drew an aggregate of $650,000 under
the Equity Line Agreement, net of deferred offering costs of $26,000, and issued
30,075,515 shares of common stock to Cornell under the Equity Line Agreement.
At the Company's direction, Cornell retained the proceeds of the draws under
the Equity Line Agreement and applied them as payments on the notes to Cornell,
discussed in Note 5 above.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan - During February 2003, the Company adopted the 2002 Stock
Option Plan (the "2002 Plan") with 25,000,000 shares of common stock reserved
for issuance there under. Also, during November 2003, the Company adopted the
2003 Stock Option Plan (the "2003 Plan") with 35,000,000 shares of common stock
reserved for issuance there under. The Company's Board of Directors administers
the plans and has discretion in determining the employees, directors,
independent contractors and advisors who receive awards, the type of awards
(stock, incentive stock options or non-qualified stock options) granted, and the
term, vesting and exercise prices.
Non-Employee Grants - During 2003, the Company granted options to purchase
5,250,000 shares of common stock to non-employees for services, prepaid services
and in settlement of amounts owed for previous services at exercise prices of
$0.0001 per share. The options were all five year options and vested on the
dates granted. 3,249,500 of these options were exercised for cash proceeds of
$525, leaving 2,000,500 options to non-employees outstanding at December 31,
2003.
Employee Grants - During the year ended December 31, 2003, the Company granted
options to purchase 40,750,000 shares of common stock to directors and employees
of the Company pursuant to the 2002 and 2003 Plans. These options are five year
options that vested on the date of grant. The related exercise prices range from
$0.01 to $0.14 per share. As of September 30, 2003, the Company had granted
5,000,000 more options under the 2002 Plan than were available under that plan.
Prior to December 31, 2003, the Company rescinded the grant of those options
through agreements with three option holders. 33,900,000 of these options were
exercised during 2003 for $301,500 of cash, $175,000 of accrued interest and
$75,000 of accrued compensation, leaving 1,850,000 options outstanding at
December 31, 2003.
During the year ended December 31, 2002, the Company granted options to purchase
10,350,000 shares of common stock to certain officers and employees of the
Company pursuant to the 2002 and 2001 Plan. These options were five year options
and vested on the date of grant. The related exercise prices range from $0.03 to
$0.05 per share. During 2002 these options were exercised for $424,000 of cash
and $25,000 of non-cash compensation leaving no options outstanding at December
31, 2002.
A summary of the stock option activity for the years ended December 31, 2003 and
2002 is as follows:
F-22
Shares Weighted Average
Exercise Price
-------------------- --------------------
Outstanding at December 31, 2001 - $ -
Granted 10,350,000 $ 0.04
Exercised (10,350,000) 0.04
-------------------- --------------------
Outstanding at December 31, 2002 - -
Granted 46,000,000 $ 0.02
Exercised (37,149,500) 0.01
Cancelled (5,000,000) 0.01
-------------------- --------------------
Outstanding at December 31, 2003 3,850,500 $ 0.02
==================== ====================
Excercisable at December 31, 2002 - $ -
==================== ====================
Excercisable at December 31, 2003 3,850,500 $ 0.02
==================== ====================
The fair value of stock options was determined at the grant dates using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended 2003 and 2002:
2003 2002
-------------------- --------------------
Expected dividend yield - -
Risk free interest rate 2.85% 3.78%
Expected volatility 338% 399%
Expected life .10 years .10 years
Weighted average fair value per share $ 0.02 $ 0.02
A summary of stock option and warrant grants with exercise prices less than,
equal to or greater than the estimated market value on the date of grant during
the years ended December 31, 2003 and 2002 is as follows:
F-23
Weighted
Weighted Average
Options Average Fair Value of
Granted Exercise Price Options
-------------------- -------------------- -------------------
Year Ended - December 31, 2003
Grants with exercise prices less than the estimated
market value of the common stock 21,750,000 $ 0.01 $ 0.01
Grants with exercise prices equal to the estimated
market value of the common stock 23,000,000 $ 0.02 $ 0.01
Grants with exercise prices greater than the estimated
market value of the common stock 1,250,000 $ 0.05 $ -
Year Ended - December 31, 2002
Grants with exercise prices less than the estimated
market value of the common stock 2,500,000 $ 0.03 $ 0.02
Grants with exercise prices equal to the estimated
market value of the common stock 5,850,000 $ 0.04 $ 0.02
Grants with exercise prices greater than the estimated
market value of the common stock 2,000,000 $ 0.05 $ 0.01
A summary of the stock options outstanding and exercisable at December 31, 2003
follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ---------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Options Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------------- ------------------ -------------- ------------ ------------------ -------------
$0.0001 2,000,500 4.89 $0.0001 2,000,500 $0.0001
$0.02 1,500,000 4.89 $0.02 1,500,000 $0.02
$0.14 350,000 0.67 $0.14 350,000 $0.14
F-24
NOTE 12 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments: electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies. The Company evaluates performance of each segment based on earnings or
loss from operations. Selected segment information is as follows:
Electronics Ethernet
Assembly Technology Total
------------------ ------------------ ---------------
2003
Sales to external customers $ 1,050,090 $ 165,155 $ 1,215,245
Intersegment sales 75,814 - 75,814
Segment loss (2,689,392) (221,586) (2,910,978)
Segment assets 1,946,221 223,613 2,169,834
Depreciation and amortization 295,439 5,081 300,520
2002
Sales to external customers $ 1,838,781 $ 460,887 $ 2,299,668
Intersegment sales 179,451 - 179,451
Segment loss (1,890,097) (259,713) (2,149,810)
Segment assets 2,342,881 237,434 2,580,315
Depreciation and amortization 449,914 20,935 470,849
Sales 2003 2002
---------------- -------------------
Total sales for reportable segments $ 1,291,059 $ 2,479,119
Elimination of intersegment sales (75,814) (179,451)
---------------- -------------------
---------------- -------------------
Consolidated net sales $ 1,215,245 $ 2,299,668
---------------- -------------------
Total Assets 2003 2002
---------------- -------------------
Total assets for reportable segments $ 2,169,834 $ 2,580,315
Adjustment for intersegment amounts - -
---------------- -------------------
Consolidated total assets $ 2,169,834 $ 2,580,315
---------------- -------------------
F-25
NOTE 13 - REVENUES
All revenue-producing assets are located in North America. Revenues are
attributed to the geographic areas based on the location of the customers
purchasing the products. The Company's net sales by geographic area are as
follows:
2003 2002
-------------------- -------------------
United States of America $ 1,206,510 $ 2,291,946
Europe/Africa/Middle East 8,735 7,722
-------------------- -------------------
$ 1,215,245 $ 2,299,668
-------------------- -------------------
NOTE 14 - SUBSEQUENT EVENTS
During January and February 2004, the Company granted options to purchase
10,750,000 shares of common stock to certain employees of the Company and to
members of the board of directors pursuant to the 2003 Plan. These options
vested on the date of grant. The related exercise price was from $0.01 to $0.015
per share, which was equal to the market value of the common stock on the dates
granted. The options are exercisable through 2009. All options granted were
exercised. The options were exercised for $55,000 of cash, $11,250 of accrued
interest to directors and $42,500 of accrued compensation. The Company estimated
the fair value of the options at the grant date using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used in
the Black-Scholes model to determine the fair value of the options to purchase a
share of common stock of $0.01: risk-free interest rate of 2.98 to 3.18 percent,
dividend yield of 0 percent, volatility of 314 to 317 percent, and expected
lives of 0.10 years.
During January and March of 2004, the Company issued $500,000 of additional
notes payable to the Equity Line Investor for $454,000 cash and $46,000 in fees
and offering costs. The notes are on the same terms as all other notes to the
Equity Line Investor as described in Note 10.
Subsequent to December 31, 2003, the Company issued an additional 40,000,000
shares to escrow for future funding of the equity line of credit agreement (see
Note 10).
Subsequent to December 31, 2003, the Company issued 30,075,515 shares of common
stock from the escrowed shares under the Equity Line Agreement in lieu of
payments of $650,000 on notes payable to the Equity Line Investor.
Subsequent to December 31, 2003, Abacas completed negotiations with several
vendors of the Company, whereby Abacas purchased various past due amounts for
goods and services provided by vendors, as well as certain notes payable. The
total of these obligations was $805,613. The Company has recorded this
transaction as a $805,613 non-cash increase to the bridge loan owed to Abacas,
pursuant to the terms of the Abacas agreement.