As filed with the Securities and Exchange Commission on September 2, 2004
Registration Statement No. 333-117466
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
---------------
CIRTRAN CORPORATION
(Name of issuer in its charter)
---------------
Nevada 3672 68-0121636
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
4125 SOUTH 6000 WEST
WEST VALLEY CITY, UTAH 84128
(801) 963-5112
(Address and telephone number of registrant's principal executive offices
and principal place of business)
----------------
IEHAB HAWATMEH
4125 SOUTH 6000 WEST
WEST VALLEY CITY, UTAH 84128
(801) 963-5112
(Name, Address and telephone number of agent for service)
----------------
Copies to:
JEFFREY M. JONES, ESQ.
C. PARKINSON LLOYD, ESQ.
DURHAM JONES & PINEGAR
111 EAST BROADWAY, SUITE 900
SALT LAKE CITY, UTAH 84111
(801) 415-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the following box. [ x ]
i
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following boxes and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following boxes and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Aggregate Aggregate Amount of
Title of Class of Securities To be Price Offering Registration
to be Registered Registered (1) Per Share Price Fee
----------------------------------------------------------------------------------------------------------------------
Common Stock, 250,000,000 shares (2) $0.04(3) $ 10,000,000 (3) $ 1,267 (3)
$0.001 par value per share
------------------- -------------- ---------
Totals 250,000,000 shares $ 10,000,000 $ 1,267 (4)
=================== ============== =========
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(1) All shares offered for resale by the Selling Shareholders.
(2) Consisting of (i) up to 249,900,000 shares of common stock issuable to
the SEDA Investor under the Standby Equity Distribution Agreement; and
(ii) 100,000 shares issued to the Placement Agent in connection with
the Placement Agent Agreement and the Standby Equity Distribution
Agreement.
(3) The fee was estimated pursuant to Rule 457(c) under the Act on the
basis of the average of the bid and asked price of CirTran's common
stock as reported on the OTC Bulletin Board on August 31, 2004.
(4) A fee of $1,584 was paid with the original filing. No additional fee
is due.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
CIRTRAN CORPORATION
A Nevada Corporation
250,000,000 Shares of Common Stock
$0.001 per share
This prospectus relates to the resale of up to 250,000,000 shares (the "Shares")
of common stock of CirTran Corporation, a Nevada corporation. Two of our
shareholders, Cornell Capital Partners, LP (the "SEDA Investor"), and Newbridge
Securities Corporation (the "Placement Agent", and together with the SEDA, the
"Selling Shareholders") are offering all of the Shares covered by this
prospectus. The Selling Shareholders will receive all of the proceeds from the
sale of the Shares and we will receive none of those proceeds. The SEDA Investor
is an underwriter of the Shares.
-------------------------
Investment in the Shares involves a high degree of risk. You should
consider carefully the risk factors beginning on page 5 of this prospectus
before purchasing any of the Shares offered by this prospectus.
-------------------------
CirTran Corporation common stock is quoted on the OTC Bulletin Board
and trades under the symbol "CIRT". The last reported sale price of our common
stock on the OTC Bulletin Board on August 31, 2004, was approximately $0.04 per
share. Nevertheless, the Selling Shareholders do not have to sell the Shares in
transactions reported on the OTC Bulletin Board, and may offer their Shares
through any type of public or private transactions.
CirTran currently has a concurrent offering of its shares that will
have a dilutive effect on any purchaser of shares under this prospectus and the
registration statement of which it is a part. A registration statement on Form
SB-2 (SEC File Number 333-104668) covers sales by the SEDA Investor and two
other selling shareholder of shares issued in connection with a prior equity
line of credit agreement, described more fully in the section "Liquidity and
Capital Resources - Equity Line of Credit Agreement" below on page 26. The
shares issuable in connection with the equity line of credit agreement are not
covered by this prospectus or the registration statement of which it is a part.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
September __, 2004
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CIRTRAN HAS NOT REGISTERED THE SHARES FOR SALE BY THE SELLING
SHAREHOLDERS UNDER THE SECURITIES LAWS OF ANY STATE. BROKERS OR DEALERS
EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THAT THE SHARES HAVE BEEN
REGISTERED UNDER THE SECURITIES LAWS OF THE STATE OR STATES IN WHICH SALES OF
THE SHARES OCCUR AS OF THE TIME OF SUCH SALES, OR THAT THERE IS AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES LAWS OF SUCH
STATES.
THIS PROSPECTUS IS NOT AN OFFER TO SELL ANY SECURITIES OTHER THAN THE
SHARES. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH AN OFFER IS UNLAWFUL.
CIRTRAN HAS NOT AUTHORIZED ANYONE, INCLUDING ANY SALESPERSON OR BROKER,
TO GIVE ORAL OR WRITTEN INFORMATION ABOUT THIS OFFERING, CIRTRAN, OR THE SHARES
THAT IS DIFFERENT FROM THE INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS,
OR ANY SUPPLEMENT TO THIS PROSPECTUS, IS ACCURATE AT ANY DATE OTHER THAN THE
DATE INDICATED ON THE COVER PAGE OF THIS PROSPECTUS OR ANY SUPPLEMENT TO IT. IN
THIS PROSPECTUS, REFERENCES TO "CIRTRAN," "THE COMPANY," "WE," "US," AND "OUR,"
REFER TO CIRTRAN CORPORATION AND ITS SUBSIDIARIES.
TABLE OF CONTENTS
Summary about CirTran Corporation and this offering.........................2
Risk factors................................................................5
Use of proceeds............................................................12
Determination of offering price............................................12
Description of business....................................................13
Management's discussion and analysis or plan of operation..................19
Forward-looking statements.................................................25
The Standby Equity Distribution Agreement..................................25
Selling Shareholders.......................................................26
Plan of distribution.......................................................28
Regulation M...............................................................29
Legal Proceedings..........................................................29
Directors, executive officers, promoters and control persons...............31
Commission's position on indemnification for Securities Act liabilities....32
Security ownership of certain beneficial owners and management.............33
Description of common stock................................................34
Certain relationships and related transactions.............................35
Market for common equity and related stockholder matters...................36
Executive compensation.....................................................37
Changes in and disagreements with accountants on accounting and
financial disclosure...............................................39
Index to financial statements .............................................39
Recent Developments........................................................40
Experts....................................................................40
Legal matters..............................................................40
Summary about CirTran Corporation and this offering
CirTran Corporation
CirTran Corporation is a Nevada corporation engaged in providing a
mixture of high and medium size volume turnkey manufacturing services for
electronics original equipment manufacturers ("OEMs") in the
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communications, networking, peripherals, gaming, consumer products,
telecommunications, automotive, medical, and semiconductor industries. These
services include providing design and new product introduction services, just-
in-time delivery on low-volume to medium-volume turnkey and consignment
projects, and other value-added manufacturing services. Our manufacturing
processes include the following: surface mount technology, ball-grid array
assembly and pin-through-hole technology, which are all methods of attaching
electronic components to circuit boards; manufacturing and test engineering
support and design for manufacturability; and in-circuit and functional test and
full-system mechanical assembly. We also design and manufacture Ethernet cards
that are used to connect computers through fiber optic networks and market these
cards through an international network of distributors, value-added resellers
and system integrators.
We 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 the year 2000, when we effected a reverse split in our
common stock, reducing our issued and outstanding shares to 116,004. In July
2000, we issued 10,000,000 shares of common stock to acquire, through our wholly
owned subsidiary, CirTran Corporation (Utah), substantially all of the assets
and certain liabilities of Circuit Technology, Inc., a Utah corporation. The
shares we issued to Circuit Technology in connection with the acquisition
represented approximately 98.6% of our issued and outstanding common stock
immediately following the acquisition.
Effective 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 of common stock.
Our address is 4125 South 6000 West, West Valley City, Utah 84128, and our
phone number is (801) 963- 5112.
This offering
We entered into a Standby Equity Distribution Agreement (the
"Agreement") dated May 21, 2004, with Cornell Capital Partners, LP (the "SEDA
Investor"). Under the Agreement, we have the right, at our sole discretion, to
draw up to $20 million on the standby equity facility (the "SEDA Facility") and
put to the SEDA Investor shares of our common stock in lieu of repayment of the
draws. The number of shares to be issued in connection with each draw is
determined by dividing the amount of the draw by the lowest volume-weighted
average price of our common stock during the five consecutive trading days after
the advance is sought. The maximum advance amount is one million dollars
($1,000,000) per advance, with a minimum of seven trading days between advances.
The SEDA Investor intends to sell any shares purchased under the Standby Equity
Distribution Agreement at the then-prevailing market price. In addition, the
SEDA Investor will retain 5% of each advance as a fee under the Agreement. The
term of the Agreement runs over a period of twenty-four months after the
effective date of this registration statement or until the full $20 million has
been drawn, whichever comes first. Nevertheless, we are under no obligation to
draw any or all of the funds under SEDA Facility. We intend to use the draws, if
any, against the SEDA Facility for general business purposes, working capital,
and repayment of indebtedness, including indebtedness to the SEDA Investor in
connection with unrelated notes.
We have engaged Newbridge Securities Corporation ("Newbridge"), an
unaffiliated registered broker-dealer, to advise us in connection with the
Agreement. We agreed to pay Newbridge a fee of 100,000 shares of our common
stock. This prospectus also covers the resale by Newbridge of these shares of
common stock.
In connection with the Agreement, we granted registration rights to the
SEDA Investor and to Newbridge, and filed this registration statement on Form
SB-2 which covers the resale by the SEDA Investor and Newbridge of shares issued
in connection with the Agreement.
As discussed below in the "Risk Factors" section, there is no cap on
the number of shares that can be issued under the Agreement. This prospectus and
the registration statement of which it is a part covers the resale by the SEDA
Investor and Newbridge of up to 250,000,000 shares of our common stock. If we
need to issue more than 250,000,000 in connection with the Agreement, we will
need to file additional registration statements to cover the resale of those
shares.
3
There is a large number of shares of common stock underlying the
Agreement that will be available for future sale, and the sale of these shares
will cause dilution to our existing shareholders.
We are limited with respect to how often we can exercise a draw down
and the amount of each draw down. For more details on the Agreement, see "The
Standby Equity Distribution Agreement" elsewhere in this prospectus.
Brokers or dealers effecting transactions in the shares being
registered in this offering should confirm that the shares are registered under
applicable state law or that an exemption from registration is available.
The SEDA Investor and Newbridge are the Selling Shareholders who will
be selling the shares covered by this prospectus and the registration statement
of which it is a part. The Selling Stockholders may sell the shares of common
stock in the public market or through privately negotiated transactions or
otherwise, as described in the section entitled "Plan of Distribution."
In April 2003, we entered into an equity line of credit agreement (the "Equity
Line Agreement") with Cornell. Under the Equity Line Agreement, we have the
right to draw up to $5,000,000 on a line of credit and put shares to Cornell in
lieu of repayments on the draw. The Equity Line Agreement is discussed in more
detail in the section "Liquidity and Capital Resources - Equity Line of Credit
Agreement." We intend to terminate the Equity Line Agreement and cease further
draws or issuances of shares in connection with the Equity Line Agreement when
we are able to draw against the SEDA Facility, which will be when the SEC
declares effective a registration statement registering resale by Cornell of
shares issued under the SEDA Facility.
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Risk Factors
In addition to the other information in this prospectus, the following risk
factors should be considered carefully in evaluating our business before
purchasing any of our shares of common stock. A purchase of our common stock is
speculative and involves significant and substantial risks. Any person who is
not in a position to lose the entire amount of his investment should forego
purchasing our common stock.
Risks Related to Our Operations
We have a history of operating losses and we expect to continue to generate
losses, which could have a material adverse impact on our ability to operate
profitably.
Our expenses are currently greater than our revenues. Our accumulated
deficit was $19,086,866 and $18,214,480 at June 30, 2004, and December 31, 2003,
respectively. Our net loss from operations for the six months ended June 30,
2004 and 2003, were $945,586 and $1,207,017, respectively. Although our gross
profit margin has improved over the last two years, and our level of sales has
decreased during the last year, our ability to operate profitably depends on our
ability to increase our sales further and achieve sufficient gross profit
margins for sustained growth. We can give no assurance that we will be able to
increase our sales sufficiently to enable us to operate profitably, which could
have a material adverse impact on our business.
Our current liabilities exceed our current assets by a significant amount, and
we may not continue as a going concern.
Our financial statements indicate a trend of an increasingly larger
excess of current liabilities over current assets. Our current liabilities
exceeded our current assets by the following amounts as of the dates indicated:
$7,832,259 as of December 31, 2001; $4,490,623 at December 31 2002; and by
$5,529,244 at December 31, 2003. This trend raises substantial doubt about our
ability to continue as a going concern. Unless we obtain additional financing
through operations, investment capital or otherwise, there is significant doubt
we will be able to meet our obligations as they come due and will be unable to
execute our long-term business plans.
The "going concern" paragraph in the reports of our independent public
accountants for the years ended December 31, 2003, 2002, and 2001, raises doubts
about our ability to continue as a going concern.
The independent public accountants' reports for our financial
statements for the years ended December 31, 2003, 2002, and 2001 include an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. This may have an adverse effect on our ability to obtain
financing for our operations and to further develop and market our products.
Our volume of sales has decreased significantly over the last two years, and
there is no guarantee that we will be able to increase sales. This decrease in
sales volume could have a material adverse impact on our ability to operate our
business profitably.
Our sales volume has increased in the first six months of 2004 as
compared to the same period of 2003. Our sales volumes for the last four years
have changed as indicated by the following levels of net sales for the periods
indicated: $1,870,848 for the year ended December 31, 2001; $2,299,668 for the
year ended December 31, 2002 and $1,215,245 for the year ended December 31,
2003. On an annualized basis, this trend indicates a 27% decrease in sales from
2000 through the year ended December 31, 2003. Even though our gross profit has
improved substantially during the same period, unless we are successful in
increasing both sales and net profit margins, there is significant doubt that we
will be able to continue as a going concern.
5
We need to raise additional capital but, due to our current financial situation,
we may not be able to do so. If we are unable to raise sufficient capital to
finance our operations, we may not be able to continue as a going concern.
As of June 30, 2004, our monthly operating costs and interest expenses
averaged approximately $280,000 per month. As income from operations is not
sufficient to meet these expenses, we must depend on other sources of capital to
fund our operations. We have operated without a line of credit since February
2000, and 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. Therefore, we likely will have to rely on equity financing to meet
our anticipated capital needs. We recently entered into a standby equity
distribution agreement to provide financing, but the funds available may not be
sufficient to sustain our operations beyond December 2007, assuming our current
level of activity. There can be no assurances that we will be successful in
obtaining additional capital. If we issue additional shares in connection with
debt or equity financing, this will serve to dilute the value of our common
stock and existing shareholders' positions. If we are unsuccessful in obtaining
additional funding to finance our operations, there is serious doubt that we
will be able to continue as a going concern, and we may be forced to seek the
protection of the bankruptcy laws.
We have significant short-term debt which we are not currently able to fully
service, which could impair our ability to continue as a going concern.
As of June 30, 2004, we have significant short-term debt, including
approximately $944,159 in accounts payable, $409,232 in demand notes due certain
of our shareholders and related parties, and $3,866,477 in accrued liabilities,
over half of which consist of delinquent federal and state payroll taxes (see
"Legal Proceedings"). We are currently not able to fully service this debt. We
are attempting to negotiate forbearance agreements with many of our creditors
and to restructure our short-term debt. There can be no assurance that we will
be successful in these efforts.
There is substantial risk, therefore, that the existence and extent of
the debt obligations could adversely affect our business, operations and
financial condition, and we may be forced to curtail our operations, sell part
or all of our assets, or seek protection under bankruptcy laws. Additionally,
there is substantial risk that our vendors could bring lawsuits to collect the
unpaid amounts. In the event of lawsuits of this type, if we are unable to
negotiate settlements or satisfy our obligations, we could be forced into
bankruptcy.
We have accrued delinquent payroll tax liabilities that we are currently not
able to fully pay, which could result in the Internal Revenue Service's pursuing
statutory foreclosure proceedings against us.
We have accrued delinquent payroll tax liabilities of approximately
$2.1 million and have not yet come to a final resolution of a payment schedule
with respect to most of this amount. Though we are attempting to negotiate
settlement with respect to this amount, there can be no assurance that we will
be successful in those negotiations or that, if successful, we will be able to
service any payment obligations which may result from such settlement. If we are
unsuccessful, the Internal Revenue Service could instigate foreclosure
proceedings against us pursuant to the Service's rules and regulations.
We are involved in numerous legal proceedings that may give rise to significant
liabilities, which could impair our ability to continue as a going concern.
We are involved in numerous legal proceedings, many of which have filed
lawsuits and have obtained judgments against us. (See "Legal Proceedings.") We
are currently attempting to negotiate with each of these claimants to settle the
claims against CirTran, although in many cases, we have not yet reached final
settlements. There can be no assurance that we will be successful in those
negotiations or that, if successful, we will be able to service any payment
obligations which may result from such settlements.
There is substantial risk, therefore, that the existence and extent of
these liabilities could adversely affect our business, operations and financial
condition, and we may be forced to curtail our operations, sell part or all of
our assets, or seek protection under bankruptcy laws. Additionally, there is
substantial risk that our vendors could
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expand their collection efforts to collect the unpaid amounts. If they undertake
significant collection efforts, if we are unable to negotiate settlements or
satisfy our obligations, we could be forced into bankruptcy.
We are dependent on the continued services of our President, and the untimely
death or disability of Iehab Hawatmeh could have a serious adverse effect upon
our company.
We view the continued services of our president, Iehab Hawatmeh, as
critical to the success of our company. Though we have an employment agreement
with Mr. Hawatmeh (see "Executive Compensation"), and a key-man life insurance
policy, the untimely death or disability of Mr. Hawatmeh could have a serious
adverse affect on our operations.
We have a limited product offering, and some of our key technologies are still
in the product development stage, which could have a material adverse impact on
our ability to generate revenues from operations.
We are a full-service contract electronics manufacturer servicing 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.
Presently, there are a limited number of commercially available applications or
products incorporating our technologies. For us to be ultimately successful,
sales from these product offerings must be substantially greater. An additional
element of our business strategy is to achieve revenues through appropriate
strategic alliances, co-development arrangements, and license arrangements with
third parties. There can be no assurance that these collaboration and license
agreements will generate material revenues for our business in the future.
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly
rapid turnaround time for their OEM customers. We do not obtain firm, long-term
purchase commitments from our customers and have experienced a demand for
reduced lead-times in customer orders. Our customers may cancel their orders,
change production quantities or delay design and production for several factors.
Cancellations, reductions or delays by a customer or group of customers could
adversely affect our results of operations. Additional factors that affect the
electronics industry and that could have a material adverse effect on our
business include the inability of our customers to adapt to rapidly changing
technology and evolving industry standards and the inability of our customers to
develop and market their products. If our customers' products become obsolete or
fail to gain commercial acceptance, our results of operations may be materially
and adversely affected.
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
The majority of our revenue is generated from our contract
manufacturing services. Our customers include electronics, telecommunications,
networking, automotive, gaming, and medical device OEMs that contract with us
for the manufacture of specified quantities of products at a particular price
and during a relatively short period of time. As a result, the mix and number of
our clients varies significantly from time to time. Responding to the
fluctuations and variations in the mix and number of our clients can cause
significant time delays in the operation of our business and the realization of
revenues from our clients. These delays could have a material adverse impact on
our business.
Our industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able, especially given our lack of financial resources,
to effectively respond to the technological requirements of a changing market,
including the need for substantial additional capital expenditures
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that may be required as a result of these changes. The electronics manufacturing
services industry is characterized by rapidly changing technology and continuing
process development. The future success of our business will depend in large
part upon our ability to maintain and enhance our technological capabilities and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. In addition, our industry could in the future encounter
competition from new or revised technologies that render existing technology
less competitive or obsolete.
There may be shortages of required components which could cause us to curtail
our manufacturing or incur higher than expected costs.
Component shortages or price fluctuations in such components could have
an adverse effect on our results of operations. We purchase the components we
use in producing circuit board assemblies and other electronic manufacturing
services and we may be required to bear the risk of component price
fluctuations. In addition, shortages of electronic components have occurred in
the past and may occur in the future. These shortages and price fluctuations
could potentially have an adverse effect on our results of operations.
Risks Related to the Offering
Holders of CirTran common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of common
stock in connection with the SEDA Facility.
The following table describes the number of shares of common stock that
would be issuable, assuming that the full remaining amount under the SEDA
Facility had been drawn and shares put to the SEDA Investor (irrespective of the
availability of registered shares), and further assuming that the applicable
conversion or exercise prices at the time of such conversion or exercise were
the following amounts:
Hypothetical Conversion Shares issuable upon draws of $20,000,000
Price under SEDA Facility
------------------------- --------------------------------------------
$0.01 2,000,000,000
$0.02 1,000,000,000
$0.03 666,666,667
$0.04 500,000,000
$0.05 400,000,000
$0.10 200,000,000
$0.15 133,333,333
$0.25 80,000,000
$0.50 40,000,000
Given the formulas for calculating the shares to be issued under the
SEDA Facility, there effectively is no limitation on the number of shares of
common stock which may be issued in connection with draws on the SEDA Facility,
except for the number of shares registered under this or other prospectuses and
related registration statements. As such, holders of our common stock may
experience substantial dilution of their interests as we draw against the SEDA
Facility.
8
Because the number of shares issuable under the SEDA Facility is determined, in
part, on the market price of our common stock, we may experience delays in
drawing the full amount of the SEDA Facility.
The number of shares issuable under the SEDA Facility is determined, in
part, on the market price of our common stock. If the market price of the common
stock decreases, the number of shares of common stock issuable in connection
with the SEDA Facility will increase and, accordingly, the aggregate amount of
draws under the SEDA Facility will decrease. Accordingly, despite our right to
draw up to an aggregate of $20,000,000 under the SEDA Facility, we may run out
of shares registered under this prospectus and the registration statement of
which it is a part to issue to the SEDA Investor in connection with our draws.
The following table demonstrates the correlation between share price decline and
decreases in aggregate draw amounts available, given the maximum 249,900,000
shares of common stock registered under this prospectus and the registration
statement of which it is a part for issuance in connection with draws against
the SEDA Facility:
Shares issuable upon puts, up Maximum draws available, up
Hypothetical Conversion Price to a maximum of 249,900,000 to $20,000,000
-------------------------------- ----------------------------- -----------------------------
$0.01 249,900,000 $ 2,499,000
$0.02 249,900,000 $ 4,998,000
$0.03 249,900,000 $ 7,497,000
$0.04 249,900,000 $ 9,996,000
$0.05 249,900,000 $12,495,000
$0.10 200,000,000 $20,000,000
$0.15 133,333,333 $20,000,000
$0.25 80,000,000 $20,000,000
$0.50 40,000,000 $20,000,000
Our issuances of shares under the SEDA Facility likely will result in overall
dilution to market value and relative voting power of previously issued common
stock, which could result in substantial dilution to the value of shares held by
shareholders prior to sales under this prospectus.
The issuance of common stock in connection with the draws under the
SEDA Facility may result in substantial dilution to the equity interests of
holders of CirTran common stock other than the SEDA Investor. Specifically, the
issuance of a significant amount of additional common stock will result in a
decrease of the relative voting control of our common stock issued and
outstanding prior to the issuance of common stock in connection with the SEDA
Facility. Furthermore, public resales of our common stock by the SEDA Investor
following the issuance of common stock in connection with the SEDA Facility
likely will depress the prevailing market price of our common stock. Even prior
to the time of actual conversions, exercises and public resales, the market
"overhang" resulting from the mere existence of our obligation to honor such
conversions or exercises could depress the market price of our common stock.
Existing shareholders likely will experience increased dilution with decreases
in market value of common stock in relation to our issuances of shares under the
SEDA Facility, which could have a material adverse impact on the value of their
shares.
9
The formula for determining the number of shares of common stock to be
issued under the SEDA Facility is based, in part, on the market price of the
common stock and are equal to the lowest closing bid price of our common stock
over the five trading days after the advance notice is tendered by us to the
SEDA Investor. As a result, the lower the market price of our common stock at
and around the time we put shares under the SEDA Facility, the more shares of
our common stock the SEDA Investor will receive. Any increase in the number of
shares of our common stock issued upon puts of shares as a result of decreases
in the prevailing market price would compound the risks of dilution described in
the preceding paragraph.
As a result of our net tangible book deficit, the SEDA Investor will experience
immediate and substantial dilution to its holdings as a result of the issuances
of common stock in connection with the SEDA Facility.
The net proceeds from the Equity Line and the SEDA Facility could
potentially exceed our net tangible book deficit of $4,015,036 at June 30, 2004.
Accordingly, the SEDA Investor will experience immediate and substantial
dilution between approximately $0.0038 to $0.4668 per share, or approximately
37.90% to 93.36% of the estimated average conversion price of $0.01 to $0.50.
The dilution at various estimated average conversion prices is as follows:
Estimated Average Conversion
Price Dilution Per Share Percent Dilution Per Share
------------------------------ ---------------------- ----------------------------
$0.01 (1) $0.0038 37.90%
$0.02 (1) $0.0094 46.94%
$0.03 (1) $0.0161 53.69%
$0.04 (1) $0.0236 58.91%
$0.05 (1) $0.0315 63.08%
$0.10 $0.0755 75.50%
$0.15 $0.1225 81.66%
$0.25 $0.2195 87.80%
$0.50 $0.4668 93.36%
(1) At this conversion price, the Company would be required to register
additional shares to receive the maximum proceeds available under the SEDA
Facility.
There is an increased potential for short sales of our common stock due to the
sales of shares put to the SEDA Investor in connection with the SEDA Facility,
which could materially effect the market price of our stock.
Downward pressure on the market price of our common stock that likely
will result from sales of our common stock by the SEDA Investor issued in
connection with a draws under the SEDA Facility, could encourage short sales of
common stock by the SEDA Investor. A "short sale" is defined as the sale of
stock by an investor that the investor does not own. Typically, investors who
sell short believe that the price of the stock will fall, and anticipate selling
at a price higher than the price at which they will buy the stock. Significant
amounts of such short selling could place further downward pressure on the
market price of our common stock.
The restrictions on the extent of draws under the SEDA Facility may have little
if any effect on the adverse impact of our issuance of shares under the SEDA
Facility, and as such, the SEDA may sell a large number of shares, resulting in
substantial dilution to the value of shares held by our existing shareholders.
10
We are prohibited from putting shares to the SEDA Investor under the
SEDA Facility if such put would result in that investor holding more than 9.9%
of the then outstanding common stock. These restrictions, however, do not
prevent the SEDA Investor from selling shares of common stock received in
connection with a draw, and then receiving additional shares of common stock in
connection with a subsequent draw. In this way, the SEDA Investor could sell
more than 9.9% of the outstanding common stock in a relatively short time frame
while never holding more than 9.9% at one time.
The trading market for our common stock is limited, and investors who purchase
shares from the SEDA Investor may have difficulty selling their shares.
The public trading market for our common stock is limited. On July 15,
2002, our common stock was listed on the OTC Bulletin Board. Nevertheless, an
established public trading market for our common stock may never develop or, if
developed, it may not be able to be sustained. The OTCBB is an unorganized,
inter-dealer, over-the-counter market that provides significantly less liquidity
than other markets. Purchasers of our common stock therefore may have difficulty
selling their shares should they desire to do so.
The selling shareholders may sell common stock at any price or time, which could
result in a decrease in the market price of our common stock and a resulting
decrease in the value of shares held by existing shareholders.
Upon effectiveness of this registration statement, the SEDA Investor
and Newbridge may offer and sell the shares of common stock received in
connection with the SEDA Facility and the Agreement at a price and time
determined by the SEDA Investor or Newbridge. The timing of sales and the price
at which the shares are sold by the Selling Shareholders could have an adverse
effect upon the public market for our common stock. Although the SEDA Investor
is a statutory underwriter, there is no independent or third-party underwriter
involved in the offering of the shares held by or to be received by the SEDA
Investor, and there can be no guarantee that the disposition of those shares
will be completed in a manner that is not disruptive to the market for our
common stock.
We may be unable to continue to make draws or put shares to the SEDA Investor if
the trading volume in our stock is not sufficient to allow the SEDA Investor to
sell the shares issued to it.
Despite our contractual right to make draws on the SEDA Facility and
sell shares of our stock to the SEDA Investor, we are also prohibited by the
Agreement from drawing down on the SEDA Facility to the extent any put would
cause the SEDA Investor to own in excess of 9.9% of our then-outstanding common
stock. Because the volume of trading in our stock has been volatile, there can
be no assurance that the SEDA Investor will be able to sell a sufficient number
of shares put to it to allow us to take full advantage of the draws.
For example, as of July 9, 2004, we had approximately 410,000,000
shares of our common stock outstanding. Nine and nine-tenths percent of
410,000,000 shares is approximately 40,600,000 shares. As of August 31, 2004,
our average daily trading volume was approximately 2,900,000 shares traded per
day. A hypothetical draw of $1,000,000 the maximum amount we are entitled to
draw under the Agreement, as of August 31, 2004, would result in the issuance of
approximately 25,000,000 shares of our common stock. It could take the SEDA
Investor longer than the 7 trading days we are required to wait between puts to
sell 25,000,000 shares.
If the SEDA Investor is unable to sell all of the shares it receives in
connection with draws under the SEDA Facility, once the number of unsold shares
retained by the SEDA Investor reaches 9.9% of the then-outstanding shares of our
common stock, we would be unable to make draws on the SEDA Facility until the
SEDA Investor had sold additional shares into the market. Alternatively, our
waiting to make subsequent draws on the SEDA Facility until the SEDA Investor
has sold all the shares it receives pursuant to draws will result in a delay in
our access to the capital available under the Agreement. These restrictions on
our access to the capital available under the Agreement could have a material
adverse effect on our operations.
11
It may be more difficult for us to raise funds in subsequent stock offerings as
a result of the sales of our common stock by the SEDA Investor in this offering.
As noted above, sales by the SEDA Investor likely will result in
substantial dilution to the holdings and interest of current and new
shareholders. Additionally, as noted above, the volume of shares sold by the
SEDA Investor could depress the market price of our stock. These factors could
make it more difficult for us to raise additional capital through subsequent
offerings of our common stock, which could have a material adverse effect on our
operations.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Securities in the OTC market are generally more difficult to trade than
those on the Nasdaq National Market, the Nasdaq SmallCap Market or the major
stock exchanges. In addition, accurate price quotations are also more difficult
to obtain. The trading market for our common stock is subject to special
regulations governing the sale of penny stock.
A "penny stock," is defined by regulations of the Securities and
Exchange Commission as an equity security with a market price of less than $5.00
per share. However, an equity security with a market price under $5.00 will not
be considered a penny stock if it fits within any of the following exceptions:
o the equity security is listed on Nasdaq or a national securities
exchange;
o the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
o the issuer of the equity security has been in continuous
operation for more than three years, and has net tangible assets
of at least $2,000,000.
If you buy or sell a penny stock, these regulations require that you
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock would be
subject to Rule 15g-9 of the Exchange Act, which relates to non-Nasdaq and
non-exchange listed securities. Under this rule, broker-dealers who recommend
our securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if their market price is at least
$5.00 per share.
Penny stock regulations will tend to reduce market liquidity of our
common stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
The price of our common stock is volatile, and an investor may not be able to
resell our shares at or above the purchase price.
12
In recent years, the stock market in general, and the OTC Bulletin
Board and the securities of technology companies in particular, has experienced
extreme price and trading volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of operating results.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the only
ones facing CirTran. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the foregoing risks actually occur, our business, financial condition,
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline.
Use of Proceeds
All of the shares of common stock issued in connection with the SEDA
Facility, if and when sold, are being offered and sold by the Selling
Shareholders or their pledgees, donnees, transferees, or other successors in
interest. We will not receive any proceeds from those sales.
We intend to use the proceeds from our draws on the SEDA Facility for
funding the acquisition of raw materials needed for increased production,
repayment of a portion of our outstanding indebtedness, including payment of
loans made to us by Cornell, general corporate purposes, and working capital.
Determination of Offering Price
The Selling Shareholders may sell our common stock at prices then
prevailing or related to the then current market price, or at negotiated prices.
The offering price may have no relationship to any established criteria or
value, such as book value or earnings per share. Additionally, because we have
not generated any profits for several years, the price of our common stock is
not based on past earnings, nor is the price of the shares of our common stock
indicative of current market value for the assets we own. No valuation or
appraisal has been prepared for our business or possible business expansion.
DESCRIPTION OF BUSINESS
We are 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.
During 2004, we established a new division, CirTran-Asia, Inc., which has
contributed to a large portion of the increase in revenue for the six months
ended June 30, 2004. This new division CirTran-Asia is our Asian-based
wholly-owned subsidiary of CirTran Corporation and provides a myriad of
manufacturing services to the direct response and retail consumer markets. Our
experience and expertise in manufacturing enables CirTran-Asia to enter a
project at any phase; engineering and design, product development and
prototyping, tooling, and hi-volume manufacturing.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. CirTran-Asia will pursue manufacturing
relationships beyond printed circuit board assemblies, cables, harnesses and
injection molding systems by establishing complete "box- build" or "turn-key"
relationships in the electronics, retail and direct consumer markets.
We have been preparing for more than a year for this strategic move into the
Asian market. Management anticipates that this new division will elevate CirTran
to an international contract manufacturer status of multiple products in a wide
variety of industries, and will, in short order, allow us to target large-scale
contracts. We
13
anticipate that our new clients will be leading manufacturing and marketing
firms in the retail and direct consumer markets.
Industry Background
The contract electronics manufacturing industry specializes in
providing the program management, technical and administrative supports 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 an OEM the opportunity to avoid large
capital investments in plant, inventory, equipment, and staffing, and to
concentrate instead on innovation, design, and marketing. Customers using our
contract electronics manufacturing services, can 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, 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 which
minimize an OEM's investment in component inventories, personnel, and related
facilities, thereby reducing costs.
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. SMT and PTH 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.
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.
14
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
Corp., a leading business to government (B2G) provider of information technology
solutions to the Department of Defense and Federal, State and Local Governments
worldwide, for another government agency in the amount of $40,000. Racore is
continually pursuing contacts with additional government agencies. In August of
2003, Racore received an order from the United States Air Force for over
$13,000. Further, Racore expects to receive additional orders through 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 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
15
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.
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 in 2004, Racore began aggressively marketing existing
products by simplifying ordering and sales processing to existing customers. We
are also developing cost-reduced versions of existing product line and adding
new sales channels. Additionally, we are in the process of expanding the current
product line and adding new product categories to existing sales channels, along
with products which have 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 new products
that are unique in the market and that will provide us with a more complete
product line.
Through 2004, we anticipate that 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. We believe that these
products will allow us to 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. We anticipate that these
products will allow us to 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 also plan to add major new sales channels to deliver products
and services directly to end users, as well as to 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, and 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.
During a typical 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
16
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, we are 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 August 30, 2004, our backlog had increased to approximately
$7,750,000.
In September and October 2001, we issued several press releases
relating to:
- Our "partnership with an offshore Malaysian entity . . .
expects to commence bidding formulti-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.
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.
17
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
hope to obtain by the end of 2003. 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. DoD and the
Canadian DND will allow us to support the commercial activities of the broad
range of manufacturers working with both governments.
In January and March 2004, we issued press releases relating to a new
agreement with a contract electronics manufacturer. The January 21, 2004, press
release stated that we 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. The March 2, 2004 press release
was issued to give an update on the due diligence process. However, the letter
of intent expired on March 5, 2004, and no agreement was reached regarding an
extension. We have decided not to pursue further negotiations relating to this
matter.
In March 2004, we issued two additional press releases relating to a
our potential acquisition of an interest in a manufacturer of digital fiber
optic cable equipment. On March 18, 2004, we announced that we had signed a
letter of intent to acquire a minority interest in a manufacturer based in
southern California, and that in connection with the acquisition, we anticipated
that we would enter into an exclusive manufacturing agreement. On March 26,
2004, we announced that we anticipated that we expected to finalize the
acquisition of the interest and the exclusive agreement.
On April 13, 2004, we entered into a stock purchase agreement with
Broadata Communications, Inc., a California corporation ("Broadata") under which
we purchased 400,000 shares of Broadata Series B Preferred Stock (the "Broadata
Preferred Shares") for an aggregate purchase price of $300,000. The Broadata
Preferred Shares are convertible, at our option, into an equivalent number of
shares of Broadata common stock, subject to adjustment. The Broadata Preferred
Shares are not redeemable by Broadata. As a holder of the Broadata Preferred
Shares, we have the right to vote the number of shares of Broadata common stock
into which the Broadata Preferred Shares are convertible at the time of the
vote. In connection with the acquisition of the Broadata Preferred Shares, we
also entered into a Preferred Manufacturing Agreement with Broadata. Under this
agreement, we will perform exclusive "turn-key" manufacturing services handling
most of Broadata's manufacturing operations from material procurement to
complete finished box-build of all of Broadata's products. The initial term of
the agreement is three years, continuing month to month thereafter unless
terminated by either party.
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.
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
18
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 "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 73 persons: 5 in administrative positions, 3 in engineering
and design, 63 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
$4,179,654 in 2000, $2,933,084 in 2001,$2,149,810 in 2002, and $2,984,178 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.
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).
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with Managements' Discussion and
Analysis of Financial Condition and Results of
19
Operations included in our Annual Report on Form 10-KSB/A for the year ended
December 31, 2003.
Overview
We provide a mixture of high- and medium volume turnkey manufacturing services
using surface mount technology, ball-grid array assembly, pin-through-hole and
custom injection molded cabling for leading electronics original equipment
manufactures ("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.
During 2004, we established a new division, CirTran-Asia, Inc., which has
contributed to a large portion of the increase in revenue for the six months
ended June 30, 2004. This new division CirTran-Asia is our Asian-based
wholly-owned subsidiary of CirTran Corporation and provides a myriad of
manufacturing services to the direct response and retail consumer markets. Our
experience and expertise in manufacturing enables CirTran-Asia to enter a
project at any phase; engineering and design, product development and
prototyping, tooling, and hi-volume manufacturing.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. CirTran-Asia will pursue manufacturing
relationships beyond printed circuit board assemblies, cables, harnesses and
injection molding systems by establishing complete "box-build" or "turn-key"
relationships in the electronics, retail and direct consumer markets.
We have been preparing for more than a year for this strategic move into the
Asian market. Management anticipates that this new division will elevate CirTran
to an international contract manufacturer status of multiple products in a wide
variety of industries, and will, in short order, allow us to target large-scale
contracts. We anticipate that our new clients will be leading manufacturing and
marketing firms in the retail and direct consumer markets.
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 contained
in our Annual Report on form 10-KSB/A 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.
Revenue Recognition
20
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 market value of related inventory is based upon those agreements.
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, described more fully under "Liquidity and Financing
Arrangements."
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
21
"Item 5 - Other Information."
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.
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.
22
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 Assembly 2003 1,050,090 929,800 (1) 120,290
2002 1,838,781 1,673,739 165,042
Ethernet Technology 2003 165,155 84,742 80,413
2002 460,887 293,112 167,775
(1) Includes the writedown of carrying value of inventories of $160,000
Year Total Sales Pre-existing Customers New Customers
-------- -------------- ------------------------- ------------------
Electronics Assembly 2003 1,050,090 1,036,418 13,672
2002 1,838,781 1,817,312 21,469
Ethernet Technology 2003 165,155 127,040 38,115
2002 460,887 338,927 121,960
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
23
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 30.73%. This increase is primarily attributable to an increase in
interest related to notes payable to Cornell.
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.
Results of Operations - Comparison of Periods Ended June 30, 2004 and 2003
Sales and Cost of Sales
Net sales increased to $1,924,242 for the three-month period ended June 30,
2004, as compared to $416,762 during the same period in 2003 for an increase of
361.7%. The second quarter sales increase can be attributed to several factors,
including the strengthening of the overall market economy. Industry-wide, we are
seeing more OEMs release larger order commitments with extended time tables. The
second significant factor directly related to CirTran is our marketing approach.
Most contract manufacturers approach customers on a job-by-job basis. CirTran
approaches customers on a partner basis. We have developed a program where we
can be more effective when we control the material procurement, purchasing, and
final assembly, providing the customer a final quality product delivered on time
and at a lower market cost. And the biggest factor is establishing a new
division CirTran-Asia, which has contributed to a large portion of the increase
in revenue. This new division CirTran-Asia, is our Asian based wholly-owned
subsidiary of CirTran Corporation provides a myriad of manufacturing services to
the Direct Response and Retail consumer markets. Our vast experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase;
Engineering and Design, Product Development and Prototyping, Tooling, Hi-Volume
Manufacturing etc.. Cost of sales increased by 476.2%, from $271,211 during the
three-month period ended June 30, 2003, to $1,562,788 during the same period in
2004. The increase in cost of sale is due to increase in revenue. Our gross
profit margin for the three-month period ended June 30, 2004, was 18.8%, down
from 34.9% for the same period in 2003. The decrease is due to the increase of
cost of sales for CirTran-Asia sales that have smaller gross margin.
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 June 30, 2004, was $1,590,014, as
compared to $1,247,248 at December 31, 2003. The increase in inventory is
required to facilitate the increase in turnkey sales.
Selling, General and Administrative Expenses
During the quarter ended June 30, 2004, selling, general and administrative
expenses were $650,759 versus $559,545 for the same period in 2003, a 16.3%
increase. The increase was due to a $315,000 increase in our acquisition and
organizational costs in starting up CirTran-Asia division, along with our
efforts to aggressively market our products during a period of economic
downturn. Selling, general and administrative expenses as a percentage of sales
as of June 30, 2004 were 33.8% as compared to 134.3% during the same period in
2003. This decrease is due in part to an increase in sales and better management
of expenses.
Interest Expense
24
Interest expense for quarter ended June 30, 2004, was $233,031 as compared to
$138,284 for the same period in 2003, an increase of 68.5%. The increase is
primarily due to interest expense related to notes payable to the Equity Line
Investor. As of June 30, 2004, and December 31, 2003, the amount of our
liability for delinquent state and federal payroll taxes and estimated penalties
and interest thereon was $2,125,183 and $2,107,930, respectively.
As a result of the above factors, our overall net loss decreased 34.5% to
$361,964 for the quarter ended June 30, 2004, as compared to $552,278 for the
quarter ended June 30, 2003. This decrease was in part attributed to a
substantial increase in sales and better cost controls.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $19,086,866 at June 30, 2004, and
$18,141,280 at December 31, 2003. Our net operating loss for the quarter ending
June 30, 2004, was $361,964, compared to $552,278 for the quarter ended June 30,
2003. Our current liabilities exceeded our current assets by $5,128,208 as of
June 30, 2004, and $5,529,244 as of December 31, 2003. The decrease was mostly
attributable to decreasing account payables, and in increase in accounts
receivable and inventory. For the six months ended June 30, 2004 and 2003, we
had negative cash flows from operations of $1,131,294 and $370,588,
respectively.
Cash
We had cash on hand of $35,089 at June 30, 2004, and $54,135 at December 31,
2003.
Net cash used in operating activities was $1,131,294 for the six months ended
June 30, 2004. During six months ended June 30, 2004, net cash used in
operations was primarily attributable to $945,586 in net losses from operations
and an increase in accounts receivable of $949,072, partially offset by
increases in accrued liabilities and accounts payable of $427,143 and $355,456,
respectively. The non-cash charges were for depreciation and amortization of
$116,228 and loan costs and interest paid from loan proceeds of $145,000.
Net cash used in investing activities during the six months ended June 30, 2004,
consisted of equipment purchases of $245,128 and a purchase of investment
securities in the amount of $300,000.
Net cash provided by financing activities was $1,657,376 during the six months
ended June 30, 2004. Principal sources of cash were proceeds of $1,895,233 from
notes payable to related parties, proceeds from notes payable of $2,927,000, and
proceeds from the exercise of options to purchase common stock of $80,000. These
proceeds were offset by principal payments on notes payable to related parties
in the amount of $2,913,432.
Accounts Receivable
At June 30, 2004, we had receivables of $1,038,259, net of a reserve for
doubtful accounts of $28,876, as compared to $89,187 at December 31, 2003, net
of a reserve of $28,876. This increase was primarily attributed to sales having
substantially increased in the last month of the second quarter as compared to
the last two months in 2003.
Accounts Payable
Accounts payable were $944,159 at June 30, 2004, as compared to $1,300,597 at
December 31, 2003. This decrease is primarily attributed to conversions of
accounts payable to notes payable in relation to settlements made by Abacas
Ventures.
25
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather than
providing cash in operations. We had an accumulated deficit of $19,086,866 and a
total stockholders' deficit of $4,015,036 at June 30, 2004. As of June 30, 2004,
our monthly operating costs and interest expenses averaged approximately
$280,000 per month.
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. At June 30,
2004, we were in default of notes payable whose principal amount, not including
the amount owing to Abacas Ventures, Inc., was approximately $320,000. In
addition, the principal amount of
notes that either mature in 2004 or are payable on demand
was approximately
26
$2,410,000.
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 operating 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
paying the debt and securing 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 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
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 on the Over the Counter Electronic Bulletin Board was obtained in July
2002.
Notes Payable to Equity Line Investor -- At December 31, 2003, we owed $650,000
to Cornell Capital Partners, LP, pursuant to prior unsecured promissory notes.
During the six months ended June 30, 2004, we borrowed an additional $3,200,000
from Cornell, pursuant to four additional unsecured promissory notes. In lieu of
interest, we paid fees at closing of 5% of the loan amount to an affiliate of
the lender. 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 88 days to 193
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 June 30,
2004, we directed the repayment of $1,450,000 of these notes from proceeds
generated under the Equity Line Agreement, discussed below. At June 30, 2004,
the balance owing on these notes was $2,400,000. All notes were paid when due or
before, and at no time did we incur the 24% penalty interest rate.
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 our operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
with Cornell Capital Partners, LP, a private investor ("Cornell").
27
We subsequently terminated that agreement, and on April 8, 2003, we entered into
an amended equity line agreement (the "Equity Line Agreement") with Cornell.
Under the 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 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 three months ended June 30, 2004, we drew an aggregate amount of
$800,000 under the Equity Line Agreement, pursuant to draws on the Equity Line,
net of fees of $32,000, and issued a total of 13,467,303 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, we 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 three months ended June 30,
2004 were $68,000. Of these payments, $32,000 was offset against additional
paid-in capital as shares were issued under the Equity Line Agreement and
$36,000 was recorded as deferred offering costs for total deferred offering
costs of $96,000 at June 30, 2004. These deferred offering costs will be offset
against additional paid-in capital as shares are issued under the Equity Line
Agreement subsequent to June 30, 2004.
From January 1, 2004 through August 18, 2004, we drew an aggregate of $2,150,000
under the Equity Line Agreement, net of deferred offering costs of $86,000 and
issued 57,464,386 shares of common stock to Cornell under the Equity Line
Agreement. At our direction, Cornell has applied the proceeds of the draws under
the Equity Line Agreement 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
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.
The Standby Equity Distribution Agreement
We entered into a Standby Equity Distribution Agreement (the "Agreement") dated
May 21, 2004, with Cornell Capital Partners, LP (the "SEDA Investor"). Under the
Agreement, we have the right, at our sole discretion, to draw up to $20 million
on the standby equity facility (the "SEDA Facility") and put to the SEDA
Investor shares of our common stock in lieu of repayment of the draws. The
number of shares to be issued in connection with each draw is determined by
dividing the amount of the draw by the lowest volume-weighted average price of
our common stock during the five consecutive trading days after the advance is
sought. The maximum advance amount is one million dollars ($1,000,000) per
advance, with a minimum of seven trading days between advances. The SEDA
Investor intends to sell any shares purchased under the Standby Equity
Distribution Agreement at the then-prevailing market price. In addition, the
SEDA Investor will retain 5% of each advance as a fee under the Agreement. The
term of the Agreement runs over a period of twenty-four months after the
effective date of this registration statement or until the full $20 million has
been drawn, whichever comes first. Nevertheless, we are under no obligation to
draw any or all of the funds under
28
SEDA Facility. We intend to use the draws, if any, against the SEDA Facility for
general business purposes, working capital, and repayment of indebtedness,
including indebtedness to the SEDA Investor in connection with unrelated notes.
We have engaged Newbridge Securities Corporation ("Newbridge"), an unaffiliated
registered broker-dealer, to advise us in connection with the Agreement. We
agreed to pay Newbridge a fee of 100,000 shares of our common stock. This
prospectus also covers the resale by Newbridge of these shares of common stock.
In connection with the Agreement, we entered into an escrow agreement under
which Butler Gonzalez LLP agreed to act as escrow agent under the Agreement.
Under the escrow agreement, shares of our common stock issuable in connection
with the SEDA Facility are placed into escrow, and are released to the SEDA
Investor in connection with draws made on the SEDA Facility. Similarly, the
amounts of the draws are placed into the escrow account and released to us at
each closing.
Additionally, in connection with the Agreement, we granted registration rights
to the SEDA Investor and to Newbridge, and filed this registration statement on
Form SB-2 which covers the resale by the SEDA Investor and Newbridge of shares
issued in connection with the Agreement.
As discussed above in the "Risk Factors" section, there is no cap on the number
of shares that can be issued under the Agreement. This prospectus and the
registration statement of which it is a part covers the resale by the SEDA
Investor and Newbridge of up to 250,000,000 shares of our common stock. If we
need to issue more than 250,000,000 in connection with the Agreement, we will
need to file additional registration statements to cover the resale of those
shares.
There is a large number of shares of common stock underlying the Agreement that
will be available for future sale, and the sale of these shares will cause
dilution to our existing shareholders.
We are limited with respect to how often we can exercise a draw down and the
amount of each draw down. We may not make draws against the SEDA Facility more
often than every seven trading days. Additionally, the Agreement prohibits us
from drawing an amount that would result in our issuing shares to the SEDA
Investor such that the SEDA Investor owns in excess of 9.9% of our
then-outstanding common stock.
Brokers or dealers effecting transactions in the shares being registered in this
offering should confirm that the shares are registered under applicable state
law or that an exemption from registration is available.
Selling shareholders
Two of our investors are the Selling Shareholders in connection with
this prospectus and the registration statement of which it is a part. None of
the Selling Shareholders is affiliated in any way with CirTran or any of our
affiliates other than in connection with the prior Equity Line Agreement and
certain loans which Cornell has made to us, described above, and neither the
Selling Shareholders nor any of their affiliates have any relationship of any
type with us and our affiliates other than the presently established Equity Line
Agreement (discussed above) and the notes to Cornell (discussed above) between
the Selling Shareholders, on the one hand, and CirTran, on the other hand. This
prospectus, and the registration statement of which it is a part, cover the
shares to be issued to the Selling Shareholders in connection with the SEDA
Facility.
The following table provides information about the actual and potential
ownership of shares of our common stock by the Selling Shareholders in
connection with the Standby Equity Distribution Agreement as of August 24, 2004,
and the number of our shares registered for sale in this prospectus. The number
of shares of common stock issuable to the SEDA Investor under the SEDA Facility
varies according to the market price at and immediately preceding the put date.
Solely for purposes of estimating the number of shares of common stock that
would be issuable to the SEDA Investor as set forth in the table below, we have
assumed a hypothetical put by us on August 31, 2004, of the full remaining
amount of $20,000,000 under the SEDA Facility at a per share price of
approximately $0.04. The actual per share price and the number of shares
issuable upon actual puts by us could differ substantially. This prospectus and
the registration statement of which it is a part covers the resale of up to
250,000,000 shares of our common stock, of which 249,900,000 are registered in
connection with shares issued to the SEDA Investor in lieu of repayment of draws
on the SEDA Facility.
Under the terms and conditions of the Standby Equity Distribution
Agreement, the SEDA Investor is prohibited from having shares put to it under
the SEDA Facility to the extent such put by us would result in that person
beneficially owning more than
29
9.9% of the then outstanding shares of our common stock following such put. This
restriction does not prevent the SEDA Investor from receiving and selling put
shares and thereafter receiving additional put shares. In this way, the SEDA
Investor could sell more than 9.9% of our outstanding common stock in a
relatively short time frame while never beneficially owning more than 9.9% of
the outstanding CirTran common stock at any one time. For purposes of
calculating the number of shares of common stock issuable to the SEDA Investor
assuming a put of the full amount under the SEDA Facility, as set forth below,
the effect of such 9.9% limitation has been disregarded. The number of shares
issuable to the SEDA Investor as described in the table below therefore may
exceed the actual number of shares such Selling Shareholder may be entitled to
beneficially own under the SEDA Facility. The following information is not
determinative of the Selling Shareholder's beneficial ownership of our common
stock pursuant to Rule 13d-3 or any other provision under the Securities
Exchange Act of 1934, as amended.
30
Shares of
Common Shares of Percentage
Stock Common Stock of Common
Owned by Issuable to Stock Number of Number of
Selling Selling Issuable to Shares of Shares of Percentage of
Share-holder Shareholder Selling Common Stock Common Common Stock
Prior to in Shareholder Registered Stock Owned Beneficially
Name of Selling Offering Connection in Hereunder (2) After Owned After
Shareholder with SEDA Connection Offering the Offering
Facility with SEDA
Transaction Facility
(1) Transaction
---------------------- ----------- ---------------- -------------- -------------- ------------- ---------------
Cornell Capital 0 500,000,000 (3) 54.82% 249,900,000 0 (4) 0% (4)
Partners, LP
---------------------- ----------- ---------------- -------------- -------------- ------------- ---------------
Newbridge Securities 100,000 (5) 0 0.02% 100,000 0 (6) 0% (6)
Corporation
---------------------- ----------- ---------------- -------------- -------------- ------------- ---------------
---------------------
(1) As noted above, the Selling Shareholder is prohibited by the terms
of the Standby Equity Distribution Agreement from having shares put to it under
the SEDA Facility to the extent that such put of shares by us would result in
that person beneficially owning more than 9.9% of the then outstanding shares of
our common stock following such put. The percentages set forth are not
determinative of the Selling Shareholder's beneficial ownership of our common
stock pursuant to Rule 13d-3 or any other provision under the Securities
Exchange Act of 1934, as amended.
(2) The registration statement of which this prospectus is a part
covers up to 249,900,000 shares of common stock issuable under the SEDA
Facility. Because the specific circumstances of the issuances under the SEDA
Facility are unascertainable at this time, the precise total number of shares of
our common stock offered by the Selling Shareholder cannot be fixed at this
time, but cannot exceed 249,900,000 unless we file additional registration
statements registering the resale of the additional shares. The amount set forth
below represents the number of shares of our common stock that have been issued
and that would be issuable, and hence offered in part hereby, assuming a put of
the full remaining amount under the SEDA Facility as of July 9, 2004. The actual
number of shares of our common stock offered hereby may differ according to the
actual number of shares issued upon such conversions.
(3) Includes:
500,000,000 shares of common stock issuable upon a
hypothetical put of the full $20,000,000 available under the SEDA Facility as of
August 31, 2004. This prospectus registers only up to 249,900,000 shares of
common stock issuable under the SEDA Facility. Accordingly, we may not issue
shares in excess of 249,900,000 unless we file additional registration
statements registering the resale of the additional shares.
(4) Assumes a hypothetical draw of the full $20,000,000 available under
the SEDA Facility as of August 31, 2004, and the issuance of 500,000,000 shares
of our common stock, together with the sale by the SEDA Investor of all such
shares. There is no assurance that the SEDA Investor will sell any or all of the
shares offered hereby. However, the SEDA Investor is contractually prohibited
from holding shares, and we are contractually prohibited from putting shares to
the SEDA Investor that would cause it to hold shares, in excess of 9.9% of the
then-issued and shares of our common stock. This number and percentage may
change based on the SEDA's decision to sell or hold the Shares.
(5) Consisting of 100,000 shares issued to Newbridge Securities
Corporation as payment for its services as placement agent.
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(6) There is no assurance that the Selling Shareholders will sell any
or all of the shares offered hereby. If the Selling Shareholders sell all of the
shares issued to them in connection with the SEDA Facility, the number of shares
held following such sales would be 0 and the percentage of ownership would be
0%.
The following table lists the natural person who has or shares voting or
investment control of each of the Selling Shareholders:
Selling Stockholder Name of Natural Person(s)
Cornell Capital Partners LP Mark Angelo*
Newbridge Securities Corporation Guy S. Amico
* Mark Angelo is the President of Yorkville Advisors, which is the general
partner of Cornell, and exercises voting and investment control over Yorkville
Advisors, which exercises voting and investment control over Cornell.
Plan of Distribution
Once the registration statement of which this prospectus is part
becomes effective with the Commission, the Shares covered by this prospectus may
be offered and sold from time to time by the Selling Shareholders or their
pledgees, donees, transferees or successors in interest. Such sales may be made
on the OTC Bulletin Board, in the over-the-counter market or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The Shares may be sold by any means
permitted under law, including one or more of the following:
o a block trade in which a broker-dealer engaged by a Selling
Shareholder will attempt to sell the Shares as agent, but may
position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus;
o an over-the-counter distribution in accordance with the rules of
the OTC Bulletin Board;
o ordinary brokerage transactions in which the broker solicits
purchasers; and
o privately negotiated transactions.
In effecting sales, broker-dealers engaged by the Selling Shareholders may
arrange for other broker-dealers to participate in the resales.
In connection with distributions of the Shares or otherwise, a Selling
Shareholder may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares covered by this prospectus in the course of hedging the positions
they assume with the Selling Shareholder. A Selling Shareholder may also sell
the Shares short and redeliver the Shares to close out such short positions. A
Selling Shareholder may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares,
which the broker-dealer may resell or otherwise transfer under this prospectus.
A Selling Shareholder may also loan or pledge the Shares registered hereunder to
a broker- dealer and the broker-dealer may sell the shares so loaned or upon a
default the broker-dealer may effect sales of the pledged shares pursuant to
this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Shareholder in amounts to
be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers are deemed to be "underwriters" within the meaning
of the Securities Act, in connection with such sales and any such commission,
discount or concession may be deemed to be underwriting discounts or commissions
under the Securities Act. The Selling Shareholder is an underwriter with respect
to its resales of the Shares.
We have advised the Selling Shareholders that the anti-manipulation
rules under the Securities Exchange Act of 1934 may apply to sales of shares in
the market and to the activities of the Selling Shareholders and their
affiliates. In addition, we will make
32
copies of this prospectus available to the Selling Shareholders and have
informed them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the Shares offered hereby.
All costs, expenses and fees in connection with the registration of the
Shares will be borne by us. Commissions and discounts, if any, attributable to
the sales of the Shares will be borne by the appropriate Selling Shareholder. A
Selling Shareholder may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the Shares against certain
liabilities, including liabilities arising under the Securities Act of 1933. We
will not receive any proceeds from the sale of the Shares.
We have agreed with the Selling Shareholders to keep the registration
statement of which this prospectus constitutes a part effective for a period of
2 years from the date of the last advance under the SEDA Facility. Trading of
any unsold shares after the expiration of such period will be subject to
compliance with all applicable securities laws, including Rule 144.
The Selling Shareholders are not obligated to sell any or all of the
Shares covered by this prospectus.
In order to comply with the securities laws of certain states, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, the sale and issuance of Shares may be subject
to the notice filing requirements of certain states.
Regulation M
We have informed the Selling Shareholders that Regulation M promulgated
under the Securities Exchange Act of 1934 may be applicable to them with respect
to any purchase or sale of our common stock. In general, Rule 102 under
Regulation M prohibits any person connected with a distribution of our common
stock from directly or indirectly bidding for, or purchasing for any account in
which it has a beneficial interest, any of the Shares or any right to purchase
the Shares, for a period of one business day before and after completion of its
participation in the distribution.
During any distribution period, Regulation M prohibits the Selling
Shareholders and any other persons engaged in the distribution from engaging in
any stabilizing bid or purchasing our common stock except for the purpose of
preventing or retarding a decline in the open market price of the common stock.
None of these persons may effect any stabilizing transaction to facilitate any
offering at the market. As the Selling Shareholders will be offering and selling
our common stock at the market, Regulation M will prohibit them from effecting
any stabilizing transaction in contravention of Regulation M with respect to the
Shares.
Legal Proceedings
As of June 30, 2004, the Company had accrued liabilities in the amount
of $2,125,183 for delinquent payroll taxes, including interest estimated at
$437,042 and penalties estimated at $230,927. Of this amount, approximately
$308,847 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 $1,805,397
was owed to the Internal Revenue Service as of June 30, 2004. 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, and the IRS is in the
process of reviewing the offer. 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
June 30, 2004.
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. 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 Confession of Judgment and also issued to
33
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 a registration statement to register the resale of the escrowed
shares.
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 had not replaced the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
Sunborne filed a foreign judgment in Salt Lake City and proceeded with execution
thereon. The Company is continuing to negotiate with Sunborne in an attempt to
settle the remaining obligation.
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 the Colorado 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 settlement agreement. 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.
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.
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 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.
34
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 subsequently entered into a
settlement agreement, and the Company has paid the amounts required. Under the
settlement agreement, SuhTech is required to dismiss the case, but as of the
date of this prospectus, the case had not been dismissed.
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 has made all of the required payments, and the
University of Utah has agreed to dismiss the case. As of the date of this
prospectus, the case had not been dismissed.
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.
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.
The Company is attempting to settle this matter with Mr. Madanat.
Cardio Pulmonary Technologies, Inc., vs. Patrick M. Volz, Peripheral
Systems, Inc., and CirTran Corporation, Civil No. 03090501B, Third 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 answered the Complaint . Cardio Pulmonary Technologies
has voluntarily agreed to dismiss the claims against the Company without
prejudice. As of the date of this prospectus, the case had not been dismissed.
35
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.
RecovAR Group, LLC vs. CirTran Corporation, Inc., District Court of
Maryland. This matter arises from an agreement between the Company and United
Parcel Services, Inc. ("UPS"). UPS alleges that the Company owes approximately
$8,024 for services rendered. RecovAR Group, LLC, brought the action on behalf
of UPS. The Company is in settlement negotiations with RecovAR Group, LLC.
Directors, Executive Officers, Promoters and Control Persons
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 38 Director since June 2001.
Trevor Saliba 30 Director since June 2001. Senior Vice-President, Sales and
Marketing. Served
since January
2002.
Iehab J. Hawatmeh, MBA
Chairman, President & CEO
Mr. Hawatmeh founded CirTran Corporation in 1993 and has been its Chairman,
President and CEO since its inception. Mr. Hawatmeh oversees all daily operation
including financial, technical, operational and sales functions for the company.
Under Mr. Hawatmeh's direction, the company has seen its annual sales exceed $20
million, its employment exceed 360 and completed two strategic acquisitions.
Prior to forming the company, Mr. Hawatmeh was the Processing Engineering
Manager for Tandy Corporation overseeing the company's entire contract
manufacturing printed circuit board assembly division. In addition, Mr. Hawatmeh
was responsible for developing and implementing Tandy's facility Quality Control
and Processing Plan model which is used by CirTran today. Mr. Hawatmeh received
his Master's of Business Administration from University of Phoenix and his
Bachelor's of Science in Electrical and Computer Engineering from Brigham Young
University.
Trevor M. Saliba, MS
Senior Vice President,
Worldwide Business Development
Mr. Saliba is responsible for sales and marketing activities worldwide and is
responsible for overseeing all worldwide business development strategies for the
company. Mr. Saliba was elected to the Board of Directors in 2001. From 1997 -
2001 he was President and CEO of Saliba Corp., a privately held contracting firm
he founded. From 1995-1997 he was an Associate with Morgan Stanley. From 1992 -
1995 he was Vice President of Sales and Marketing for SNJ Industries. Mr. Saliba
holds a Bachelors Degree in
36
Business Administration and a Masters Degree in Finance from La Salle University
and has completed an Advanced Graduate Program in Engineering and Management at
the University of California, Berkeley.
James Snow
Vice President,
Product Development
President - Racore Technology Corporation
Mr. Snow is the Vice President of Product Development for CirTran Corporation
and also President of Racore Technology Corp., a wholly owned subsidiary of the
company. Mr. Snow directly oversees the design, planning and management of
Racore's proprietary Local Area Network (LAN) products and provides network
consulting services to clients. Mr. Snow held the position of Director of
Forward Planning and Project Engineering for Phillips Telecommunications and
Data Systems (a Division of N.V. Phillips) from 1982 - 1992. In addition he was
a Principle Engineer for Digital Equipment Corp. from 1992 - 1994. Mr. Snow
holds a Bachelor's degree in Electrical Engineering from Brigham Young
University and Business Management from Brookhaven College.
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.
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.
Commission's Position on Indemnification for Securities Act Liabilities
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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of the 425,044,580
outstanding shares of our
37
common stock which, according to the information supplied to us, were
beneficially owned, as of August 24, 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, 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 12.27%
115 S. Valley Street Shareholder
Burbank, CA 91505
Roger Kokozyon 5% 27,715,620 6.52%
4539 Haskell Avenue Shareholder
Encino, CA 91436
Iehab J. Hawatmeh Director, 60,048,621(2) 11.00%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5% Shareholder
Raed Hawatmeh Director 27,790,530 6.54%
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 18.97%
(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.
38
(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 prospectus, the shares had not been issued.
Description of Common Stock
Effective August 6, 2001, our authorized capital was increased from
500,000,000 to 750,000,000 shares of common stock, $0.001 par value, and we also
effected, effective the same date, a 1:15 forward split of our issued and
outstanding shares of common stock through a forward split and share
distribution. As of August 24, 2004, 425,044,580 (post forward-split) shares of
our common stock were issued and outstanding. We are not authorized to issue
preferred stock.
Each holder of our common stock is entitled to a pro rata share of cash
distributions made to shareholders, including dividend payments, and are
entitled to one vote for each share of record on all matters to be voted on by
shareholders. There is no cumulative voting with respect to the election of our
directors or any other matter. Therefore, the holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of our common stock are entitled to receive dividends when, as and if
declared by our board of directors, in its sole discretion, from funds legally
available for such use. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities
and after provision has been made for each class of stock, if any, having any
preference in relation to our common stock. Holders of our common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to our common stock.
We have never declared or paid a cash dividend on our capital stock,
nor do we expect to pay cash dividends on our common stock in the foreseeable
future. We currently intend to retain our earnings, if any, for use in our
business. Any dividends declared in the future will be at the discretion of our
board of directors and subject to any restrictions that may be imposed by our
lenders.
We have elected not to be governed by the terms and provisions of the
Nevada Private Corporations Law that are designed to delay, defer or prevent a
change in control of the Company.
Registration Rights and Related Matters
Pursuant to an agreement dated November 3, 2000, and as part of our
debt settlement with Future Electronics Corporation ("Future"), we granted
certain registration rights to Future with respect to 5,281,050 (352,070
pre-forward split) shares of our common stock. These rights provide Future with
the opportunity, subject to certain terms and conditions, to include up to 50%
of our common stock that it holds in any registration statement filed by us.
Among other things, we have agreed to pay any costs incurred with the
registration of such stock and to keep any registration statement we file active
for a period of 180 days or until the distribution contemplated in the
registration statement has been completed. Future's registration rights are
assignable and transferable to any individual or entity that does not directly
compete with us. These registration rights are not exercisable, however, with
respect to registration statements relating solely to the sale of securities to
participants in a company stock plan or relating solely to corporate
reorganizations. In addition, the rights would not be fully exercisable if an
underwriter managing a public offering determined in good faith that market
factors required a limitation on the number of shares that Future (or its
assignee) would otherwise be entitled to have registered.
In connection with our debt settlement with Future, our three largest
shareholders, Iehab Hawatmeh, Raed Hawatmeh and Roger Kokozyon (see "Security
Ownership of Certain Beneficial Owners and Management"), entered into lock-up
agreements with Future, whereby they agreed not to sell to the public any shares
of our common stock held by them until June 27, 2002, unless previously
consented to by Future.
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.
39
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. During the six months ended June 30, 2004,
and the year ended December 31, 2003, Abacas purchased certain converted trade
payables, notes payable, and accrued interest of the Company of approximately
$1.273,713 and $2,986, respectively, and converted the obligations into notes to
Abacas. Accrued interest of $27,020 associated with the notes payable was not
converted to the note payable with Abacus; therefore, a gain on forgiveness of
debt was recorded for $27,020 for the six months ended June 30, 2004. The
Company intends to continue to pursue this type of debt conversion going forward
with other creditors.
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. 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.
Market for Common Equity and Related Stockholder Matters
40
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 respective
periods indicated, 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
June 30, 2004 $0.09 $0.04
March 31, 2004 $0.08 $0.01
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
Our 15-for-1 forward stock split was made effective August 6, 2001, and
our stock price decreased accordingly.
As of August 24, 2004, we had approximately 540 shareholders of record
holding 425,044,580 shares of common stock.
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, 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 August 31, 2004, we have issued an
aggregate of 57,464,386 shares of Common Stock to the Equity Line Investor in
connection with draws on the Equity Line. We have used the proceeds of the draws
on the Equity Line to pay outstanding liabilities, including notes to Cornell,
the Equity Line Investor, discussed above. 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. The proceeds of the draws on the Equity Line were used
to pay down notes to Cornell, discussed above.
41
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
$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 $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Executive Compensation
The following table sets forth certain information regarding the annual
and long-term compensation for services to us in all capacities (including
Circuit Technologies, Inc.) for the prior fiscal years ended December 31, 2003,
2002, and 2001, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
42
Annual Compensation Long-Term Compensation
Awards
Name and Salary Bonus Restricted
Principal Position Year ($) ($) Stock Stock
------------------ ---- --- ---
Awards Options All Other
($) (#) Compensation
Iehab J. Hawatmeh 2003 175,000 - - 6,500,000 -
President, Secretary 2002 175,000 - - 1,850,000 -
Treasurer, and Director 2001 175,000 - - - -
Trevor M. Saliba 2003 127,000 - - 3,000,000 -
Sr. Vice President and Director 2002 118,000 - - 500,000 -
of CirTran Corporation 2001 - - - - -
Raed S. Hawatmeh 2003 - - - 3,000,000 -
Director of CirTran 2002 - - - 500,000 -
Corporation 2001 - - - - -
Option/SAR Grants in the Year Ended December 31, 2003
Number of Securities
Underlying % of Total Options
Options/SARs Granted to Employees in Exercise or Base Price
Granted (#) Fiscal Year ($/Sh)
Name Expiration Date
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 - $0.03 Feb - Nov 2008
Aggregated Option/SAR Exercises in the Year Ended December 31, 2003 and
December 31, 2003 Option/SAR Values
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money
Options/SARs at FY End Options/SARs at FY-
(#) End ($)
Exercisable/ Exercisable/
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.
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.
Changes in and disagreements with accountants on
accounting and financial disclosure
None.
Index to Financial Statements
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
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 Q-2
43
Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2004 and 2003 Q-3
Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2004 and 2003 Q-4
Notes to Condensed Consolidated Financial Statements Q-6
Recent Developments
Broadata Manufacturing Agreement
On April 13, 2004, the Company entered into a stock purchase agreement
with Broadata Communications, Inc., a California corporation ("Broadata") under
which the Company purchased 400,000 shares of Broadata Series B Preferred Stock
(the "Broadata Preferred Shares") for an aggregate purchase price of $300,000.
The Broadata Preferred Shares are convertible, at the Company's option, into an
equivalent number of shares of Broadata common stock, subject to adjustment. The
Broadata Preferred Shares are not redeemable by Broadata. As a holder of the
Broadata Preferred Shares, the Company has the right to vote the number of
shares of Broadata common stock into which the Broadata Preferred Shares are
convertible at the time of the vote.
The Company and Broadata also entered into a Preferred Manufacturing
Agreement. Under this agreement, the Company will perform exclusive "turn-key"
manufacturing services handling most of Broadata's manufacturing operations from
material procurement to complete finished box-build of all of Broadata's
products. The initial term of the agreement is three years, continuing month to
month thereafter unless terminated by either party.
Experts
Our consolidated balance sheets as of December 31, 2003 and 2002, and
the consolidated statements of operations, stockholders' deficit, and cash
flows, for the years then ended, have been included in the registration
statement on Form SB-2 of which this prospectus forms a part, in reliance on the
report of Hansen, Barnett & Maxwell, independent certified public accountants,
given on the authority of that firm as experts in auditing and accounting.
Legal matters
The validity of the Shares offered hereby will be passed upon for us by
Durham Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City, Utah
84111.
44
Table of Contents
Summary about CirTran Corporation
and this offering 2
Risk factors 5
Use of proceeds 12
Determination of offering price 12
Description of business 13
Management's discussion and analysis
or plan of operation 19
Forward-looking statements 25
The Standby Equity Distribution Agreement 25
Selling Shareholders 26
Plan of distribution 28
Regulation M 29
Legal Proceedings 29
Directors, executive officers, promoters and
control persons 31
Commission's position on indemnification
for Securities Act liabilities 32
Security ownership of certain beneficial
owners and management 33
Description of common stock 34
Certain relationships and related
transactions 35
Market for common equity and related
stockholder matters 36
Executive compensation 37
Changes in and disagreements with
accountants on accounting
and financial disclosure 39
Index to financial statements 39
Recent Developments 40
Experts 40
Legal matters 40
--------------------
Dealer Prospectus Delivery Obligation. Until [a date which is 90 days from the
effective date of this prospectus], all dealers that effect transactions in
these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
CirTran Corporation
250,000,000
SHARES
COMMON STOCK
--------------------
PROSPECTUS
-------------------
September ___, 2004
45
PART II. Information Not Required in the Prospectus
Item 24. Indemnification of Directors and Officers
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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Item 25. Other Expenses of Issuance And Distribution
We will pay all expenses in connection with the registration and sale
of the common stock by the selling shareholders. The estimated expenses of
issuance and distribution are set forth below.
Registration Fees $ 1,584.00
Transfer Agent Fees 1,000.00
Costs of Printing and Engraving 5,000.00
Legal Fees 20,000.00
Accounting Fees 20,000.00
----------------
Total Estimated Costs of Offering $ 47,584.00
Item 26. Recent Sales of Unregistered Securities
Pursuant to the Equity Line of Credit Agreement (discussed more fully
above 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 August 24, 2004, we have issued an
aggregate of 57,464,386 shares of Common Stock to the Equity Line Investor in
connection with draws on the Equity Line. We have used the proceeds of the draws
on the Equity Line to pay outstanding liabilities, including notes to Cornell,
the Equity Line Investor, discussed above. 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
1
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.
In April 1999, as Vermillion Ventures, Inc., we issued 200,000,000
restricted shares of our common stock (equivalent to 1,000,000 shares of common
stock as presently constituted), valued at $0.0001 per share ($20,000 in the
aggregate) to Milagro Holdings, Inc. for services rendered in connection with
the revival of Vermillion to seek a new business opportunity. Milagro was an
affiliate of Vermillion's principal, and for the purposes of this issuance,
Vermillion relied on the exemption from the registration and prospectus delivery
requirements provided by Section 4(2) of the Securities Act of 1933.
In July 2000, we issued an aggregate of 10,000,000 restricted shares of
common stock (150,000,000 shares of common stock as presently constituted) to
Circuit Technology, Inc. ("CTI") in connection with our acquisition of the
assets and liabilities of CTI. Of these restricted shares, 9,200,000 were
distributed on a pro-rata basis by way of liquidation to, and registered in the
name of, CTI's shareholders, from each of whom we obtained investment
representation letters. The balance of 800,000 common shares issued pursuant to
the CTI acquisition were paid to Cogent Capital Corp. in respect of financial
advisory services rendered in connection with the acquisition. See above under
the section entitled "Certain Relationships and Related Transactions." For the
purpose of these stock issuances, the Company relied on the exemption from the
registration and prospectus delivery requirements provided by Section 4(2) of
the Securities Act of 1933.
In July 2000, concurrent with our acquisition of CTI's assets, we
issued 25,333 restricted shares of our common stock to Milagro, Holdings, Inc.
and 1,000 restricted shares of our common stock (379,995 shares and 15,000
shares, respectively, as presently constituted) to each of Kurt Hughes and John
Lambert, in payment of services rendered to us in connection with the CTI
acquisition. For the purpose of these stock issuances, we relied on the
exemption from the registration and prospectus delivery requirements provided by
Section 4(2) of the Securities Act of 1933. No broker was involved and no
commissions were paid in connection with these transactions.
In November 2000, we issued 352,070 restricted shares of our common
stock (5,281,050 shares as presently constituted) to Future Electronics
Corporation in exchange for $324,284 in debt relief. For the purpose of this
stock issuance, we relied on the exemption from the registration and prospectus
delivery requirements provided by Section 4(2) of the Securities Act of 1933. No
broker was involved and no commissions were paid in connection with this
transaction.
In 2000, prior to our acquisition of CTI, CTI sold 830 restricted
shares of its common stock (subsequently exchanged into 627,238 restricted
shares of our common stock following our acquisition of CTI) for $945,473 to 29
accredited investors in reliance on the exemption from registration requirements
set forth in Section 4(2) of the Securities Act of 1933. During 1999, CTI sold
1,881 restricted shares of its common stock (subsequently exchanged into
1,421,488 restricted shares of our common stock following our acquisition of
CTI) for $2,171,235 to 19 accredited investors in reliance on the exemption from
registration requirements set forth in Section 4(2) of the Securities Act of
1933.
In July 2001, we issued 175,000 shares of common stock (2,625,000
shares post-forward split) pursuant to the exercise of stock options previously
granted pursuant to our 2001 Stock Plan.
Item 27. Exhibits
Copies of the following documents are filed with this registration statement as
exhibits:
Exhibit No. Document
5.1 Opinion of Durham Jones & Pinegar, P.C. (previously filed)
2
10.20 Standby Equity Distribution Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of May 21, 2004 (previously filed)
23.1 Consent of Hansen Barnett & Maxwell LLP
23.2 Consent of Counsel (included in Exhibit 5 Opinion Letter)
(previously filed)
24. Power of Attorney (previously filed)
Item 28. Undertakings
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the provisions described above, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by our director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
We hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To specify in the prospectus any facts or events arising after the
effective date of the registration statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424(b)
(Section 230.4242(b) of Regulation S-B) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, we certify that we have reasonable grounds to believe that we meet all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the city of Salt
Lake City, Utah, on September 2, 2004.
CIRTRAN CORPORATION
A Nevada Corporation
By: /s/ Iehab Hawatmeh
---------------------------------------------
Iehab Hawatmeh
Its: President and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following person in the capacity and on
the date stated.
/s/ Iehab Hawatmeh September 2, 2004
---------------------------------------------
Iehab Hawatmeh
Director
September 2, 2004
/s/ Iehab Hawatmeh*
----------------------------------------------
Raed Hawatmeh
Director
/s/ Iehab Hawatmeh* September 2, 2004
----------------------------------------------
Trevor Saliba
Director
* Signed pursuant to power of attorney.
4
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 applied the proceeds of the
draws under the Equity Line Agreement 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 applied the proceeds of the draws under
the Equity Line Agreement 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.
F-26
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of CirTran Corporation and related
notes thereto are filed as part of this Form 10-QSB:
Page
Condensed Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003 Q-2
Condensed Consolidated Statements of
Operations for the Three and Six Months June 30, 2004 and 2003 Q-3
Condensed Consolidated Statements of Cash Flows for the Three
and Six Months June 30, 2004 and 2003 Q-4
Notes to Condensed Consolidated Financial Statements Q-6
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BANANCE SHEETS
June 30, December 31,
2004 2003
---------------- ----------------
ASSETS
Current Assets
Cash and cash equivalents $ 35,089 $ 54,135
Trade accounts receivable, net of allowance for doubtful
accounts of $28,876 1,038,259 89,187
Inventory 1,590,014 1,247,428
Other 179,334 165,091
---------------- ----------------
Total Current Assets 2,842,696 1,555,841
---------------- ----------------
Property and Equipment, Net 704,198 577,603
Investment in Securities at Cost 300,000 -
Other Assets, Net 13,247 10,390
Deferred Offering Costs 96,000 26,000
---------------- ----------------
Total Assets $ 3,956,141 $ 2,169,834
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 9,623
Accounts payable 944,159 1,300,597
Accrued liabilities 3,886,477 3,615,264
Current maturities of long-term notes payable 2,731,199 1,964,021
Notes payable to stockholders 86 31,838
Notes payable to related parties 409,256 163,742
---------------- ----------------
Total Current Liabilities 7,971,177 7,085,085
---------------- ----------------
Long-Term Notes Payable, Less Current Maturities - -
---------------- ----------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 411,123,012 and 349,087,699
net of 3,000,000 shares held in treasury at no cost at
March 31, 2004 and December 31, 2003, respectively 411,123 349,088
Additional paid-in capital 14,660,707 12,876,941
Accumulated deficit (19,086,866) (18,141,280)
---------------- ----------------
Total Stockholders' Deficit (4,015,036) (4,915,251)
---------------- ----------------
Total Liabilities and Stockholders' Deficit $ 3,956,141 $ 2,169,834
---------------- ----------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Q-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Sales $ 1,924,242 $ 416,762 $ 2,603,604 $ 686,536
Cost of Sales (1,562,788) (271,211) (1,996,547) (456,927)
------------ ------------ ------------ ------------
Gross Profit 361,454 145,551 607,057 229,609
------------ ------------ ------------ ------------
Operating Expenses
Selling, general and administrative expenses 650,759 559,545 1,364,576 1,115,099
Non-cash employee compensation expense 45,000 - 78,750 72,500
------------ ------------ ------------ ------------
Total Operating Expenses 695,759 559,545 1,443,326 1,187,599
------------ ------------ ------------ ------------
Loss From Operations (334,305) (413,994) (836,269) (957,990)
------------ ------------ ------------ ------------
Other Income (Expense)
Interest (233,031) (138,284) (314,593) (249,027)
Other, net (61) - (157) -
Gain on forgiveness of debt 205,433 - 205,433 -
------------ ------------ ------------ ------------
Total Other Expense, Net (27,659) (138,284) (109,317) (249,027)
------------ ------------ ------------ ------------
Net Loss $ (361,964) $ (552,278) $ (945,586) $ (1,207,017)
------------ ------------ ------------ ------------
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00)
------------ ------------ ------------ ------------
Basic and diluted weighted-average
common shares outstanding 402,089,809 256,305,246 387,597,854 253,676,241
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Q-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2004 2003
-------------------- --------------------
Cash flows from operating activities
Net loss $ (945,586) $ (1,207,017)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 116,228 157,154
Loss on disposal of equipment 2,305 -
Gain on forgiveness of debt (205,433) -
Non-cash compensation expense - 72,500
Settlement expense 60,000 -
Loan costs and interest paid from loan proceeds 145,000 -
Options exercised in lieu of board compensation 78,750
Options issued to attorneys and consultants for services 143,601 -
Changes in assets and liabilities:
Trade accounts receivable (949,072) (52,164)
Inventories (342,586) 12,147
Prepaid expenses and other assets (17,100) 3,713
Accounts payable 355,456 187,312
Accrued liabilities 427,143 455,767
-------------------- --------------------
Total adjustments (185,708) 836,429
-------------------- --------------------
Net cash used in operating activities (1,131,294) (370,588)
-------------------- --------------------
Cash flows from investing activities
Purchase of investment (300,000) -
Purchase of property and equipment (245,128) (4,495)
-------------------- --------------------
Net cash used in investing activities (545,128) (4,495)
-------------------- --------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank (9,623) (19,531)
Payments for deferred offering costs - (30,753)
Proceeds from notes payable to stockholders - 107,725
Payments on notes payable to stockholders (31,752) (96,551)
Proceeds from notes payable, net of cash paid for offering costs 2,927,000 230,800
Principal payments on notes payable (290,500) (59,081)
Proceeds from notes payable to related parties 1,895,233 100,000
Payment on notes payable to related parties (2,913,432) -
Proceeds from exercise of options and warrants to purchase
common stock 80,000 187,500
Exercise of options issued to attorneys and consultants
for services 450 -
-------------------- --------------------
Net cash provided by financing activities 1,657,376 420,109
-------------------- --------------------
Net increase in cash and cash equivalents (19,046) 45,026
Cash and cash equivalents at beginning of year 54,135 500
-------------------- --------------------
Cash and cash equivalents at end of year $ 35,089 $ 45,526
-------------------- --------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Q-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
For the Six Months Ended June 30, 2004 2003
-------------------- --------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 59,263 $ 85,804
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 711,894 $ 47,561
Common stock issued for settlement of note payable $ 30,000 $ -
Common stock issuance in which proceeds were retained
as payment of notes payable $ 1,450,000 $ -
Common stock issued for accrued compensation $ - $ 10,000
Accrued interest converted to notes payable $ 9,160 $ 32,054
Stock options exercised for settlement of accrued interest
and accrued compensation $ 61,000 $ 90,000
Note issued for settlement of notes payable and accrued
interest $ 551,819 $ -
Fees withheld from notes payable for Equity Line Agreement $ 58,000 $ 1,840
Deferred offering costs withheld from notes payable proceeds $ 128,000 $ 9,200
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiaries (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
included in the Company's Annual Report on Form 10-KSB/A. In particular, the
Company's significant accounting principles were presented as Note 1 to the
consolidated financial statements in that Report. In the opinion of management,
all adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three and six
months ended June 30, 2004, are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2004.
Principles of Consolidation -- In June 2004, the Company incorporated
CirTran-Asia, Inc., a Utah corporation, as a wholly owned subsidiary.
CirTran-Asia was formed to manufacture, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement.
Other such agreements will be sought in the future.
The condensed consolidated financial statements include the accounts of CirTran
Corporation, and its wholly owned subsidiaries, Racore Technology Corporation
and CirTran-Asia Inc. All significant intercompany transactions have been
eliminated in consolidation.
Stock-Based Compensation -- At June 30, 2004, the Company has one stock-based
employee compensation plan, which is described more fully in Note 8. The Company
accounts for the plan under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25") and related
interpretations. During the six months ended June 30, 2004 and 2003, the Company
recognized compensation expense relating to stock options and warrants of
$78,750 and $72,500, 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:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ------------------------------------
2004 2003 2004 2003
------------ -------------------- ------------- --------------------
Net loss, as reported $ (361,964) $ (552,278) $ (945,586) $ (1,207,017)
Add: Stock-based employee compensation expense
included in net loss 45,000 - 78,750 72,500
Deduct: Total stock-based employee compensation
benefit (expense) determined under fair value
based method for all awards (168,993) 57,863 (304,466) (199,528)
------------ -------------------- ------------- --------------------
Pro forma net loss $ (485,957) $ (494,415) $ (1,171,302) $ (1,334,045)
------------ -------------------- ------------- --------------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.00) $ (0.00) $ (0.00)
------------ -------------------- ------------- --------------------
Basic and diluted loss per common share pro forma $ (0.00) $ (0.00) $ (0.00) $ (0.01)
------------ -------------------- ------------- --------------------
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
Q-6
America, which contemplate continuation of the Company as a going concern.
However, the Company sustained losses of $945,586 and $2,910,978 for the six
months ended June 30, 2004 and the year ended December 31, 2003, respectively.
As of June 30, 2004 and December 31, 2003, the Company had an accumulated
deficit of $19,086,866 and $18,141,280, respectively, and a total stockholders'
deficit of $4,015,036 and $4,915,251, respectively. In addition, the Company
used, rather than provided, cash in its operations in the amounts of $1,131,294
and $1,123,818 for the six months ended June 30, 2004, and the year ended
December 31, 2003, 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 5).
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
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 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 to cure defaults
with lenders through forbearance agreements that the Company will be able to
service. During the six months ended June 30, 2004, and the year ended December
31, 2003, the Company successfully converted trade payables, notes payable, and
accrued interest of approximately $1,263,713 and $2,986, respectively, into
notes. Accrued interest of $27,020 associated with the notes payable was not
converted to the note payable with Abacus; therefore, a gain on forgiveness of
debt was recorded for $27,020 for the six months ended June 30, 2004. The
Company intends to continue to pursue this type of debt conversion going forward
with other creditors. As discussed in Note 7, the Company has entered into an
equity line of credit agreement and a standby equity distribution agreement
with a private investor. The Company intends to terminate the equity line of
credit agreement when it is able to draw against the standby equity
distribution agreement. Realization of additional proceeds under either
agreement is not assured.
NOTE 3 - INVESTMENT IN SECURITIES AT COST
On April 13, 2004, the Company entered into a stock purchase agreement with an
unrelated party under which the Company purchased 400,000 shares of the
investee's Series B Preferred Stock (the "Preferred Shares") for an aggregate
purchase price of $300,000 cash. This purchase was made at fair value. The
Preferred Shares are convertible, at the Company's option, into an equivalent
number of shares of investee common stock, subject to adjustment. The Preferred
Shares are not redeemable by the investee. As a holder of the Preferred Shares,
the Company has the right to vote the number of shares of investee common stock
Q-7
into which the Preferred Shares are convertible at the time of the vote. The
investment represents less than a 5% interest in the investee.
Separate from the purchase of the Preferred Shares, the Company and the investee
also entered into a Preferred Manufacturing Agreement. Under this agreement, the
Company will perform exclusive "turn-key" manufacturing services handling most
of the investee's manufacturing operations from material procurement to complete
finished box-build of all of investee products. The initial term of the
agreement is three years, continuing month to month thereafter unless terminated
by either party.
NOTE 4 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable -- The Company had amounts due to stockholders from
two separate notes. The balance due to stockholders at June 30, 2004, and
December 31, 2003, was $86 and $31,838, respectively. Interest associated with
amounts due to stockholders is accrued at 10 percent. Unpaid accrued interest
was $7,178 and $6,900 at June 30, 2004, and December 31, 2003, 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 six
months ended June 30, 2004, and the year ended December 31, 2003, the Company
was advanced $3,158,946 and $350,000, respectively, and made cash payments of
$2,913,431 and $875,000, respectively, for an outstanding balance on the bridge
loan of $409,256 and $163,742, 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.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $409,256 and $163,742 as of March 31, 2004, and December 31,
2003, respectively. The total accrued interest owed to Abacas between the note
payable and the bridge loan was $325,916 and $230,484 as of June 30, 2004, and
December 31, 2003, respectively, and is included in accrued liabilities.
NOTE 5 - 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
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
Q-8
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.
On April 14, 2004 an unrelated party filed a claim against the Company alleging
that the Company stopped paying amounts due under a note entered into in June
1998. The suit seeks $90,500 plus fees and costs. During May 2004, the Company
settled this claim by issuing 1,000,000 shares of common which resulted in a
settlement expense of $60,000.
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. During 2004, this claim was purchased by Abacus and
recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
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
Q-9
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. During 2004, 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.
During 2004, this claim was purchased by Abacus and recorded as an increase to
the amount owed to Abacus under the terms of the bridge loan.
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. During 2004, this claim was purchased by Abacus
and recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
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. During 2004, 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. During 2004, this claim was
purchased by Abacus and recorded as an increase to the amount owed to Abacus
under the terms of the bridge loan.
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. During 2004, this claim was purchased
by Abacus and recorded as an increase to the amount owed to Abacus under the
terms of the bridge loan.
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 has settled this claim
in full as discussed in Note 5.
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.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $127,236. 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.
Q-10
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 $102,447. 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 7), 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.
Also, in connection with the Company's entering into a standby equity
distribution agreement (described in Note 7), the Company granted to the
investor registration rights, in connection with which the Company is required
to file a registration statement covering the resale of shares put to the
investor under the standby equity distribution agreement. The Company is also
required to keep the registration statement effective until two years following
the date of the last advance under the standby equity distribution agreement.
The Company has not yet had such registration statement declared effective by
the Securities and Exchange Commission.
Accrued Payroll Tax Liabilities -- As of June 30, 2004, the Company had accrued
liabilities in the amount of $2,125,183 for delinquent payroll taxes, including
interest estimated at $437,042 and penalties estimated at $230,927. Of this
amount, approximately $308,847 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 $1,805,397 was owed to the Internal Revenue Service as of June 30,
2004. 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 June 30, 2004.
NOTE 6 - NOTES PAYABLE
In March 2004, the Company settled a note payable with a financial institution.
The outstanding loan balance and accrued interest at the time of settlement was
$189,663. The balance was settled for $90,000 in cash and 542,495 shares of
common stock valued at $30,000. A gain on forgiveness of debt of $61,370 was
recorded on this transaction.
In April 2004, the Company settled three notes payable with a financing company.
The outstanding loan balances and accrued interest at the time of settlement was
$192,043. The balance was settled for $75,000 in cash. A gain on forgiveness of
debt of $117,043 was recorded on this transaction.
Notes Payable to Equity Line Investor -- At December 31, 2003, the Company owed
$650,000 to Cornell Capital Partners, LP, pursuant to prior unsecured promissory
notes. During the six months ended June 30, 2004, the Company borrowed an
additional $3,200,000 from Cornell, pursuant to four additional unsecured
promissory notes. In lieu of interest, the Company paid fees at closing of 4% to
Q-11
5% of the loan amount to an affiliate of the lender. 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 88 days to 193 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 June 30, 2004, the
Company directed the repayment of $1,450,000 of these notes from proceeds
generated under the Amended Equity Line Agreement, discussed in Note 7 below. At
June 30, 2004, the balance owing on these notes was $2,400,000 and the Company
had not incurred the 24% penalty interest rate.
NOTE 7 - STOCKHOLDER'S EQUITY
Common Stock Issuance -- As discussed in Note 6, the Company issued 542,495
shares of common stock valued at $30,000 as part of a settlement agreement for a
note payable.
As discussed in Note 5, during May 2004, the Company settled a legal claim by
issuing 1,000,000 shares of common which resulted in a settlement expense of
$60,000.
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 with Cornell Capital Partners, LP, a
private investor ("Cornell"). The Company subsequently terminated the original
Equity Line of Credit Agreement, and on April 8, 2003, the Company entered into
an amended equity line agreement (the "Equity Line Agreement") with Cornell.
Under the 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 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 six months ended June 30, 2004, the Company drew an aggregate amount
of $1,450,000 under the Equity Line Agreement, pursuant to draws on the equity
line, net of fees of $58,000, and issued a total of 43,542,818 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 6 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 six months ended June
30, 2004 were $128,000. Of these payments, $32,000 was offset against additional
paid-in capital as shares were issued under the Equity Line Agreement and
$96,000 was classified as deferred offering costs at June 30, 2004. These
deferred offering costs will be offset against additional paid-in capital as
shares are issued under the Equity Line Agreement subsequent to June 30, 2004.
From January 1, 2004 through August 18, 2004, the Company drew an aggregate of
$2,150,000 under the Equity Line Agreement, net of deferred offering costs of
$86,000 and issued 57,464,386 shares of common stock to Cornell under the Equity
Line Agreement. At the Company's direction, Cornell has applied the proceeds of
the draws under the Equity Line Agreement as payments on the notes to Cornell,
discussed in Note 6 above.
Q-12
Standby Equity Distribution Agreement - The Company entered into a Standby
Equity Distribution Agreement dated May 21, 2004, with Cornell. Under the
Agreement, the Company has the right, at its sole discretion, to draw up to $20
million on the standby equity facility (the "SEDA Facility") and put to Cornell
shares of its common stock in lieu of repayment of the draws. The number of
shares to be issued in connection with each draw is determined by dividing the
amount of the draw by the lowest volume-weighted average price of our common
stock during the five consecutive trading days after the advance is sought. The
maximum advance amount is one million dollars ($1,000,000) per advance, with a
minimum of seven trading days between advances. Cornell will retain 5% of each
advance as a fee under the Agreement. The term of the Agreement runs over a
period of twenty-four months after a registration statement related to the
Agreement is declared effective or until the full $20 million has been drawn,
whichever comes first.
The Company intends to terminate the Equity Line Agreement and cease further
draws or issuances of shares in connection with the Equity Line Agreement when
it is able to draw against the SEDA Facility, which will be when the SEC
declares effective a registration statement registering resale by Cornell of
shares issued under the SEDA Facility.
NOTE 8 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under APB No. 25 and related interpretations.
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 Statement of Financial Accounting Standards 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 the six months ended June 30, 2004, the Company
granted options to purchase 4,000,000 shares of common stock to attorneys for
services at exercise prices of $0.0001 per share. The options were all five year
options and vested on the dates granted. The weighted average fair value of the
options on the grant dates was $0.048, which resulted in a fair value of
$143,701 which reduced the amount owed for prior services provided. The
attorneys exercised the 4,000,000 options for cash proceeds of $400. An
additional 500,000 of previously issued options were exercised for cash proceeds
of $50.
Employee Grants - During the six months ended June 30, 2004, the Company granted
options to purchase 13,200,000 shares of common stock to directors and employees
of the Company pursuant to the 2003 Plan. These options are five year options
that vested on the date of grant. The related exercise prices range from $0.01
to $0.03 per share. 12,450,000 of these options were exercised during the six
months ended June 30, 2004 for $80,000 of cash, $78,750 of compensation and
$61,000 of accrued compensation.
Q-13
A summary of the stock option activity for the six months ended June 30, 2004,
is as follows:
Shares Weighted Average
Exercise Price
-------------------- --------------------
Outstanding at December 31, 2003 3,850,500 $ 0.02
Granted 17,200,000 $ 0.01
Exercised (16,950,000) $ 0.01
Cancelled - -
--------------------
Outstanding at June 30, 2004 4,100,500 $ 0.03
====================
Excercisable at June 30, 2004 4,100,500 $ 0.03
====================
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 six months ended June 30, 2004:
2004
--------------------
Expected dividend yield -
Risk free interest rate 3.25%
Expected volatility 216%
Expected life .07 years
Weighted average fair value per share $ 0.02
14
NOTE 9 -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 three reportable segments: electronics assembly, Ethernet
technology, and contract manufacturing. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables. The
Ethernet technology segment designs and manufactures Ethernet cards. The
contract manufacturing segment manufactures, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement. 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 Contract
Assembly Technology Manufacturing Total
------------------- ------------------- -------------------- ------------------
June 30, 2004
Sales to external customers $ 1,594,976 $ 42,816 $ 965,812 $ 2,603,604
Intersegment sales 11,325 167 - 11,492
Segment loss (553,362) (123,166) (269,058) (945,586)
Segment assets 3,653,509 206,677 95,955 3,956,141
Depreciation and amortization 115,069 1,159 - 116,228
June 30, 2003
Sales to external customers $ 552,442 $ 134,094 $ - $ 686,536
Intersegment sales 52,242 - - 52,242
Segment loss (1,128,351) (78,666) - (1,207,017)
Segment assets 2,259,617 243,254 - 2,502,871
Depreciation and amortization 154,354 2,800 - 157,154
June 30,
-------------------------------------------
Sales 2004 2003
------------------- --------------------
Total sales for reportable segments $ 2,615,096 $ 738,778
Elimination of intersegment sales (11,492) (52,242)
------------------- --------------------
Consolidated net sales $ 2,603,604 $ 686,536
------------------- --------------------
June 30,
-------------------------------------------
Total Assets 2004 2003
------------------- --------------------
Total assets for reportable segments $ 3,956,141 $ 2,502,871
Adjustment for intersegment amounts - -
------------------- --------------------
Consolidated total assets $ 3,956,141 $ 2,502,871
------------------- --------------------
Q-15