================================================================================
As filed with the Securities and Exchange Commission on December __, 2005
Registration Statement No. 333-128549
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 ]
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
Title of Class of Maximum Maximum
Securities Amount Aggregate Aggregate
Registration To be Price Offering Amount of
to be Registered Registered(1) Per Share Price Fee
-------------------------------------------------------------------------------------------
Common Stock, $0.001 100,000,000 shares(2) $ 0.03(3) $3,000,000(3) $ 354(3)
par value per share
------------------ ---------- ----------
Totals 100,000,000 shares $3,000,000 $ 354(4)
================== ========== ==========
--------------------------------------------------------------------------------------------
(1) All shares offered for resale by the Selling Shareholder.
(2) Consisting of (i) up to 100,000,000 shares of common stock issuable to
the Selling Shareholder upon conversion of the Company's 5% Secured
Convertible Debenture.
(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 September 6, 2005.
(4) Fee paid with original filing. No additional fee 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.
2
CIRTRAN CORPORATION
A Nevada Corporation
100,000,000 Shares of Common Stock
Par Value $0.001 per share
This prospectus relates to the resale of up to 100,000,000 shares (the "Shares")
of common stock of CirTran Corporation, a Nevada corporation. One of our
shareholders, Highgate House Funds, Ltd., (the "Selling Shareholder") is
offering all of the Shares covered by this prospectus. The Selling Shareholder
may receive shares in connection with conversions of our 5% Secured Convertible
Debenture (the "Debenture") sold to the Selling Shareholder pursuant to a
Securities Purchase Agreement (the "Purchase Agreement"), discussed in more
detail herein. The Selling Shareholder may elect to convert, at its option, all
or part of the principal amount, together with accrued interest on the
Debenture, into shares of our common stock at a conversion price discussed in
more detail herein. The Selling Shareholder will receive all of the proceeds
from the sale of the Shares and we will receive none of those proceeds. Highgate
House Funds, Ltd. may be deemed to be 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 7 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 September 21, 2005, was approximately $0.03 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.
-------------------------
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.
-------------------------
December ___, 2005
3
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............................4
Risk factors...................................................................7
Use of proceeds...............................................................14
Determination of offering price...............................................14
Description of business.......................................................14
Management's discussion and analysis or plan of operation.....................25
Forward-looking statements...................................... .............32
5% Convertible Debenture......................................................32
Selling Shareholders..........................................................34
Plan of distribution............................................. ...........36
Regulation M..................................................................37
Legal Proceedings.................................................. ..........38
Directors, executive officers, promoters and control persons..................39
Commission's position on indemnification for Securities Act liabilities.......41
Security ownership of certain beneficial owners and management................42
Description of common stock...................................................43
Certain relationships and related transactions................................44
Market for common equity and related stockholder matters......................46
Executive compensation..................................................... ..48
Changes in and disagreements with accountants on accounting and financial
disclosure...................................................................51
Index to financial statements ................................................51
Experts.......................................................................52
Legal matters.................................................................52
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 communications, networking,
4
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
On May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate" or the "Selling Shareholder"), relating to the sale by us of a 5%
Secured Convertible Debenture, due December 31, 2007, in the aggregate principal
amount of $3,750,000 (the "Convertible Debenture").
In connection with the purchase of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
We also paid a commitment fee of $240,765 and a structuring fee of $10,000 to
Highgate, and we paid legal fees of $5,668. As such, of the total purchase
amount of $3,750,000, the net proceeds to us were $1,228,567, which we received
following the closing of the sale of the Convertible Debenture. We intend to use
these proceeds for general corporate and working capital purposes, in our
discretion.
The Convertible Debenture bears interest at a rate of 5%. Highgate is entitled
to convert, at its option, all or part of the principal amount owing under the
Convertible Debenture into shares of our common stock at a conversion price
equal to the lesser of (a) $0.10 per share, or (b) an amount equal to the lowest
closing bid price of the Common Stock as listed on the OTC Bulletin Board, as
quoted by Bloomberg L.P. for the twenty (20) trading days immediately preceding
the conversion date. Except as otherwise set forth in the Convertible Debenture,
Highgate's right to convert principal amounts owing under the Convertible
Debenture into shares of our common stock is limited as follows:
1. Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the market price of our
stock is $0.10 per share or less at the time of conversion;
2. Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the price of our stock is
5
greater than $0.10 per share at the time of conversion,
provided, however, that Highgate may convert in excess of the
foregoing amounts if we and Highgate mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), Highgate may, in its sole discretion,
accelerate full repayment of all debentures outstanding and
accrued interest thereon or may, notwithstanding any
limitations contained in the Convertible Debenture and/or the
Purchase Agreement, convert the Convertible Debenture and
accrued interest thereon into shares of our common stock
pursuant to the Convertible Debenture.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
12.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
The terms of the Convertible Debenture include and set forth other information,
including certain limitations on conversions by Highgate and redemption of the
Convertible Debenture, all discussed more fully below in the Section "5%
Convertible Debenture." Additionally, in connection with the sale of the
Convertible Debenture, we entered into additional agreements with Highgate,
including a registration rights agreement, a security agreement, and an escrow
agreement, all discussed more fully below in the Section "5% Convertible
Debenture."
Recent Developments
CirTran Products Division
On December 2, 2005, we announced that we had formed a new division,
CirTran Products, which will offer products for sale at retail. The new division
will be run from our new Los Angeles office, with Trevor Saliba, our executive
vice president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006.
6
Risk Factors
The short- and long-term success of CirTran is subject to certain risks, many of
which are substantial in nature and outside the control of CirTran. You should
consider carefully the following risk factors, in addition to other information
contained herein. All forward-looking statements contained herein are deemed by
CirTran to be covered by and to qualify for the safe harbor protection provided
by Section 21E of the Private Securities Litigation Reform Act of 1995. When
used in this prospectus, words such as "believes," "expects," "intends,"
"plans," "anticipates," "estimates," and similar expressions are intended to
identify forward-looking statements, although there may be certain
forward-looking statements not accompanied by such expressions. You should
understand that several factors govern whether any forward-looking statement
contained herein will or can be achieved. Any one of those factors could cause
actual results to differ materially from those projected herein. These
forward-looking statements include plans and objectives of management for future
operations, including the strategies, plans and objectives relating to the
products and the future economic performance of CirTran and its subsidiaries
discussed above. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by CirTran or any other person that
the objectives or plans of CirTran will be achieved.
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 preceeding the quarters ended June 30,
2005 and September 30, 2005, with no assurance that we can stay profitable,
which could have a material adverse impact on our ability to continue
operations.
We have had a history of losses preceeding the quarters ended June 30, 2005 and
September 30, 2005. Our current assets exceeded our current liabilities by
$1,946,157 as of September 30, 2005, and our current liabilities exceeded our
current assets by ($3,558,826) as of December 31, 2004. Our net income for the
nine months ending September 30, 2005, was $839,543, compared to a net loss of
($1,497,673) for the nine months ended September 30, 2004. 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 ability to obtain funding has had a material effect on our
operations. Additionally, there is no guarantee that the fluctuations in the
volume of our sales will stabilize or that we will be able to continue to
increase our revenues to exceed our expenses. There are doubts that we will be
able to continue as a going concern.
Until recently, our current liabilities exceeded our current assets, which
raises doubts that we may continue as a going concern.
Until recently, our current liabilities exceeded our current assets. As of
September 30, 2005, our current assets exceeded our current liabilities by
$1,946,157. However, our current liabilities exceeded our current assets by
($3,558,826) as of December 31, 2004. For the nine months ended September 30,
2005 and 2004, we had negative cash flows from operations of ($1,255,396) and
($1,075,957), respectively. There can be no guarantee that our current assets
will continue to exceed our current liabilities. As such, and in light of our
recent history, there remains a doubt we will be able to meet our obligations as
they come due and will be able to execute our long-term business plans. If we
are unable to meet our obligations as they come due or are unable to execute our
long-term business plans, we may be forced to curtail our operations, sell part
or all of our assets, or seek protection under bankruptcy laws.
The "going concern" paragraph in the reports of our independent registered
public accounting firm for the years ended December 31, 2004 and 2003, raises
doubts about our ability to continue as a going concern.
7
The independent registered public accounting firm's reports for our financial
statements for the years ended December 31, 2004 and 2003, 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 fluctuated significantly over the last four years, and
there is no guarantee that we will be able to increase sales. These fluctuations
in sales volume could have a material adverse impact on our ability to operate
our business profitably.
Our sales volume increased in the year of 2004 as compared to 2003. Our sales
volumes for the previous 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. For the year ended December 31,
2004 our sales increased to $8,862,715 which is a 629.3% increase from year
ended December 31, 2003. Net sales increased to $11,521,411 for the nine month
period ended September 30, 2005, as compared to $5,230,374 during the same
period in 2004, for an increase of 120.3%. This increase indicates an increasing
trend in sales volume. There is no guarantee that the fluctuations in the volume
of our sales will stabilize or that we will be able to continue to increase our
sales volume.
We have negotiated settlements with Utah State Tax Commission. However if we are
unable to pay the amounts required under the agreements, Utah State Tax
Commission could bring statutory foreclosure proceedings against us.
We have entered into an agreement with the Utah State Tax Commission with
respect to certain tax liabilities. However, there can be no assurance that we
will be able to service our payment obligations. If we are unable to meet our
payment obligations, the Utah State Tax Commission could instigate proceedings
against us, including foreclosure proceedings, pursuant to the applicable rules
and regulations of those two entities
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 legal proceedings, several of which involve lawsuits filed
against us. As of December 12, 2005, one company had a judgment against us in
the amount of $37,966, and there were additional claims, in connection with
pending litigation, in the aggregate amount of approximately $12,000,000 As
discussed in the "Legal Proceedings" section, 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 expand their collection efforts to
collect the unpaid amounts. If they undertake significant collection efforts,
and if we are unable to negotiate settlements or satisfy our obligations, we
could be forced into bankruptcy.
In connection with the sale of the Convertible Debenture, we granted a security
interest in all of our assets to secure our payment obligations under the
Convertible Debenture. If we are unable to satisfy our payment obligations,
Highgate could execute on the security interest and take control of our assets.
In connection with the sale of the Convertible Debenture to Highgate, we entered
into a security agreement with the Highgate, pursuant to which we pledged all of
our property, including goods; inventory; contract rights and general
intangibles; documents, receipts, and chattel paper; accounts and other
receivables; products and proceeds; and any interest in any subsidiary, joint
venture, or other investment interest to secure our obligation under the
Convertible Debenture and the related agreements. In the event that we are
unable to make our payment obligations under the Convertible Debenture or to
8
work out alternate arrangements with Highgate, or to arrange for financing to
enable us to make our payment obligations to Highgate, Highgate could execute on
the security interest and take control of all of our property and assets.
We are dependent on the continued services of our President and other officers,
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, and our other
officers as critical to the success of our company. Though we have employment
agreements with Mr. Iehab Hawatmeh, Mr. Trevor Saliba, and Mr. Shaher Hawatmeh
(see "Executive Compensation"), and a key-man life insurance policy for Mr.
Iehab Hawatmeh, the untimely death or disability of Mr. Hawatmeh could have a
serious adverse affect on our operations.
Our international business activities subject us to risks that could adversely
affect our business.
For the nine months ended September 30, 2005, sales of products manufactured in
the United States accounted for 21.4 percent of our total net revenues, and
sales of products manufactured in China accounted for 78.6 percent of our total
net revenues. Our sales of our products manufactured internationally have
increased, and now represents a larger percentage of our sales. Additionally,
the portion of our products that are produced at facilities in close proximity
to our CirTran-Asia production facilities in ShenZhen, China, has increased. As
a result, we are subject to the risks inherent in international operations. Our
international business activities could be affected, limited, or disrupted by a
variety of factors, including:
* the imposition of or changes in governmental controls, taxes,
tariffs, trade restrictions and regulatory requirements;
* the costs and risks of localizing products for foreign
countries;
* longer accounts receivable payment cycles;
* changes in the value of local currencies relative to our
functional currency;
* import and export restrictions;
* loss of tax benefits due to international production;
* general economic and social conditions within foreign
countries;
* taxation in multiple jurisdictions; and/or
* political instability, war or terrorism.
All of these factors could harm future sales of our products to international
customers or future production outside of the United States of our products, and
have a material adverse effect on our business, results of operations and
financial condition.
We may continue to expand our operations in international markets. Our failure
to effectively manage our international operations could harm our business.
Entering new international markets, including our recent entry into China with
CirTran-Asia, may require significant management attention and expenditures and
could adversely affect our operating margins and earnings. To date, we have only
recently begun to penetrate international markets. To the extent that we are
unable to do so, our growth in international markets would be limited, and our
business could be harmed.
9
We expect that our international business operations will be subject to a number
of material risks, including, but not limited to:
* difficulties in managing foreign sales channels;
* difficulties in enforcing agreements and collecting
receivables through foreign legal systems and addressing other
legal issues;
* longer payment cycles;
* taxation issues;
* differences in international telecommunications standards and
regulatory agencies;
* product requirements different from those of our current
customers;
* fluctuations in the value of foreign currencies; and
* unexpected domestic and international regulatory, economic or
political changes.
A combination of any or all of these risks could have a material adverse impact
both on our international business, and on our core business operations in the
United States.
We are dependent on the continued services of Charles Ho, the President of our
CirTran-Asia subsidiary, and the untimely death or disability of Mr. Ho could
have a serious adverse effect upon our subsidiary and company.
We view the continued services of Charles Ho, the president of our CirTran-Asia
subsidiary, as critical to the success of that subsidiary. Though we have an
employment agreement with Mr. Ho (see "Executive Compensation"), we have no
key-man life insurance policy for Mr. Ho. The untimely death or disability of
Mr. Ho could have a serious adverse affect on our international operations and
our operations overall.
Since the merger of CirTran Corporation with Circuit Technology, Abacas
Ventures, Inc., has worked with us to settle certain claims against us brought
by lenders, vendors, and others. Any failure by Abacas to continue to assist us
to settle claims, or any demands by Abacas for payment on claims settled, could
have a material adverse impact on our ability to continue in business.
An explanation of the relationship between CirTran and Abacas Ventures, Inc., is
as follows: Two trusts, the Saliba Living Trust and the Saliba Private Annuity
Trust (collectively, the "Saliba Trusts"), were investors in Circuit Technology,
a Utah corporation and predecessor entity of the Company. The trustees of the
trusts are Tom and Betty Saliba, and Tom Saliba, respectively. (Tom Saliba is
the nephew of the grandfather of Trevor Saliba, one of the directors of
CirTran.) In July 2000, CirTran Corporation merged with Circuit Technology.
Through that merger, the Saliba Trusts became shareholders of CirTran. The
Saliba Trusts are also two of the shareholders of an entity named Abacas
Ventures, Inc. ("Abacas"). At the time of the merger, CirTran was in default on
several of its obligations, including an obligation to Imperial Bank. The Saliba
Trusts, through Abacas, purchased the bank's claim against CirTran to protect
their investment in CirTran. Following the merger, Abacas worked to settle debts
of CirTran to improve Abacas's position and to take advantage of certain
discounts that creditors of CirTran offered to settle their claims. On several
occasions, the Abacas shareholders have agreed to convert outstanding debt owed
by CirTran to Abacas into shares of CirTran common stock. In March 2005, we
agreed with Abacas and its shareholders to settle claims in the aggregate amount
of $2,050,000 which Abacas held against us in exchange for the issuance of
51,250,000 shares of our common stock to certain shareholders of Abacas.
As of December 12, 2005, Abacas did not have any claims against us, and we were
not working with Abacas or its shareholders relating to the settlement of any of
our claims or obligations. However, in the future if claims arise, should we
choose to attempt to work with Abacas regarding the settlement of such potential
10
claims, there can be no assurance that Abacas will agree to work with us to
settle such claims. Additionally, should Abacas choose to work with us with
respect to the settlement of such potential claims, there can be no assurance
that Abacus will agree to convert any debt it acquires in the future, into
shares of CirTran, or that conversions will occur at a price and on terms that
are favorable to CirTran. If Abacus and CirTran cannot agree on acceptable
conversion terms, Abacus may demand payment of some or all of the debt. If
CirTran does not have sufficient cash or credit facilities to pay the amount
then due and owing by CirTran to Abacus, Abacus may exercise its rights and
commence foreclosure or other proceedings against the assets of CirTran. Such
actions by Abacus could have a material adverse effect upon CirTran and its
ability to continue in business.
We have not held an annual meeting in several years, which could result in a
legal action being brought against the Company to compel an annual meeting.
We have not held an annual meeting of shareholders since 2001. Under Nevada law,
if a Nevada corporation does not hold a meeting to elect directors of the
corporation within eighteen months after the last election of directors, a
shareholder or shareholders owning at least fifteen percent of the company's
outstanding voting stock can apply to a court for an order compelling the
company to hold a shareholder meeting to elect directors. Because it has been
more than eighteen months since our last meeting where directors were elected,
an action could be brought, pursuant to Nevada law, against the Company to
compel us to hold an annual meeting and elect directors of the Company.
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, which could make it difficult for us to continue as a
going concern.
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.
A percentage of our revenue is generated from our contract manufacturing
services. Of this amount our three largest customers generate approximately 72%
of the revenue. Our customers include electronics, telecommunications,
networking, automotive, gaming, exercise equipment, 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, resulting from, among other things, the costs
associated from shifting operations to respond to different orders.
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 to effectively respond to the technological requirements of a
changing market, including the need for substantial additional capital
expenditures 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
11
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. If we are unable to respond adequately
to such changes, our business operations could be adversely impacted, which
could make it difficult for us to continue as a going concern.
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 by delaying or making it more
difficult or expensive for us to fill customer orders. 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, again by delaying or making it more difficult or expensive for us to
fill orders or to seek new orders.
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 Convertible Debenture.
The following table describes the number of shares of common stock that would be
issuable, assuming that the full principal amount of the Convertible Debenture
(excluding any interest accrued) was converted into shares of our common stock,
irrespective of the availability of registered shares and any conversion
limitations contained in the Convertible Debenture, 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 Conversion of
Price $3,750,000 Principal Amount of
Convertible Debenture
$0.01 375,000,000
$0.02 187,500,000
$0.03 125,000,000
$0.04 93,750,000
$0.05 75,000,000
$0.10 37,500,000
$0.15 25,000,000
$0.25 15,000,000
$0.50 7,500,000
Given the formula for calculating the shares to be issued in connection with
conversions of the Convertible Debenture, there effectively is no limitation on
the number of shares of common stock which may be issued in connection with
conversions of the Convertible Debenture, except for the number of shares
registered under prospectuses and related registration statements. As such,
holders of our common stock may experience substantial dilution of their
interests to the extent that Highgate converts amounts under the Convertible
Debenture.
Our issuances of shares in connection with conversions of the Convertible
Debenture 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.
12
The issuance of common stock in connection with conversions of the Convertible
Debenture by Highgate may result in substantial dilution to the equity interests
of holders of CirTran common stock other than Highgate. 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 conversions
of the Convertible Debenture. Furthermore, public resales of our common stock by
Highgate following the issuance of common stock in connection with conversions
of the Convertible Debenture likely will depress the prevailing market price of
our common stock. Even prior to the time of actual conversions 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, which could make it more difficult for existing investors
to sell their shares of our common stock, and could reduce the amount they would
receive on such sales.
Existing shareholders likely will experience increased dilution with decreases
in market value of common stock in relation to our issuances of shares in
connection with the Convertible Debenture, which could have a material adverse
impact on the value of their shares.
The formula for determining the number of shares of common stock to be issued in
connection with conversions of the Convertible Debenture is based, in part, on
the market price of the common stock and are equal to the lower of $0.10 per
share or the lowest closing bid price of our common stock over the twenty
trading days after the conversion notice is tendered by us to Highgate. As a
result, the lower the market price of our common stock at and around the time we
issue shares to Highgate in connection with the Convertible Debenture, the more
shares of our common stock Highgate will receive. Any increase in the number of
shares of our common stock issued upon conversion of principal or interest on
the Convertible Debenture as a result of decreases in the prevailing market
price would compound the risks of dilution described in the preceding
paragraphs.
Highgate will experience immediate and substantial dilution to its holdings as a
result of the issuances of common stock in connection with the Convertible
Debenture.
The potential increase in stockholders' equity if Highgate converted the entire
Convertible Debenture could potentially exceed our net tangible book value of
$2,868,679 at September 30, 2005. Accordingly, Highgate will experience
immediate and substantial dilution between approximately $0.0039 to $0.4901 per
share, or approximately 39.43% to 98.02% of the estimated average conversion
price of $0.01 to $0.50. The dilution at various estimated average conversion
prices is as follows:
Average Conversion Price
Estimated Dilution Per Share Percent Dilution Per Share
$0.01 (1) $0.0039 39.43%
$0.02 (1) $0.0124 62.24%
$0.03 (1) $0.0218 72.57%
$0.04 $0.0314 78.46%
$0.05 $0.0411 82.27%
$0.10 $0.0906 90.59%
$0.15 $0.1404 93.60%
$0.25 $0.2402 96.09%
$0.50 $0.4901 98.02%
(1) At this conversion price, the Company would be required to register
additional shares to convert the entire amount of the Convertible Debenture to
shares of common stock.
There is an increased potential for short sales of our common stock due to the
sales of shares issued to Highgate in connection with the Convertible Debenture,
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 Highgate issued in connection with
conversions of the Convertible Debenture, could encourage short sales of common
13
stock by Highgate. 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, which could make it more difficult for existing shareholders to sell
their shares.
The restrictions on the number of shares issued upon conversion of the
Convertible Debenture may have little if any effect on the adverse impact of our
issuance of shares in connection with the Convertible Debenture, and as such,
Highgate may sell a large number of shares, resulting in substantial dilution to
the value of shares held by our existing shareholders.
Highgate is prohibited, except in certain circumstances, from converting amounts
of the Convertible Debenture to the extent that the issuance of shares would
cause Highgate to beneficially own more than 4.99% of our then outstanding
common stock. These restrictions, however, do not prevent Highgate from selling
shares of common stock received in connection with a conversion, and then
receiving additional shares of common stock in connection with a subsequent
conversion. In this way, Highgate could sell more than 4.99% of the outstanding
common stock in a relatively short time frame while never holding more than
4.99% at one time. As a result, existing shareholders and new investors could
experience substantial dilution in the value of their shares of our common
stock.
The trading market for our common stock is limited, and investors who purchase
shares from Highgate 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.
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 Highgate in this offering.
As noted above, sales by Highgate 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 Highgate 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:
* the equity security is listed on Nasdaq or a national
securities exchange;
* 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
14
* 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.
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. Investors in our common stock should be aware
that they may not be able to resell our shares at or above the price paid for
them due to the fluctuations in the market.
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 conversions of the
Convertible Debenture, if and when sold, are being offered and sold by the
Highgate as the Selling Shareholder or its pledgees, donnees, transferees, or
other successors in interest. We will not receive any proceeds from those sales.
Under the Convertible Debenture and related purchase agreement, we used
$2,265,000 to repay two promissory notes to Cornell Capital Partners, LP
("Cornell"), one in the amount of $1,700,000, and the other in the amount of
$565,000.
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to
Highgate, and legal fees of $5,668. As such, of the total purchase amount of
$3,750,000, the net proceeds to us were $1,228,566. We intend to use these
proceeds for general corporate and working capital purposes, at our discretion.
15
As discussed below in the section "MET Advisors Agreement," we presently have no
acquisitions pending or anticipated. Nevertheless, we will continue to review
potential acquisition candidates as they arise, and we may choose to use the
proceeds of the sale of the Convertible Debenture in connection with future
acquisitions.
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
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the increase in revenue for the year ended
December 31, 2004 and the nine months ended September 30, 2005. This division is
an 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 high-volume manufacturing. We anticipate that
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.
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.
We have been preparing since 2003 for this strategic move into the Asian market.
Management anticipates that this new division will elevate CirTran to an
international contract manufacturer status for 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.
Information relating to developments in our increasing line of fitness products
is as follows:
In early June 2004, the Company entered into an exclusive manufacturing
agreement with certain Developers, including Charles Ho, the President of
CirTran-Asia. Under the terms of the agreement, CirTran, through its
wholly-owned subsidiary CirTran-Asia, has the exclusive right to manufacture
certain products developed by the Developers or any of their affiliates.
Pursuant to the agreement, we could enter into addendum agreements with the
developers with respect to particular products to be produced and manufactured.
The agreement was to be for an initial term of 36 months, and may be continued
after that on a month-to-month basis unless terminated by either party by
providing written notice.
16
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, from International Edge relating to the manufacture of
80,000 Ab King abdominal fitness machines. This order was the first order placed
with CirTran-Asia under the exclusive manufacturing agreement. Subsequently, on
June 14, 2004, we received another order for 80,000 units of the abdominal
fitness machines, which was announced on June 16, 2004, through a separate press
release. Since these announcements, CirTran-Asia has manufactured, shipped, and
received payments of approximately $5,546,000. On August 13, 2004, we also
announced that on August 11, 2004 we had received new orders for Wal-Mart. The
company shipped to Wal-Mart the complete order of abdominal fitness machines and
received payments of approximately $400,000 through the date of this Report. The
units were distributed to Wal-Mart stores throughout Canada.
On September 9, 2004, we announced that on September 6, 2004, CirTran-Asia had
been awarded the rights to manufacture the Ab Trainer Club Pro, a new abdominal
fitness machine, for Tristar Products, under an exclusive manufacturing
agreement. This new product is another type of abdominal fitness machine. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately $42,000.
On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had
been awarded the rights to manufacture the AbRoller, another type of an
abdominal fitness machine, for Tristar Products, under an exclusive
manufacturing agreement. Since this announcement, and through the date of this
Report, CirTran-Asia had manufactured and shipped units, and received payments
of approximately $1,300,000.
On September 14, 2004, we announced that on September 7, 2004, we had begun
manufacturing the Instant Abs product, another type of abdominal fitness
machine, for Tristar Products, under an exclusive manufacturing agreement. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured, and shipped units, and received payments of approximately
$620,000.
On September 30, 2004, we announced that on September 23, 2004, CirTran-Asia had
been awarded the rights to manufacture the Denise Austin Pilates product, a
pilates fitness machine, for Tristar Products, under an exclusive manufacturing
agreement. Since this announcement, and through the date of this Report,
CirTran-Asia had manufactured and shipped units, and received payments of
approximately $85,000.
On April 28, 2005, CirTran-Asia announced that it has been awarded a contract
(the "April 2005 Agreement") from Guthy - Renker Corporation to be the exclusive
manufacturer of a new fitness machine (the "Fitness Product") for the sold-on-TV
direct response industry. Pursuant to the April 2005 Agreement, GRC agreed to
purchase all of its requirements of the Fitness Product during the term of the
April 2005 Agreement, which is defined as running from the signing of the
agreement through the time when the Fitness Product is not being sold in
quantity. Since signing the April 2005 Agreement, we have received orders
totaling approximately $700,000 and had expected to complete the shipment of
those orders before the end of December 2005. The contract was extended at the
customer's request to be weekly shipments. Since these announcements,
CirTran-Asia has manufactured and shipped approximately $550,000 worth of units
of the Fitness Product, and has received $520,000 as payment for such shipments.
We expect to ship the balance of the order prior to December 31, 2005.
Information relating to recent developments in new products under development
along with procuring new products for development is as follows:
On August 11, 2004, we announced that CirTran-Asia received a purchase order
from Emson in New York, on August 10, 2004 relating to the manufacture of The
Hot Dog Express, a household cooking appliance for hot dogs and sausages. Since
these announcements, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately
$1,290,000.
On October 1, 2004, we entered into an agreement with Transactional Marketing
Partners, Inc. ("TMP"), for consulting services. Pursuant to the agreement, we
engaged TMP to provide strategic planning and for introduction of new business
to us. Under the agreement, we agreed to pay to TMP a fee of ten
17
percent of the net proceeds received by us from business brought to us by TMP.
The fee is to be paid within 15 calendar days following the end of the month in
which we receive the net proceeds. Additionally, we agreed to pay $7,500 during
each of the first six months of the term of the agreement, with such payments
being viewed as an advance against the fee to be earned. The advance payments
are not refundable, but will be deducted from fees earned by TMP. The agreement
had an initial term of six months, beginning October 1, 2004, and could
automatically extended for successive six-month periods unless either party
gives written notice at least 30 days prior to the expiration of the term of the
agreement of its intent not to renew. Additionally, we may terminate the
agreement at any time by giving 30 days' written notice. In March 2005, we
extended our agreement an additional 6 months that would expire in early
September 2005. In September 2005, the parties agreed to another six-month
extension through March 2006. The parties will evaluate the relationship at that
time and decide if there needs to be another extension. To date the relationship
has proven successful, resulting in multiple new manufacturing relationships.
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with Advanced Beauty Solutions, a company relating to the manufacture
of a hair product in California. Since these announcements, CirTran-Asia has
manufactured and shipped approximately $4,860,000 worth of units of the hair
care products. Early October, CirTran Corporation was notified that the company
had defaulted on its obligation to its financing company. CirTran Corporation
has stopped shipping under credit and is in the process of exercising its rights
permitted by the agreements.
On July 7, 2005, CirTran Corporation signed an Exclusive Manufacturing Agreement
with Advanced Beauty Solutions, a company relating to the manufacture of
additional hair product in California. We have already begun shipment on
previous contracts and are projecting to begin early in 2006.
Information relating to other recent developments in our on going electronics
business and lines of products are as follows:
On June 10, 2005, we announced that Racore Technology Inc., ("Racore"), a
subsidiary of CirTran Corporation, received a purchase order from the New York
Fire Department, an established city public department on the east coast for
fiber optic Ethernet network adapters. Since this announcement, the product has
been manufactured and shipped, and payment has been received. We continue to
market and solicit orders on the Racore product line from various commercial and
public agency clients.
On June 23, 2005, we announced that CirTran Corporation entered the "sold-on-TV"
market by having its CirTran-Asia subsidiary build consumers' electronics
products in China, and is now bringing business to the United States,
refurbishing popular skill-stop slot machines from Japan for home amusement use
in the United States. We continue to receive the imported machines from Rock
Bottom Slots, perform the conversion and refurbishment services and ship
directly to the customer.
On June 24, 2005, we announced that Racore received a purchase order from
Lockheed-Martin, a well-known aerospace manufacturing company for fiber optic
token-ring network adapters. Direct sales of new and repeat business from this
company have totaled more than $30,000. Since this announcement the product has
been manufactured and shipped, and payment has been received. As of the date of
this Report, we have shipped an additional $40,000 worth of product to this
company.
On July 22, 2005, we announced that Racore received a purchase order from the
United States Air Force for OptiCORE network interface cards.. Since this
announcement, the product has been manufactured and shipped, and payment has
been received.
On August 1, 2005, we announced that Racore received a purchase order for fiber
optics products from Cherokee City Appraisal District, another city public
department located in the southern United States for fiber optic PCI Ethernet
network interface cards with VF-45 connectors. Since this announcement, the
product has been manufactured and shipped, and payment has been received.
On August 4, 2005, we announced that Racore received a purchase order from
Disney World, a well-known amusement park in the southeastern United States
18
for more than $21,000 worth of network interface cards. Since this announcement,
the product has been manufactured and shipped, and payment has been received.
On August 9, 2005, we announced that CirTran Corporation completed the first
phase of the redevelopment of the next-generation SafetyNet(TM) RadioBridge(TM).
Since this announcement, the company has begun working on the second phase of
the contract.
On September 13, 2005, we announced that Racore had been named an "approved
vendor" by the City of New York. Racore began its current business relationship
with the City of New York in April when it received a request for an evaluation
unit of the Racore M8190A Fiber Optic Fast Ethernet Network Adapters with
Volition Patch Cords. Racore subsequently received an order placed through one
of its value-added resellers. Since this announcement, the product has been
manufactured and shipped, and payment has been received.
On October 11, 2005, we announced that CirTran Corporation was opening a
satellite office in Los Angeles in accordance with the company's internal
expansion program. The new 2,500-square foot office will be located on the 17th
floor at 1875 Century Park East in the Century City Entertainment and Business
District of Los Angeles. Scheduled to open in late November, the office will
serve as headquarters for CirTran's business development and strategic planning
activities for the company's multiple business divisions including electronics,
consumer products, direct response/retail and "as sold-on-TV" products. Current
plans call for CirTran to open additional satellite offices in New York and
London in 2006. Since this announcement, we have signed a lease for the office
space in Los Angles, Ca.
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006.
Industry Background
The contract manufacturing industry specializes in providing the program
management, technical and administrative support and manufacturing expertise
required to take products 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 client. This full range of
services gives the client an opportunity to avoid large capital investments in
plant, inventory, equipment and staffing and to concentrate instead on
innovation, design and marketing. By using our contract manufacturing services,
our customers have the ability to improve the return on their investment with
greater flexibility in responding to market demands and exploiting new market
opportunities.
We believe two important trends have developed in the contract manufacturing
industry. First, we believe customers increasingly require contract
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis where the customer 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 customers and contract
manufacturers involves an increased use of "just-in-time" inventory management
techniques that minimize the customer's investment in component inventories,
personnel and related facilities, thereby reducing costs.
We believe a second trend in the industry, that relates to our electronics
division, has been the increasing shift from pin-through-hole, or PTH, to
surface mount technology, or SMT, interconnection technologies. Surface mount
and pin-through-hole printed circuit board assemblies are printed circuit boards
on which various electronic components, such as integrated circuits, capacitors,
microprocessors and resistors are mounted. These assemblies are key functional
elements of many types of electronic products. PTH technology involves the
attachment of electronic components to printed circuit boards with leads or pins
that are inserted into pre-drilled holes in the boards. The pins are then
soldered to the electronic circuits. The drive for increasingly greater
19
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
For the year ended December 31, 2004, approximately 38% of our revenues were
generated by our low-volume 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.
As part of our electronics assembly and manufacture focus, in April 2004, we
entered into a Preferred Manufacturing Agreement (the "Broadata Agreement") with
Broadata Communications, Inc. ("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. Specifically, Broadata agreed that during the three-year term of the
Broadata Agreement, we would be the exclusive manufacturer of the Broadata
products covered by the Broadata Agreement. Under the Broadata Agreement,
Broadata issues us purchase orders specifying the work to be completed and the
delivery time. The price paid for work performed under the Broadata Agreement is
our costs plus 10%, plus an assembly fee of $0.07 per component and an hourly
charge of $18 per hour for manual assembly, mechanical assembly, and testing,
subject to periodic review and adjustment. We agreed to ship the products
manufactured FOB West Valley City, Utah. Beginning in May 2005, we will be
handling all of Broadata's manufacturing operations from material procurement to
complete finished box-build. The initial term of the agreement is three years,
continuing month to month thereafter unless terminated by either party.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation ("Racore"), we design,
manufacture, and distribute Ethernet cards. These components are used to connect
computers through fiber optic networks. In addition, we produce private label,
custom designed networking products and technologies on an OEM basis. Our
products serve major industrial, financial, and telecommunications companies
worldwide. We market our products through an international network of
distributors, value added resellers, and systems integrators who sell, install,
and support our entire product catalogue.
Additionally, we have established, and continue to seek to establish, key
business alliances with major multinational companies in the computing and data
communications industries for which we produce private label, custom designed
networking products and technologies on an OEM basis. These alliances generally
require that Racore either develop custom products or adapt existing Racore
products to become part of the OEM customer's product line. Under a typical
contract, Racore provides a product with the customer's logo, packaging,
documentation, and custom software and drivers to allow the product to appear
unique and proprietary to the OEM customer. Contract terms generally provide for
a non-recurring engineering charge for the development and customization
charges, together with a contractual commitment for a specific quantity of
product over a given term.
20
Contract Manufacturing
Through our subsidiary, CirTran-Asia, we design, engineer, manufacture and
supply (DEMS) of products in the electronics, consumer products and general
merchandise industries for various marketers, distributors and national
retailers. This new division is an Asian-based, wholly owned subsidiary of
CirTran Corporation and provides 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 high-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 since 2003 for this strategic move into the Asian market.
Management anticipates that this new division will help to elevate CirTran to an
international contract manufacturer status for 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
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 OEMs, marketing firms,
distributors and national retailers. We believe the trend towards outsourcing
manufacturing will continue. OEMs utilize manufacturing specialists for many
reasons, including the following:
* To Reduce Time to Market. Due to intense competitive pressures
in the electronics and general manufacturing 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.
* To Reduce Investment. The investment required for internal
manufacturing has increased significantly as 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.
* 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.
* 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.
* 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
21
reduce production costs by using a manufacturing specialist's
volume procurement capabilities. In addition, a manufacturing
specialist's expertise in inventory management can provide
better control over inventory levels and increase the OEM's
return on assets.
An important element of our strategy is to establish partnerships with major and
emerging OEM leaders in diverse segments across the electronics industry. Due to
the costs inherent in supporting customer relationships, we focus our efforts on
customers with which the opportunity exists to develop long-term business
partnerships. Our goal is to provide our customers with total manufacturing
solutions for both new and more mature products, as well as across product
generations.
Another element of our strategy is to provide a complete range of manufacturing
management and value-added services, including materials management, board
design, concurrent engineering, assembly of complex printed circuit boards and
other electronic assemblies, test engineering, software manufacturing, accessory
packaging and post-manufacturing services. We believe that as manufacturing
technologies become more complex and as product life cycles shorten, OEMs will
increasingly contract for manufacturing on a turnkey basis as they seek to
reduce their time to market and capital asset and inventory costs. We believe
that the ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it serves. In
addition, we believe that due to the difficulty and long lead-time required to
change manufacturers, turnkey projects generally increase an OEM's dependence on
its manufacturing specialist, which can result in a more stable customer base.
In our high volume electronics, consumer products, and general merchandise
manufacturing divisions, we believe we add value by providing turn-key solutions
in design, engineering, manufacturing and supply of products to our clients.
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, 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 2004 and 2003, CirTran Corporation spent approximately $75,000 and
$52,200, 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
$42,536 and $45,244, 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 started working more aggressively on marketing
existing products by simplifying ordering and sales processing to existing
customers. We are also working towards some cost reduced versions of existing
product line and adding new sales channels. We are also in the process of
expanding the current product line, adding new product categories to existing
sales channels, along with products with reduced development costs, quicker time
to market, higher profit margins, greatly reduced support costs, less pressure
from competitors and shorter sales cycles. We are currently developing one new
product that is unique in the market and one new product that will provide us
with a more complete product line.
In the coming months, 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. These products will
realize reduced development costs, quicker time to market, higher profit
margins, greatly reduced support costs, less pressure from competitors, and
shorter sales and delivery cycles. These products will leverage our expertise in
the areas of fiber optics, security, and portability.
22
We possess advanced design and engineering capabilities with experienced
professional staffs at both our Salt Lake City and ShenZhen offices for
electrical, software, mechanical and industrial design. This provides the end
client a total solution for original design, re-design and final design of
products.
Sales and Marketing
As of December 12, 2005, we had three individuals on our internal sales staff,
and we have continued to pursue sales representative relationships with firms
that work as independent contractors in generating new business. We signed an
agreement with TMP and have other outside independent contractors that we
continue to work with. This is advantageous to the company, as it provides the
company with a broad sales network with no direct cost. It is our intention to
continue pursuing sales representative relationships as well as internal
salaried sales executives. The company is considering establishing a dedicated
satellite sales/engineering office in Los Angeles to headquarter all business
development activities companywide.
We are working aggressively to market existing products through current sales
channels. We will also add major new conduits to deliver products and services
directly to end users, as well as motivate our distributors, partners, and other
third party sales mechanisms. We continue to simplify and improve the sales,
order, and delivery process.
Historically, we have had substantial recurring sales from existing customers,
though we continue to seek out new customers to generate increased sales. We
treat sales and marketing as an integrated process involving direct salespersons
and project managers, as well as senior executives. We also use independent
sales representatives in certain geographic areas. We have also engaged
strategic consulting groups to make strategic introductions to generate new
business. This strategy has proven successful, and has already generated
multiple manufacturing contracts.
During the typical sales process, a customer provides us with specifications for
the product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
In 2004, due to our new contract manufacturing division, only 20% of our net
sales were derived from pre-existing customers, whereas during the year ended
December 31, 2003, over 96% of our net sales were derived from customers that
were also customers during 2002. In 2004, 80% of our sales were derived from new
business, with the majority of those sales being secured by exclusive
manufacturing contracts. In 2004, our major new customer was International Edge
which accounted for about 52% of our net sales. Our second and third largest
customers for 2004 were pre-existing customers, Meret Optical Communications
with about 14%, and Dynojet Research Inc. with over 7%of our net sales. This
trend should continue into 2006 and 2007. Historically, a small number of
customers accounted for a significant portion of our electronics assembly and
manufacture division net sales. In 2004, our three largest customers accounted
for approximately 55% of our total sales in the electronics assembly and
manufacture division, compared to 2003 where our three largest customers
accounted for approximately 60% of our total sales. In 2003, our three largest
customers were pre-existing customers, Dynojet Research Inc with over 28%, Linux
Network with about 23%, and The Parvus Corporation with over 9% of our net
sales.
Our expansion into China manufacturing has allowed us to increase our sales,
manufacturing capacity and output with minimal capital investment required. By
using various subcontractors, including Zhejiang Hengtai Machinery Manufacturing
Co., Ltd., which manufactures the Supreme Pilates and Zhejiang Cuiori Electrical
Appliances Co., Ltd,, which manufactures the Perfect Grill, we leveraged our
upfront payments for inventories and tooling to control costs and receive
benefits from economics of scale in most Asian manufacturing facilities. These
expenses can be upwards of $100,000 per product. The Company will, depending on
the contract, prepay anywhere from 10% to 50% of the purchase orders for
materials to some of the factory we have contracts with. In exchange for theses
financial commitments, the Company receives dedicated manufacturing
responsiveness, thus eliminating the costly expense associated with capitalizing
complete proprietary facilities.
23
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. As of November 21, 2005, our backlog was
approximately $3,000,000 with confirmed deliveries dates. The Company also has a
total of approximately $80,000,000 of signed contracts for blanket quantities,
in which the customer agrees to purchases a set amount and will issue purchases
against the contract when product is needed. The majority of these blanket
quantities orders are two contracts from Advanced Beauty Solutions for
$22,000,000 and $15,000,000. We have a $30,000,000 contracts from Guthy - Renker
Corporation, a contract from Emson for about $7,000,000 along with a few other
smaller contracts. Each contract contains a buy out clause that varies,
depending on the product and amounts of product agreed upon.
In February 2003, we issued a press release relating to our receiving
Certification Approval under the Joint Certification Program ("JCP") from the
United States/Canada Joint Certification Office, Defense Logistics Information
Service. This is an important recognition for CirTran and is consistent with our
efforts to expand our revenue opportunities. Our approved access to technologies
in the U.S. Department of Defense and the Canadian Department of National
Defense will allow us to support the commercial activities of the broad range of
manufacturers working with the U.S. and Canadian governments. We continue to
receive proposals on products to manufacture and were able to build products for
Hill Air Force Base.
In January and March 2004, we issued two press releases relating to our entering
into a Letter of Intent to purchase all the assets of a leading Contract
Electronics Manufacturer (CEM) of printed circuit board assemblies based in
Orange County, California. In March 2004, the Letter of Intent expired by its
terms and we did not pursue the transaction.
In March 2004, we issued two press releases relating to our signing a Letter of
Intent (LOI) to acquire a minority ownership interest in a leading manufacturer
in the Digital Fiber Optic Cable Communications firm based in Southern
California." That Letter of Intent expired and was not renewed.
In December of 2004, we issued a press release relating to our hiring of Mr.
Patrick L. Gerrard Sr. as a director of our corporate Quality Control Systems.
We also announced that we had received an order for the United States Air Force.
The products were built and shipped to them.
Management has continued its internal plan for increasing sales, reducing costs
and restructuring the overall financial condition. As part of this strategy,
sales for the company in 2004 were greater than sales in 2003, and the company
reached an offer in compromise with the Internal Revenue Service and State of
Utah settling most outstanding tax liabilities.
The year 2004 was a critical year for CirTran Corporation. The most significant
event for CirTran in 2004 was the acceptance of the offer in compromise by the
Internal Revenue Service settlement of the Company's prior tax obligation. This
has been a top priority for management and the board of directors as the
Company's viability was in question. With this new milestone, management feels
the Company is financially stable and in position to continue its plan to grow.
In addition, our effort to enter high-volume manufacturing in the electronics,
consumer products and general merchandise industries has had a dramatic impact
to the Company's sales and backlog. Also, management's constant pursuit of
establishing the Company as a world-class manufacturer was recognized with the
Company receiving ISO9001:2000 certification on March 31, 2005. This is an
international monitoring agency that requires all companies who are certified to
comply with a set standard of policies on quality and manufacturing.
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.
24
Cogent Agreement
On September 14, 2003, we entered into an agreement with Cogent Capital Corp.
("Cogent"), under which we engaged Cogent to provide strategic planning and
advisory services relating to acquisitions and with a view to obtaining a
listing on either the American Stock Exchange or the NASDAQ. In a September 2003
press release, we mentioned that Cogent was assisting us in connection with a
proposed direct investment in CirTran, but that transaction was not closed. We
continue to work with Cogent, and they continue to provide strategic planning
and advice.
MET Advisors Agreement
In August 2003, we entered into an agreement with MET Advisors ("MET") under
which we retained MET to identify and provide detailed information on potential
acquisition targets. Pursuant to the MET agreement, we agreed to pay MET a
transaction fee equal to 5% of the total value of the transaction (but not less
than $100,000), together with expenses incurred by MET in connection with the
potential acquisition.
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 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. Separate from 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.
As of September 21, 2005 we had no other acquisitions planned or anticipated. We
continue to work with MET and Cogent with respect to potential acquisitions.
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
25
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.
Furthermore, the Asian manufacturing market is growing at a rapid pace.
Particularly in China, therefore, management feels that the Company is
strategically positioned to hedge against unforeseen obstacles and continues its
efforts to increase establishing additional relationships with manufacturing
partners, facilities and personnel.
Regulation
We are subject to typical federal, state and local regulations and laws
governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee safety laws and
regulations and labor practices laws and regulations. We are not required under
current laws and regulations to obtain or maintain any specialized or
agency-specific licenses, permits, or authorizations to conduct our
manufacturing services. Other than as discussed in "Item 3 - Legal Proceedings"
concerning delinquent payroll taxes, we believe we are in substantial compliance
with all relevant regulations applicable to our business and operations.
Employees
In our Salt Lake headquarters, we employ 90 persons: 5 in administrative
positions, 2 in engineering and design, 81 in clerical and manufacturing, and 2
in sales. In our CirTran-Asia division, we employ 7 people; 1 administrative, 2
accounting staff, 2 quality engineers, and 2 design engineers. We believe that
our relationship with our employees is good.
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.
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) and it is likely that the statute of
limitations has run on whatever public trades in the shares of our common stock
may have taken place during the period during which Vermillion failed to file
reports.
26
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.
The short- and long-term success of CirTran is subject to certain risks, many of
which are substantial in nature and outside the control of CirTran. You should
consider carefully the following risk factors, in addition to other information
contained herein. All forward-looking statements contained herein are deemed by
CirTran to be covered by and to qualify for the safe harbor protection provided
by Section 21E of the Private Securities Litigation Reform Act of 1995. When
used in this Report, words such as "believes," "expects," "intends," "plans,"
"anticipates," "estimates," and similar expressions are intended to identify
forward-looking statements, although there may be certain forward-looking
statements not accompanied by such expressions. You should understand that
several factors govern whether any forward-looking statement contained herein
will or can be achieved. Any one of those factors could cause actual results to
differ materially from those projected herein. These forward-looking statements
include plans and objectives of management for future operations, including the
strategies, plans and objectives relating to the products and the future
economic performance of CirTran and its subsidiaries discussed above.
Description of Property
On December 17, 2003, we entered into a ten-year lease agreement (the "Lease")
with PFE Properties, LLC, a Utah limited liability company (the "Lessor"), for
our existing 40,000 square-foot headquarters and manufacturing facility, located
at 4125 South 6000 West in Salt Lake City, Utah. The workspace includes 10,000
square feet of office space to support the Registrant's Administration, Sales,
and Engineering Staff. The 30,000 square feet of manufacturing space includes a
highly secured inventory area, shipping and receiving areas, and manufacturing
and assembly space that support six full surface-mount lines with
state-of-the-art equipment capable of placing over 360 million components per
year.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with a fair value of $800,000 on the date of issuance.
No registration rights were granted. 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 primary asset of PFE is its rights, titles and interests in and to a parcel
of real property, together with any improvements, rents and profits thereon or
associated therewith, located at 4125 S. 6000 W., West Valley City, Utah, 84128,
where the Company presently has its headquarters and manufacturing facility.
Following the acquisition of the PFE interests, PFE will continue to own the
building. PFE will remain a separate LLC due to liability issues and the Company
will continue to make intercompany lease payments under the 2003 lease.
Our facilities in Shenzhen, China, constitute a sales and business office. We
have no manufacturing facilities in China. Our office in Shenzhen is
approximately 1,600 square feet. Under the terms of our lease on the space, the
monthly payment is 15,000 Renminbi, which in October 2004 was approximately
$2,100, depending on the exchange rate. The term of the lease is for two years,
running from July 18, 2004.
We believe that the facilities and equipment described above are generally in
good condition, are well maintained, and are generally suitable and adequate for
our current and projected operating needs.
Where to get additional information
27
Federal securities laws require us to file information with the Commission
concerning our business and operations. Accordingly, we file annual, quarterly,
and special reports, and other information with the Commission. You can inspect
and copy this information at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549.
You can get additional information about the operation of the Commission's
public reference facilities by calling the Commission at 1-800-SEC-0330. The
Commission also maintains a web site (http://www.sec.gov) at which you can read
or download our reports and other information.
CirTran's internet address' are www.cirtran.com., www.cirtranasia.com,
www.racore.com.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 major portion of the increase in revenue for the nine months
ended September 30, 2005 as compared to the same period in 2004. This division
is an Asian-based, wholly owned subsidiary of CirTran Corporation and provides a
myriad of manufacturing services to the direct response and retail consumer
markets. Since the introduction of this new division, we have been manufacturing
mainly fitness equipment, beauty products, and food preparation equipment for
the direct response market. We are looking into manufacturing more of these
types of products and expanding into other areas in the coming years. 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 high-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.
29
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material, and overhead costs. Overhead costs are based on
indirect costs allocated among cost of sales, work-in-process inventory, and
finished goods inventory. Indirect overhead costs have been charged to cost of
sales or capitalized as inventory based on management's estimate of the benefit
of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled. The 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.
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
section under "Liquidity and Capital Resources - Liquidity and Financing
Arrangements," and in "Certain Relationships and Related Transactions."
Results of Operations - Comparison of Periods ended September 30, 2005 and 2004
Sales and Cost of Sales
Net sales increased to $4,291,762 for the three months period ended September
30, 2005, as compared to $2,626,770 during the same period in 2004, for an
increase of 63.4%. Net sales increased to $11,521,411 for the nine months period
ended September 30, 2005, as compared to $5,230,374 during the same period in
2004, for an increase of 120.3%. The largest factor contributing to the increase
of net sales during the third quarter was the new division, CirTran-Asia, which
has contributed $1,664,992 and for the nine months ended September 30, 2005, a
$6,295,406 increase in revenue. CirTran-Asia, the Asian-based wholly owned
subsidiary of CirTran Corporation, 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
high-volume manufacturing. Cost of sales increased by 26.6%, from $2,069,828
during the three months period ended September 30, 2004, to $2,620,109 during
the same period in 2005. Cost of sales increased by 71.2%, from $4,066,375
during the nine months period ended September 30, 2004, to $6,962,380 during the
same period in 2005. The increase in cost of sales is due to the increase in
revenue. Our gross profit margin for the three months period ended September 30,
2005, was 39.0%, up from 21.2% for the same period in 2004 Our gross profit
margin for the nine months period ended September 30, 2005, was 39.6%, up from
22.3% for the same period in 2004. The majority of the increase is due to a
considerable increase in CirTran-Asia sales which has consistent and less
favorable margins compared to the electronics assembly and Ethernet technology
business operations.
Inventory
30
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 September 30, 2005, was $1,448,585,
as compared to $1,453,754 at December 31, 2004. The decrease in inventory is
nominal.
Selling, General and Administrative Expenses
During the three months ended September 30, 2005, selling, general and
administrative expenses were $1,036,565 versus $876,043 for the same period in
2004, an 18.3% increase. During the nine months ended September 30, 2005,
selling, general and administrative expenses were $3,565,707 versus $2,240,620
for the same period in 2004, a 59.1% increase. The increase was due to expenses
related to the CirTran-Asia division, along with our efforts to aggressively
market our products. Selling, general and administrative expenses as a
percentage of sales for the three months ended September 30, 2005 were 24.2% as
compared to 33.4% during the same period in 2004. Selling, general and
administrative expenses as a percentage of sales for the nine months ended
September 30, 2005 were 30.9% as compared to 42.8% during the same period in
2004. This decrease is due in part to an increase in sales and better control of
expenses.
Interest Expense
Interest expense for three months ended September 30, 2005, was $149,732 as
compared to $85,446 for the same period in 2004, an increase of 75.2%. Interest
expense for nine months ended September 30, 2005, was $412,530 as compared to
$400,039 for the same period in 2004, an increase of 3.1%. The increase is
primarily due to the convertible debenture, discussed below.
As a result of the above factors, we have net income of $575,042 for the quarter
ended September 30, 2005, as compared to a net loss of ($552,086) for the
quarter ended September 30, 2004. This net profit is attributed to a substantial
increase in sales and better cost controls.
Results of Operations - Comparison of Years Ended December 31, 2004 and 2003
Sales and Cost of Sales
Net sales increased 629.3% to $8,862,715 for the year ended December 31, 2004,
as compared to $1,215,245 for the year ended December 31, 2003. This sales
increase can be attributed to several factors. The first factor was 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. This approach for the electronics assembly and
manufacture division has resulted in sales to new customers of $577,337 during
the year ended December 31, 2004. The biggest factor that contributed to the
increase of net sales during the 2004 was the establishment of the new division
CirTran-Asia, which contributed $5,458,944 of the increase in revenue.
Cost of sales increased by 722.8%, from $854,542 during the year ended December
31, 2003, to $7,030,934 during year ended December 31, 2004. The increase in
cost of sales is due to an increase in revenue. Our gross profit margin for the
year ended December 31, 2004, was 20.5%, down from 16.5% from the year ended
December 31, 2003. The decrease is due to the increase of cost of sales for
CirTran-Asia products that have smaller gross margins, but higher sales volume.
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, for the nine months ended September 30, 2005 and the
31
years ended December 31, 2004 and 2003; and (ii) comparisons during these
periodsfor each division between sales generated by pre-existing customers and
sales generated by new customers.
------------- ------------ ------------ ------------- --- -----------------
9 Months
ended/Year Sales Cost of Sales Gross Loss/Margin
------------- ------------ ------------ ------------- ---- -----------------
Asia Division 2005 $ 9,054,870 $ 5,580,313 $ 3,474,557
------------- ------------ ------------ ------------- ---- -----------------
2004 $ 5,458,944 $ 4,736,479 $ 722,465
------------- ------------ ------------ ------------- ---- -----------------
2003 $ 0 $ 0 $ 0
------------- ------------ ------------ ------------- ---- -----------------
Electronics
Assembly 2005 $ 2,355,655 $ 1,329,658 $ 1,025,997
------------- ------------ ------------ ------------- ---- -----------------
2004 $ 3,354,057 $ 2,282,531 (2) $ 1,071,526
------------- ------------ ------------ ------------- ---- -----------------
2003 $ 1,050,090 $ 929,800 (1) $ 120,290
------------- ------------ ------------ ------------- ---- -----------------
Ethernet
Technology 2005 $ 110,886 $ 52,409 $ 58,477
------------- ------------ ------------ ------------- ---- -----------------
2004 $ 49,714 $ 25,202 $ 24,512
------------- ------------ ------------ ------------- ---- -----------------
2003 $ 165,155 $ 84,742 $ 80,413
------------- ------------ ------------ ------------- ---- -----------------
(1) Includes the write-down of carrying value of inventories of $160,000
(2) Includes the write-down of carrying value of inventories of $13,000
9 Months Pre-existing
Ended/Year Total Sales Customers New Customers
-------------- ---------- ------------- ------------ -----------------
Asia Division 2005 $9,054,870 $2,345,648 $6,709,222
-------------- ---------- ------------- ------------ -----------------
2004 $5,458,944 $ 0 $5,458,944
-------------- ---------- ------------- ------------ -----------------
2003 $ 0 $ 0 $ 0
-------------- ---------- ------------- ------------ -----------------
Electronics
Assembly 2005 $2,355,655 $2,084,796 $ 270,859
-------------- ---------- ------------- ------------ -----------------
2004 $3,354,057 $2,796,720 $ 557,337
-------------- ---------- ------------- ------------ -----------------
2003 $1,050,090 $1,036,418 $ 13,672
-------------- ---------- ------------- ------------ -----------------
Ethernet
Technology 2005 $ 110,886 $ 55,667 $ 55,219
-------------- ---------- ------------- ------------ -----------------
2004 $ 49,714 $ 30,257 $ 19,457
-------------- ---------- ------------- ------------ -----------------
2003 $ 165,155 $ 127,040 $ 38,115
-------------- ---------- ------------- ------------ -----------------
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
32
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, 2004 was $1,453,754, as
compared to $1,247,428 at December 31, 2003. The increase in inventory was
required to facilitate the increase in turnkey sales.
Selling, General and Administrative Expenses
During the year ended December 31, 2004, selling, general and administrative
expenses were $3,362,933 versus $2,402,968 for 2003, a 39.9% increase. The
increase was due to expenses related to the CirTran-Asia division, along with
our efforts to aggressively market our products. Selling, general and
administrative expenses as a percentage of sales as of December 30, 2004 were
37.9% as compared to 197.7% during 2003. This decrease is due in part to an
increase in sales and better control of expenses.
Other Income and Expense
Interest expense for 2004 was $495,637 as compared to $571,044 for 2003, a
decrease of 13.2%. The decrease is primarily due to the reduction in interest
expense related the settlement of various notes payable. We also had a gain on
forgiveness of debt in the amount of $1,713,881.
As a result of the above factors, our overall net loss decreased 77.4% to
$658,322 for the year ended December 31, 2004, as compared to $2,910,978 for the
year ended December 31, 2003.
Liquidity and Capital Resources
Our revenues are currently greater than our expenses. We have had a history of
losses preceeding this quarter, and our accumulated deficit has decreased to
$17,960,059 at September 30, 2005, compared to $18,799,602 at December 31, 2004.
Our net income for the quarter ending September 30, 2005, was $575,042, compared
to a net loss of ($552,086) for the quarter ended September 30, 2004. Our
current assets exceeded our current liabilities by $1,946,157 as of September
30, 2005, and our current liabilities exceeded our current assets by
($3,558,826) as of December 31, 2004. The decrease was mostly attributable to
settlements of notes payable, an increase in accounts receivable and inventory
along with acquiring the building and property. For the nine months ended
September 30, 2005 and 2004, we had negative cash flows from operations of
($1,255,396) and ($1,075,957) respectively.
Cash
We had cash on hand of $377,357 at September 30, 2005, and $81,101 at December
31, 2004.
Net cash used in operating activities was $1,255,396 for the nine months ended
September 30, 2005. Cash received from customers of $7,775,664 was not
sufficient to offset cash paid to vendors, suppliers, and employees of
$9,031,060. The non-cash charges were for depreciation and amortization of
$253,701 and loan costs and interest paid from loan proceeds of $67,168. Because
the Company has negative cash flows from operations, it must rely on sources of
cash other than customers to support its operations. It is anticipated that
various methods of equity financing will be required to support operations until
cash flows from operations are positive.
Net cash used in investing activities during the nine months ended September 30,
2005, consisted of equipment purchases of $353,196 and cash acquired with PFE
acquisition in the amount of $39,331.
Net cash provided by financing activities was $1,865,367 during the nine months
ended September 30, 2005. Principal sources of cash were proceeds of $95,586
from notes payable to related parties, proceeds from notes payable of
$1,732,067, and proceeds from the exercise of options to purchase common stock
of $33,300.
Accounts Receivable
33
At September 30, 2005, we had receivables of $5,034,466, net of a reserve for
doubtful accounts of $40,867, as compared to $1,288,719 at December 31, 2004,
net of a reserve of $41,143. This increase was primarily attributed to sales
having substantially increased in the last month of the third quarter as
compared to the last two months in 2004. The Company has implemented an
aggressive process to collect past due accounts over the past several years.
Individual accounts are continually monitored for collectibilty. As part of
monitoring individual customer accounts, the Company evaluates the adequacy of
its allowance for doubtful accounts. Since the implementation of the new
collection process, very few accounts have been deemed uncollectible. In
addition, the majority of the increase in accounts receivable as of September
30, 2005, related to sales that occurred in the last month of the quarter.
Therefore they were not deemed uncollectible.
Accounts Payable
Accounts payable were $2,068,346 at September 30, 2005, as compared to
$1,104,392 at December 31, 2004. This increase is primarily attributed to the
new sales generated from our new division, CirTran Asia and to facilitate the
continuing increase in turnkey sales.
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 $17,960,059 and a
total stockholders' equity of $2,868,679 at September 30, 2005. As of September
30, 2005, our monthly operating costs and interest expenses averaged
approximately $450,000 per month.
Abacas Ventures, Inc.
An explanation of the relationship between CirTran and Abacas Ventures, Inc., is
as follows: Two trusts, the Saliba Living Trust and the Saliba Private Annuity
Trust (collectively, the "Saliba Trusts"), were investors in Circuit Technology,
a Utah corporation and predecessor entity of the Company. The trustees of the
trusts are Tom and Betty Saliba, and Tom Saliba, respectively. (Tom Saliba is
the nephew of the grandfather of Trevor Saliba, one of the directors of
CirTran.) In July 2000, CirTran Corporation merged with Circuit Technology.
Through that merger, the Saliba Trusts became shareholders of CirTran. The
Saliba Trusts are also two of the shareholders of an entity named Abacas
Ventures, Inc. ("Abacas"). At the time of the merger, CirTran was in default on
several of its obligations, including an obligation to Imperial Bank. The Saliba
Trusts, through Abacas, purchased the bank's claim against CirTran to protect
their investment in CirTran. Following the merger, Abacas worked to settle debts
of CirTran to improve Abacas's position and to take advantage of certain
discounts that creditors of CirTran offered to settle their claims. On several
occasions, the Abacas shareholders have agreed to convert outstanding debt owed
by CirTran to Abacas into shares of CirTran common stock. In March 2005, we
agreed with Abacas and its shareholders to settle claims in the aggregate amount
of $2,050,000 which Abacas held against us in exchange for the issuance of
51,250,000 shares of our common stock to certain shareholders of Abacas.
As of December 12, 2005, Abacas did not have any claims against us, and we were
not working with Abacas or its shareholders relating to the settlement of any of
our claims or obligations. However, in the future if claims arise, should we
choose to attempt to work with Abacas regarding the settlement of such potential
claims, there can be no assurance that Abacas will agree to work with us to
settle such claims. Additionally, should Abacas choose to work with us with
respect to the settlement of such potential claims, there can be no assurance
that Abacus will agree to convert any debt it acquires in the future, into
shares of CirTran, or that conversions will occur at a price and on terms that
are favorable to CirTran.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors. 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.
34
Notes Payable to Equity Line Investor -- During 2003, we borrowed a total of
$1,830,000 from Cornell Capital Partners, LP, pursuant to nine unsecured
promissory notes. The loans were made and the notes were issued from June 2003
through December 2003. In lieu of interest, we paid fees 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
us and by the lender and its affiliate. The notes were repayable over periods
ranging from 70 days to 131 days. Each of the notes stated that if we did not
repay the notes when due, a default interest rate of 24% would apply to the
unpaid balance. Through December 31, 2003, we directed the repayment of
$1,180,000 of these notes from proceeds generated under the Equity Line
Agreement, discussed 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 we incur the 24% penalty interest rate.
During the year ended December 31, 2004, Cornell loaned us an additional
$3,200,000 pursuant to four additional unsecured promissory notes, $1,700,000 of
which remained outstanding at December 31, 2004. The loans were made and the
notes were issued in January through June 2004, bringing the total aggregate
loans from Cornell to $5,030,000. As before, in lieu of interest, we 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 us and by the lender and its
affiliate. The notes were repayable over periods of 88 days and 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.
As noted above, we received proceeds of $5,030,000 from notes payable to
Cornell. We used the proceeds from these notes to fund operating losses of
approximately $2,938,000, pay down accounts payable, notes payable and other
settlements of approximately $1,401,000, purchase equipment and tooling in the
amount of $391,000, and to invest in Broadata in the amount of $300,000. During
January 2005, the Company received proceeds of $565,000 from an additional note
payable to Cornell to fund the settlement with the Internal Revenue Service
With the sale of the Convertible Debenture in May 2005 to Highgate, $2,265,000
of the proceeds were paid to Cornell to repay promissory notes in the amount of
$1,700,000 and $565,000.
Prior Equity Line of Credit Agreement - 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. 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 had 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
was 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
was tendered. Cornell was 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 year ended December 31, 2004, we drew an aggregate amount of
$2,150,000 under the Equity Line Agreement, pursuant to draws on the Equity
Line, net of fees of $86,000, and issued a total of 57,464,386 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 year ended December 31, 2004
were $128,000. Of these payments, $86,000 was offset against additional paid-in
capital as shares were issued under the Equity Line Agreement and $68,000 was
recorded as deferred offering costs for total deferred offering costs of $68,000
at December 31, 2004. These deferred offering costs were expensed as the Equity
Line Agreement was terminated in conjunction with the sale of the Convertible
Debenture in May 2005.
Standby Equity Distribution Agreement - We entered into a Standby Equity
Distribution Agreement (the "Agreement") dated May 21, 2004, with Cornell. Under
the Agreement, we had the right, at our sole discretion, to sell periodically to
Cornell shares of our common stock for an aggregate purchase price of up to $20
35
million. The purchase price for the shares sold to Cornell was to be equal to
the lowest volume-weighted average price of our common stock during the pricing
period consisting of the five consecutive trading days after we gave an advance
notice. The periodic sale of shares was known as an advance. We could request an
advance, by giving a written advance notice to Cornell, and could not request
advances more frequently than every seven trading days. A closing was to be held
on the first trading day after the end of the pricing period. The maximum
advance amount was one million dollars ($1,000,000) per advance, with a minimum
of seven trading days between advances. In addition, we could not request
advances if the shares to be issued in connection with such advances would
result in Cornell owning more than 9.9% of our outstanding common stock.
Cornell was to retain a commitment fee of 5% of the amount of each advance under
the Agreement.
With the sale of the Convertible Debenture in May 2005, the Standby Equity
Distribution Agreement and related agreements were terminated.
Convertible Debenture - On May 26, 2005, the Company entered into an agreement
with Highgate House Funds, Ltd. ("Highgate") to sale to Highgate a $3,750,000,
5% Secured Convertible Debenture (the "Debenture"). The Debenture is due
December 2007 and is secured by all of the Company's property.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made.
At any time, Highgate may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of our common stock for the twenty trading days immediately preceding the
conversion date. The Company has the right to redeem a portion or the entire
Debenture then outstanding by paying 105% of the principal amount redeemed plus
accrued interest thereon.
Highgate's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Highgate may convert in
excess of the foregoing amounts if the Company and Highgate
mutually agree; and
(iii) Upon the occurrence of an event of default, Highgate may, in
its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon or may
convert the Debentures and accrued interest thereon into
shares of the Company's common stock.
Except in the event of default, Highgate may not convert the Debenture for a
number of shares that would result in Highgate owning more than 4.99% of the
Company's outstanding common stock.
The Company granted Highgate registration rights, pursuant to which the Company
agreed to file, within 120 days of the closing of the purchase of the debenture,
a registration statement to register the resale of shares of the Company's
common stock issuable upon conversion of the principal or accrued interest on
the Debenture. The Company agreed to register the resale of up to 100,000,000
shares, and to keep such registration statement effective until all of the
shares issuable upon conversion of the principal or interest accrued on the
36
Debenture have been sold. In the event that the Company issues more than
100,000,000 shares of its common stock, it will file additional registration
statements as necessary.
The Company determined that Highgate LLC received a beneficial conversion option
and allocated $441,402 of the proceeds received to the beneficial conversion
option that resulted in an offsetting discount to the note payable. The discount
on the note payable is being amortized to interest expense from the date
proceeds were received through December 2007, and amounted to $16,271 of
accretion of the discount during the six months ended June 30, 2005.
In connection with the sale of the Debenture, $2,265,000 of the proceeds was
paid directly to Cornell to repay promissory notes. Fees of $256,433 were also
withheld from the proceeds. As such, of the total Debenture amount of
$3,750,000, the net proceeds to us were $1,228,567. The proceeds will be used
for general corporate and working capital purposes, at the Company's discretion.
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.
5% Convertible Debenture
On May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate" or the "Selling Shareholder"), relating to the sale by us of a 5%
Secured Convertible Debenture, due December 31, 2007, in the aggregate principal
amount of $3,750,000 (the "Convertible Debenture").
In connection with the purchase of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
We also paid a commitment fee of $240,765.11, a structuring fee of $10,000 to
the Selling Shareholder, and legal fees of $5,668.17. As such, of the total
purchase amount of $3,750,000, the net proceeds to us were $1,228,566.72, which
we received following the closing of the purchase of the Convertible Debenture.
We intend to use these proceeds for general corporate and working capital
purposes, in our discretion.
The Convertible Debenture bears interest at a rate of 5%. The Selling
Shareholder is entitled to convert, at its option, all or part of the principal
amount owing under the Convertible Debenture into shares of our common stock at
a conversion price equal to the lesser of (a) $0.10 per share, or (b) an amount
equal to the lowest closing bid price of the Common Stock as listed on the OTC
Bulletin Board, as quoted by Bloomberg L.P. for the twenty (20) trading days
immediately preceding the conversion date. Except as otherwise set forth in the
Convertible Debenture, the Selling Shareholder's right to convert principal
amounts owing under the Convertible Debenture into shares of our common stock is
limited as follows:
1. The Selling Shareholder may convert up to $250,000 worth of
the principal amount plus accrued interest of the Convertible
Debenture in any consecutive 30-day period when the market
price of our stock is $0.10 per share or less at the time of
conversion;
37
2. The Selling Shareholder may convert up to $500,000 worth of
the principal amount plus accrued interest of the Convertible
Debenture in any consecutive 30-day period when the price of
our stock is greater than $0.10 per share at the time of
conversion, provided, however, that the Selling Shareholder
may convert in excess of the foregoing amounts if we and the
Selling Shareholder mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), the Selling Shareholder may, in its
sole discretion, accelerate full repayment of all debentures
outstanding and accrued interest thereon or may,
notwithstanding any limitations contained in the Convertible
Debenture and/or the Purchase Agreement, convert the
Convertible Debenture and accrued interest thereon into shares
of our common stock pursuant to the Convertible Debenture.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
11.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, in our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Under the terms of the Convertible Debenture, except upon an event of default as
defined in the Convertible Debenture, the Selling Shareholder may not convert
the Convertible Debenture for a number of shares of common stock in excess of
that number of shares of common stock which, upon giving effect to such
conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by the Selling Shareholder and its affiliates to exceed 4.99%
of the outstanding shares of the common stock following such conversion.
Also pursuant to the Convertible Debenture, we have the right to redeem, by
giving 3 days' written notice to the Selling Shareholder, a portion or all of
the Convertible Debenture then outstanding by paying an amount equal to one
hundred five percent (105%) of the amount redeemed plus interest accrued
thereon. In the event that we redeem only a portion of the outstanding principal
amount of the Convertible Debenture, the Selling Shareholder may convert all or
any portion of the unpaid principal or interest of the Convertible Debenture not
being redeemed. Additionally, if after the earlier to occur of (x) fifteen (15)
months following the date of the purchase of the Convertible Debenture or (y)
twelve (12) months following the date on which the initial registration
statement is declared effective, all or any portion of the Convertible Debenture
remains outstanding, then we, at the request of the Selling Shareholder, shall
redeem such amount outstanding at the rate of five hundred thousand dollars
($500,000) per each 30-day period. Finally, upon the occurrence of an event of
default as defined in the Convertible Debenture, the Selling Shareholder can
convert all outstanding principal and accrued interest under the Convertible
Debenture irrespective of any of the limitations set forth in the Convertible
Debenture and/or the Purchase Agreement, and in such event, all such principal
and interest shall become immediately due and payable.
In connection with the Purchase Agreement, we entered into an investor
registration rights agreement (the "Registration Rights Agreement") with the
Selling Shareholder, pursuant to which, we agreed to file, within 120 days of
the closing of the purchase of the Convertible Debenture, a registration
statement to register the resale of shares of the Company's common stock
issuable to the Selling Shareholder upon conversion of the principal or interest
on the Convertible Debenture. We agreed to register the resale of up to
100,000,000 shares, and to keep such registration statement effective until all
of the shares issuable upon conversion of the principal or accrued interest on
the Convertible Debenture have been sold. In the event that we issue more than
100,000,000 shares of common stock upon conversion of the Convertible Debenture,
we will file additional registration statements as necessary.
We also entered into a security agreement (the "Security Agreement") with the
Selling Shareholder, pursuant to which we pledged all of our property, including
goods; inventory; contract rights and general intangibles; documents, receipts,
and chattel paper; accounts and other receivables; products and proceeds; and
any interest in any subsidiary, joint venture, or other investment interest to
secure our obligation under the Convertible Debenture and the related
agreements.
38
We also entered into an escrow agreement (the "Escrow Agreement") with the
Selling Shareholder relating to the holding and disbursement of payment of the
purchase price of the Convertible Debenture and cash payments made by us in
payment of the obligations owing under the Convertible Debenture. David Gonzalez
was appointed as the Escrow Agent under the Escrow Agreement.
We sold the Convertible Debenture without registration under the Securities Act
of 1933, as amended (the "1933 Act") in reliance on Section 4(2) of the 1933
Act, and the rules and regulations promulgated thereunder. Upon future
conversions, if any, of the Convertible Debenture into shares of our common
stock, we intend to issue the shares without registration under the 1933 Act in
reliance on Section 4(2) of the 1933 Act, and the rules and regulations
promulgated thereunder. As noted above, we anticipate that any resales by the
Selling Shareholder of the shares issued upon conversion of the Convertible
Debenture will be made pursuant to this registration statement.
Selling shareholder
One of our investors, Highgate House Funds, Ltd., a Cayman Island exempted
company, is the Selling Shareholder in connection with this prospectus and the
registration statement of which it is a part. Highgate is not affiliated in any
way with CirTran or any of our affiliates, except that the escrow agent
appointed in connection with the Purchase Agreement and the Escrow Agreement,
David Gonzalez, is an officer of Cornell Capital Partners, LLP ("Cornell"), an
entity with which we previously entered into two transactions, an equity line of
credit agreement and a standby equity distribution agreement. Highgate and
Cornell have the same general partner, Yorkville Advisors, but have different
portfolio managers. Both the equity line of credit agreement and the standby
equity distribution agreement have been terminated. Additionally, as described
above, prior to our entering into the Purchase Agreement with Highgate, Cornell
had previously made loans to us in the aggregate amounts of $5,595,000, all of
which have been repaid, including two notes for $1,700,000 and $565,000,
respectively, which loans we repaid with part of the proceeds of the sale of the
Convertible Debenture.
This prospectus, and the registration statement of which it is a part, cover the
resales of the shares to be issued to Highgate, the Selling Shareholder, in
connection with conversions of the Convertible Debenture.
The following table provides information about the actual and potential
ownership of shares of our common stock by Highgate in connection with the
Convertible Debenture as of September 21, 2005, and the number of our shares
registered for sale in this prospectus. The number of shares of common stock
issuable to Highgate in connection with conversions of the Convertible Debenture
varies according to the market price at and immediately preceding the date of a
conversion by Highgate. Solely for purposes of estimating the number of shares
of common stock that would be issuable to Highgate as set forth in the table
below, we have assumed a hypothetical conversion by Highgate on September 21,
2005, of the full amount of $3,750,000 principal amount of the Convertible
Debenture (with no interest accrued) at a per share price of $0.03. The actual
per share price and the number of shares issuable upon actual conversions by
Highgate could differ substantially. This prospectus and the registration
statement of which it is a part covers the resale of up to 100,000,000 shares of
our common stock issuable to Highgate in connection with conversions of the
principal or interest on the Convertible Debenture.
Under the terms and conditions of the Convertible Debenture and the Purchase
Agreement, Highgate is prohibited from converting amounts under the Convertible
Debenture that would cause Highgate to beneficially own more than 4.99% of the
then-outstanding shares of our common stock following such issuance. This
restriction does not prevent Highgate from receiving and selling shares and
thereafter receiving additional shares. In this way, Highgate could sell more
than 4.99% of our outstanding common stock in a relatively short time frame
while never beneficially owning more than 4.99% of the outstanding CirTran
common stock at any one time. For purposes of calculating the number of shares
of common stock issuable to Highgate assuming a conversion of the full amount of
the Convertible Debenture, as set forth below, the effect of such 4.99%
limitation has been disregarded. The number of shares issuable to Highgate as
described in the table below therefore may exceed the actual number of shares
Highgate may be entitled to beneficially own under the Convertible Debenture.
The following information is not determinative of Highgate'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.
39
----------------------------------------------------------------------------------------------------------
Shares of Shares of Percentage of
Common Common Common
Stock Stock Issuable Stock Issuable
Owned by to Selling to Selling Number of Number of Percentage of
Name of Selling Selling Shareholder Shareholder Shares of Shares of Common
Shareholder Share- in Connection in Connection Common Common Stock
holder with SEDA with SEDA Stock Stock Owned Beneficially
Prior to Facility Facility Registered After Owned After
Offering Transaction Transaction Hereunder Offering the Offering
(1) (2) (3)
----------------------------------------------------------------------------------------------------------
Highgate House 0 17.84% 100,000,000 0 (5) 0% (5)
Funds, Ltd. 125,000,000
(4)
----------------------------------------------------------------------------------------------------------
(1) To our knowledge, and based on representations from Highgate's
management, Highgate did not own any shares of our common stock as of December
12, 2005. Highgate House Funds, Ltd., is an entity managed by Yorkville
Advisors, LLC. Adam Gottbetter is the co-portfolio manager of Yorkville
Advisors, LLC.
(2) As noted above, Highgate is prohibited by the terms of the
Convertible Debenture from converting amounts of the Convertible Debenture that
would cause it to beneficially own more than 4.99% 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.
(3) The registration statement of which this prospectus is a part
covers up to 100,000,000 shares of common stock issuable in connection with the
Convertible Debenture. Because the specific circumstances of the issuances under
the Convertible Debenture are within the discretion of Highgate and are
therefore 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 100,000,000 unless we file additional registration
statements registering the resale of the additional shares. The amount set forth
in the table 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
conversion of the full principal amount of the Convertible Debenture (excluding
any interest accrued thereon) as of December 12, 2005. The actual number of
shares of our common stock offered hereby may differ according to the actual
number of shares issued upon such conversions.
(4) Includes:
125,000,000 shares of common stock issuable upon a
hypothetical conversion of the full
$3,750,000 principal amount of the
Convertible Debenture as of December 12,
2005. This prospectus registers only up to
100,000,000 shares of common stock issuable
in connection with the Convertible
Debenture. Accordingly, we may not issue
shares in excess of 100,000,000 unless we
file additional registration statements
registering the resale of the additional
shares.
(5) Assumes a hypothetical conversion of the full $3,750,000 principal
amount of the Convertible Debenture as of December 12, 2005, and the issuance of
125,000,000 shares of our common stock, together with the sale by Highgate of
all such shares. There is no assurance that Highgate will sell any or all of the
shares offered hereby. However, Highgate is contractually prohibited from
converting amounts of the Convertible Debenture that would cause it to hold
shares in excess of 4.99% of the then-issued and shares of our common stock.
This number and percentage may change based on Highgate's decision to sell or
40
hold the Shares. There is no assurance that Highgate will sell any or all of the
shares offered hereby. If Highgate sells all of the shares issued to it in
connection with the Convertible Debenture, the number of shares held following
such sales would be 0 and the percentage of ownership would be 0%.
Plan of Distribution
The Selling Shareholder, its pledgees, donees, transferees or other successors
in interest, may from time to time sell the Shares of our Common Stock directly
to purchasers or indirectly to or through underwriters, broker-dealers or
agents. The Selling Shareholder may sell all or part of its shares in one or
more transactions at fixed prices, varying prices, prices at or related to the
then-current market price or at negotiated prices. The Selling Shareholder will
determine the specific offering price of the Shares from time to time that, at
that time, may be higher or lower than the market price of our Common Stock
quoted on the OTC Bulletin Board.
The Selling Shareholder and any underwriters, broker-dealers or agents
participating in the distribution of the Shares of our Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any profit from the sale of such shares by the Selling Shareholder and any
compensation received by any underwriter, broker-dealer or agent may be deemed
to be underwriting discounts under the Securities Act. The Selling Shareholder
may agree to indemnify any underwriter, broker-dealer or agent that participates
in transactions involving sales of the Warrants or shares against certain
liabilities, including liabilities arising under the Securities Act.
Because the Selling Shareholder may be deemed to be an "underwriter" within the
meaning of the Securities Act, the Selling Shareholder will be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
Selling Shareholder that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to its sales in the market. With
certain exceptions, Regulation M precludes the Selling Shareholder, any
affiliated purchasers, and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security.
The method by which the Selling Shareholder, or its pledgees, donees,
transferees or other successors in interest, may offer and sell their Shares may
include, but are not limited to, the following:
* sales on the over-the-counter market, or other securities
exchange on which the Common Stock is listed at the time of
sale, at prices and terms then prevailing or at prices related
to the then-current market price;
* sales in privately negotiated transactions; o sales for their
own account pursuant to this prospectus;
* through the writing of options, whether such options are
listed on an options exchange or otherwise through the
settlement of short sales;
* cross or block trades in which broker-dealers will attempt to
sell the shares as agent, but may position and resell a
portion of the block as a principal in order to facilitate the
transaction;
* purchases by broker-dealers who then resell the shares for
their own account; o brokerage transactions in which a broker
solicits purchasers; o any combination of these methods of
sale; and o any other method permitted pursuant to applicable
law.
Any Shares of Common Stock covered by this prospectus that qualify for sale
under Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or
Rule 144A rather than under this prospectus. The Shares of our Common Stock may
be sold in some states only through registered or licensed brokers or dealers.
In addition, in some states, the Shares of our Common Stock may not be sold
unless they have been registered or qualified for sale or the sale is entitled
to an exemption from registration.
41
The Selling Shareholder may enter into hedging transactions with broker-dealers
or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
securities in the course of hedging the positions they assume with the Selling
Shareholder. The Selling Shareholder may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of the
securities offered hereby, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
To our knowledge, there are currently no plans, arrangements or understandings
between the Selling Shareholder and any underwriter, broker-dealer or agent
regarding the sale of Shares of our Common Stock by the Selling Shareholder.
The Selling Shareholder will pay all fees, discounts and brokerage commissions
in connection with any sales, including any fees to finders. We will pay all
expenses of preparing and reproducing this prospectus, including expenses or
compliance with state securities laws and filing fees with the SEC.
Under applicable rules and regulations under Regulation M under the Exchange
Act, any person engaged in the distribution of securities may not simultaneously
engage in market making activities, subject to certain exceptions, with respect
to the securities for a specified period set forth in Regulation M prior to the
commencement of such distribution and until its completion. In addition and with
limiting the foregoing, the Selling Shareholder will be subject to the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of the securities by
Selling Shareholder. The foregoing may affect the marketability of the
securities offered hereby.
The Selling Shareholder may be deemed to be an "underwriter" as such term is
defined in the Securities Act, and any commissions paid or discounts or
concessions allowed to any such person and any profits received on resale of the
securities offered hereby may be deemed to be underwriting compensation under
the Securities Act.
Our Common Stock is quoted on the OTC Bulletin Board under the symbol "CIRT.OB."
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.
We also have advised the Selling Shareholders that they should be aware that the
anti-manipulation provisions of Regulation M under the Exchange Act will apply
to purchases and sales of shares of common stock by the Selling Shareholders,
and that there are restrictions on market-making activities by persons engaged
in the distribution of the shares. Under Regulation M, the Selling Shareholders
or their agents may not bid for, purchase, or attempt to induce any person to
bid for or purchase, shares of our common stock while such Selling Shareholders
are distributing shares covered by this prospectus. Regulation M may prohibit
the Selling Shareholders from covering short sales by purchasing shares while
the distribution is taking place, despite any contractual rights to do so under
the Agreement. We have advised the Selling Shareholders that they should consult
with their own legal counsel to ensure compliance with Regulation M.
42
Legal Proceedings
As of September 30, 2005, the Company had accrued liabilities in the amount of
$155,627 for delinquent payroll taxes, including interest and penalties due to
the State of Utah. In November 2003, the Company entered into an agreement with
the Utah State Tax Commission to allow the Company to pay the tax liability
incurred by CirTran Corporation owing to the State of Utah in equal monthly
installments over a two year period. Under the agreement, the Company would make
monthly payments of $4,000 per month through November 2005 to pay the tax
liability only. When this has been satisfied, we anticipate that we will
negotiate with the Utah State Tax Commission regarding the payment of the
penalties and interest along with the balance due from Circuit Technology. As of
December 12, 2005, the Company was current in its payments to the State of Utah.
As of December 31, 2004, the Company had accrued liabilities in the amount of
$500,000 for delinquent payroll taxes, including interest and penalties, owed to
the Internal Revenue Service. 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 in November 2003, and after meeting with IRS personnel,
filed a revised offer in compromise on August 31, 2004. The Company was notified
in November 2004 that the IRS had accepted the offer in compromise. Under the
offer, the Company was required to pay an aggregate amount of $500,000
(representing payments of $350,000 by Circuit Technology, Inc., $100,000 by
CirTran Corporation, and $50,000 by Racore Technology, Inc.), not later than
February 3, 2005. These amounts were paid. Additionally, the Company must remain
current in its payment of taxes for 5 years, and may not claim any NOLs for the
years 2001 through 2015, or until the three companies pay taxes in an amount
equal to the taxes waived by the offer in compromise.
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. As of
December 12, 2005, the only remaining liabilities of Circuit Technology were
Sunborne and C/S Utilities, discussed below.
We (as successor to Circuit Technology, Inc.) were a defendant in an action in
El Paso County, Colorado District Court, brought by Sunborne XII, LLC, a
Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Our liability in this action was
originally estimated to range up to $2.5 million, and we subsequently filed a
counter suit in the same court against Sunborne in an amount exceeding $500,000
for missing equipment. Effective January 18, 2002, we entered into a settlement
agreement with Sunborne with respect to the above-described litigation. The
settlement agreement required us to pay Sunborne the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the agreement, and the balance of
$225,000, together with interest at 8% per annum, was payable by July 18, 2002.
As security for payment of the balance, we executed and delivered to Sunborne a
Confession of Judgment and also issued to Sunborne 3,000,000 shares of our
common stock, which were held in escrow and have been treated as treasury stock
recorded at no cost. Because 75% of the balance owing under the agreement was
not paid by May 18, 2002, we were required to prepare and file with the
Securities & Exchange Commission, at our expense, a registration statement with
respect to the shares that were escrowed. The payment was not made, nor was a
registration statement filed with respect to the escrowed shares.
Pursuant to a Termination of Sublease Agreement dated as of May 22, 2002 among
the Company, Sunborne and other parties, the sublease agreement that was the
subject of our litigation with Sunborne was terminated and a payment of
approximately $109,000 was credited against the amount owed by the Company to
Sunborne under the Company's settlement agreement with them. Sunborne has filed
a claim that this amount was to be an additional rent expense rather than a
payment on the note payable. The Company disputes this claim and intends to
vigorously defend the action.
43
As of September 30, 2005, the Company was in default of its obligations under
the settlement agreement with Sunborne, i.e., the total payment due thereunder
had not been made, a registration statement with respect to the escrowed shares
was not filed, and the Company did not replace the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
Sunborne has filed the Confession of Judgment and proceeded with execution
thereon. Additionally, Sunborne sold the 3,000,000 shares. The Company is
continuing to negotiate with Sunborne in an attempt to settle the remaining
obligation.
C/S Utilities notified the Company that (as successor to Circuit Technology,
Inc.) it believes it has a claim against the Company in the amount of $32,472
regarding utilities services. The claim was assigned to BC Services, Inc., which
obtained a judgment against Circuit Technology, Inc., for $37,965.84 in El Paso
County, Colorado, District Court on February 13, 2003. The Company is reviewing
its records in an effort to confirm the validity of the claims and is evaluating
its options.
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 payment of a commission, 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 Plaintiff sought leave to file
a supplemental complaint, which the court granted. The Company subsequently was
served with the supplemental complaint, in which Salamon seeks additional
commissions, consisting of shares of the Company's common stock valued at
$1,400,000 (for an aggregate claim of $1,750,000), to which the Company filed
its answer. The parties filed cross motions for summary judgment. A ruling on
the motions had not been issued as of the date of this report. The Company is
also currently conducting settlement negotiations.
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 continuing its settlement negotiations with RecovAR Group, LLC.
CirTran Asia v. Mindstorm Civil No. 050902290, Third Judicial District Court,
Salt Lake County, State of Utah. CirTran Asia brought suit against Mindstorm
Technologies, LLC, for nonpayment for goods provided. On April 22, 2005, the
defendant filed its answer and counterclaim, following which, defendant's
counsel withdrew from representation. CirTran Asia notified defendant that under
local rules it was required to appoint successor counsel. The defendant failed
to do so, and CirTran Asia moved for default judgment, which was granted.
CirTran Asia submitted a proposed order of default judgment in the amount of
$288,529.29 to the court in September 2005, which has been signed.
CirTran Asia, et al. v. International Edge, et al., Civil No. 2:05 CV 413BSJ,
U.S. District Court, District of Utah. On May 11, 2005, CirTran Asia, UKING
System Industry Co., Ltd., and Charles Ho filed suit against International Edge,
Inc., Michael Casey Enterprises, Inc., Michael Casey, David Hayek, and HIPMG,
Inc., for breach of contract, breach of the implied covenant of good faith and
fair dealing, interference with economic relationships, and fraud in relation to
certain licensing issues relating to the Ab King Pro. The defendants
counterclaimed, alleging breach of contract, fraud, defamation and related
claims, all related to the Ab King Pro. CirTran Asia and the other plaintiffs
filed their reply to the counterclaim, disputing all of the allegations and
claims. International Edge filed a motion to dismiss for lack of jurisdiction,
which was pending as of the date of this report. Sales from this product in the
year ended December 31, 2004 were approximately $3,480,000, and as of the nine
months ended September 30, 2005 were approximately $940,000. CirTran Asia
intends to vigorously pursue this action.
CirTran Asia v. Robinson, Civil No. 050915272, Third Judicial District Court,
Salt Lake County, State of Utah. On August 30, 2005, CirTran Asia brought suit
against Glenn Robinson, one of the principals of Mindstorm Technologies, LLC,
for nonpayment for goods provided. Mr. Robinson has filed an answer. CirTran
Asia intends to vigorously pursue this action.
44
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 38 President, Chief Executive Officer, Chief Financial
Officer, Secretary and Director of CirTran
Corporation; President of CirTran Corporation
(Utah)
Served since July 2000
Raed Hawatmeh 39 Director since June 2001.
Trevor Saliba 31 Director since June 2001. Senior Vice-President,
Sales and Marketing
Served since January 2002
Shaher Hawatmeh 39 Chief Operating Officer
Served since June 2004
Charles Ho 50 President, CirTran-Asia
Served since June 2004
Iehab J. Hawatmeh, MBA
Chairman, President & CEO
Mr. Iehab 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. Iehab and Shaher Hawatmeh are brothers.
Raed Hawatmeh.
Director
Mr. Raed Hawatmeh, who is not related to Iehab Hawatmeh, has served as a
director since June 2001. Mr. Raed Hawatmeh has been a self-employed investor
and venture capitalist for the past five years, specializing in financing
start-up companies in various industries.
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
45
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 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.
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.
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.
Shaher Hawatmeh
Chief Operating Officer
Mr. Shaher Hawatmeh joined the company in 1993 as its Controller shortly after
its founding. Today, Mr. Hawatmeh directly oversees all daily manufacturing
production, customer service, budgeting and forecasting for the company.
Following the companies acquisition of Pro Cable Manufacturing in 1996, Mr.
Hawatmeh directly managed the entire company, supervising all operations for
approximately two years and successfully oversaw the integration of this new
division into the company. Prior to joining CirTran, Mr. Hawatmeh worked for the
Utah State Tax Commission. Mr. Hawatmeh earned his Master's of Business
Administration with an emphasis in Finance from the University of Phoenix and
his Bachelor's of Science in Business Administration and a Minor in Accounting.
Iehab and Shaher Hawatmeh are brothers.
Charles Ho
President, CirTran-Asia
Mr. Ho, who became the President of our CirTran-Asia division on June 15, 2004,
served for six years as the chairman of Meicer Semiconductor Co., Ltd., one of
the leading semiconductor manufacturers located in China, and was a co-founder
of two of the leading design and manufacturing firms of DVD and CD players: Lead
Data Co., Ltd., and Media Group. Mr. Ho has served as CEO for Uking System Inc.
since 1986 and is still holds that position. Mr. Ho has a Master of Business
Administration Degree from the University of South Australia and Bachelor of
Science degree in Industrial Design from National Taipei University of
Technology.
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
46
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 577,368,569
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of September 21, 2005, 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.
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.
------------------------------- -------------- --------------- ------------
Percent
Name and Address Relationship Common Shares of Class
------------------------------- -------------- --------------- ------------
Saliba Private Annuity Trust(1) 5% 75,698,990 13.40%
115 S. Valley Street Shareholder
Burbank, CA 91505
------------------------------- -------------- --------------- ------------
Iehab J. Hawatmeh * Director, 64,729,621 11.42%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5%
Shareholder
------------------------------- -------------- --------------- ------------
47
------------------------------- -------------- --------------- ------------
Raed Hawatmeh ** Director 33,566,530 5.94%
10989 Bluffside Drive & 5%
Studio City, CA 91604 Shareholder
------------------------------- -------------- --------------- ------------
Trevor Saliba * Director 13,375,000 2.36%
13848 Valleyheart Drive
Sherman Oaks, CA 91423
------------------------------- -------------- --------------- ------------
All Officers and Directors as a Group 187,370,141 19.52%
(3 persons)
------------------------------- -------------- --------------- ------------
----------------------
(1) Includes 13,189,620 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.
* Includes options of 2,000,000 shares each that can be exercised anytime at
exercise price of $0.02 - $0.03 per share.
** Includes options of 4,250,000 shares that can be exercised anytime at
exercise price of $0.02 - $0.03 per share.
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
September 21, 2005, 577,368,569 (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.
48
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. Such lock-up agreements expired of their
terms, were not renewed, and are no longer in effect.
Certain Relationships and Related Transactions
An explanation of the relationship between CirTran and Abacas Ventures, Inc., is
as follows:
Two trusts, the Saliba Living Trust and the Saliba Private Annuity Trust
(collectively, the "Saliba Trusts"), were investors in Circuit Technology, a
Utah corporation and predecessor entity of the Company. The trustees of the
trusts are Tom and Betty Saliba, and Tom Saliba, respectively. (Tom Saliba is
the nephew of the grandfather of Trevor Saliba, one of the directors of
CirTran.) In July 2000, CirTran Corporation merged with Circuit Technology.
Through that merger, the Saliba Trusts became shareholders of CirTran. The
Saliba Trusts are also two of the shareholders of an entity named Abacas
Ventures, Inc. ("Abacas"). At the time of the merger, CirTran was in default on
several of its obligations, including an obligation to Imperial Bank. The Saliba
Trusts, through Abacas, purchased the bank's claim against CirTran to protect
their investment in CirTran. Since that time, Abacas has continued to settle
debts of CirTran to improve Abacas's position and to take advantage of certain
discounts that creditors of CirTran offered to settle their claims. On two
occasions, the Abacas shareholders have agreed to convert outstanding debt owed
by CirTran to Abacas into shares of CirTran common stock (discussed below).
Abacas continues to work with the company to settle claims by creditors against
CirTran, and, on occasion, to provide funding. There can be no assurance that
Abacus will agree to convert its existing debt, or any debt it acquires in the
future, into shares of CirTran, or that conversions will occur at a price and on
terms that are favorable to CirTran. If Abacus and CirTran cannot agree on
acceptable conversion terms, Abacus may demand payment of some or all of the
debt. If CirTran does not have sufficient cash or credit facilities to pay the
amount then due and owing by CirTran to Abacus, Abacus may exercise its rights
as a senior secured lender and commence foreclosure or other proceedings against
the assets of CirTran. Such actions by Abacus could have a material adverse
effect upon CirTran and its ability to continue in business.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,499,090 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.075 per share, for the aggregate
amount of $1,500,000.
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,500,000 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.05 per share, for the aggregate
amount of $1,500,000.
During 2002, the Company entered into a verbal 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
49
interest at 24% and is payable on demand. There are no required monthly
payments. During the years ended December 31, 2004 and 2003, the Company was
advanced $3,128,281 and $350,000, respectively, and made cash payments of
$3,025,149 and $875,000, respectively.
During the year ended December 31, 2004, 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 notes payable
(see Note 6). The total of these obligations was $1,263,713. The Company has
recorded this transaction as a $1,263,713 non-cash increase 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 $1,530,587 and $163,742 as of December 31, 2004 and 2003,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $430,828 and $230,484 as of December 31, 2004 and 2003,
respectively, and is included in accrued liabilities.
In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 of
principal and accrued interest in return for the Company's issuing 51,250,000
shares of our restricted common stock to certain shareholders of Abacas. No
registration rights were granted. As of December 12, 2005, Abacas had no claims
against us.
Additional Information
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. 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 2002, 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, 2004 the company owed I&R Properties, LLC, the previous
owner of our principal office and manufacturing facility for unpaid accrued rent
and accrued interest. The Company settled with owed I&R Properties, LLC., on
50
accrued rent and interest of $400,000 by issuing 10,000,000 shares of
unregistered common stock in March 2005. I&R Properties, LLC, is an entity that
is owned as follows: 40% by Iehab Hawatmeh, our President, CEO, and Chairman;
10% by Shaher Hawatmeh, Chief Operating Officer of CirTran and the brother of
Iehab Hawatmeh; and 50% by Raed Hawatmeh, a director of CirTran, but who is not
related to Iehab or Shaher Hawatmeh.
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.
Purchase of Interests in Landlord
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with a fair value of $800,000 on the date of issuance.
No registration rights were granted. 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 primary asset of PFE is its rights, titles and interests in and to a parcel
of real property, together with any improvements, rents and profits thereon or
associated therewith, located at 4125 S. 6000 W., West Valley City, Utah, 84128,
where the Company presently has its headquarters and manufacturing facility.
Prior to the purchase of the membership interests, on December 17, 2003, the
Company had entered into a ten-year lease with PFE for the property. The lease
payments were $16,974. Following the acquisition of the PFE interests, PFE will
continue to own the building, and the Company will continue to make lease
payments under the 2003 lease.
Market for Common Equity and Related Stockholder Matters
Our common stock traded sporadically on the Pink Sheets under the symbol "CIRT"
from July 2000 to July 2002. Effective July 15, 2002, the NASD approved our
shares of common stock for quotation on the NASD Over-the-Counter Electronic
Bulletin Board. The following table sets forth, for the 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, 2005 $0.05 $0.03
March 31, 2005 $0.05 $0.03
December 31, 2004 $0.04 $0.02
September 30, 2004 $0.06 $0.03
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
51
Our 15-for-1 forward stock split was made effective August 6, 2001, and our
stock price decreased accordingly.
As of September 21, 2005, we had approximately 535 shareholders of record
holding 577,368,569 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
In May 2005, we entered into a securities purchase agreement with Highgate
concerning the purchase and sale of the Convertible Debenture. The sale of the
Convertible Debenture to Highgate was made in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and rules and regulations
promulgated thereunder, as a transaction not involving any public offering. No
advertising or general solicitation was employed in offering the securities, and
the Convertible Debenture was issued to only one investor which represented that
it is an "accredited investor" as that term is defined in Regulation D
promulgated pursuant to the Securities Act of 1933. Through September 21, 2005,
we had issued no shares of our common stock in connection with any conversions
of the Convertible Debentures, and we had received notice of no conversions from
Highgate. This registration statement is filed to register the resale of shares
into the market that Highgate will receive upon conversion of the Convertible
Debenture, and our issuances of shares to Highgate will be made without
registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act, and
the rules and regulations promulgated thereunder.
In March 2005, the Company entered into agreements with eight individuals or
entities (collectively, the "Lenders") to whom the Company was indebted, in an
aggregate amount of $2,450,000, pursuant to which, the Company agreed to issue
an aggregate of 61,250,000 shares of its restricted common stock in exchange for
the Lenders' agreeing to cancel the debt obligations owed by the Company. With
respect to $2,050,000 of the indebtedness, that amount was owed to Abacas
Ventures, Inc. ("Abacas"), a company that had purchased certain of the Company's
obligations. Abacas agreed to the cancellation of the Company's obligation to
Abacas in return for the Company's issuing shares to certain of Abacas's
shareholders and the other named individuals. Trevor Saliba, who is a
beneficiary of the Saliba Private Annuity Trust, has been a director of the
Company since June 2001. The remaining $400,000 was due to I&R Properties in
connection with past rent on the Company's headquarters building. I&R Properties
is a company owned and controlled by individuals who are officers, directors and
principal stockholders. The issuances of shares to the Lenders were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in the issuance of the securities.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with an estimated value of One Million Dollars
($1,000,000). No registration rights were granted. 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, as a transaction not involving any public
offering. No advertising or general solicitation was employed in the issuance of
the securities
Pursuant to the Equity Line of Credit Agreement, we were 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 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 were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
52
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in offering the securities, and the shares
were issued to only one investor which 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
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 used the proceeds of
the draws on the Equity Line to pay outstanding liabilities, including notes to
Cornell, the Equity Line Investor, discussed above. As noted above, the Company
has terminated the Equity Line of Credit Agreement.
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 1933 Act, 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 $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Executive Compensation
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2004, 2003,
and 2002, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
53
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
------------------------ ------------------- --------------------
Annual Long-Term
Compensation Compensation Awards
------------------------ ------------------- --------------------
Restricted
Stock Stock
Name and Salary Bonus Awards Options All Other
Principal Position Year ($) ($) ($) (#) Compensation
------------------------ ------------------- -------------------- ------------
- -
Iehab J. Hawatmeh 2004 200,000 - - 3,500,000 -
President, Secretary, 2003 175,000 - - 6,500,000 -
Treasurer and Director 2002 175,000 - 1,850,000
------------------------ ------------------- -------------------- ------------
Trevor M. Saliba
Sr. Vice President and 2004 108,000 - - 4,250,000 -
Director of 2003 127,000 - - 3,000,000 -
CirTran Corporation 2002 118,000 - - 500,000 -
------------------------ ------------------- -------------------- ------------
Raed S. Hawatmeh 2004 - - - 2,500,000 -
Director of CirTran 2003 - - - 3,000,000 -
Corporation 2002 - - - 500,000 -
------------------------ ------------------- -------------------- ------------
Option/SAR Grants in the Year Ended December 31, 2004
Number of % of Total
Securities Options Granted
Underlying to Employees
Options/SARs in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Sh) Expiration Date
-------------- ------------ --------------- ---------------- ---------------
Iehab Hawatmeh 3,500,000 14.58% $0.015 - $0.03 Jan - Dec 2009
-------------- ------------ --------------- ---------------- ---------------
Trevor Saliba 4,250,000 17.71% $0.015 - $0.03 Jan - Dec 2009
-------------- ------------ --------------- ---------------- ---------------
Raed Hawatmeh 3,500,000 14.58% $0.015 - $0.03 Jan - Dec 2009
-------------- ------------ --------------- ---------------- ---------------
Aggregated Option/SAR Exercises in the Year Ended December 31, 2004 and December
31, 2004 Option/SAR Values
-------------- ------------ ------------ ------------------ ---------------
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at FY FY-End ($)
Shares End (#) Exercisable/
Acquired on Value Exercisable/ Unexercisable
Name Exercise (#) Realized ($) Unexercisable
-------------- ------------ ------------ ------------------ ---------------
Iehab Hawatmeh 1,500,000 $33,750 - $ -
-------------- ------------ ------------ ------------------ ---------------
Trevor Saliba 2,250,000 $56,250 - $ -
-------------- ------------ ------------ ------------------ ---------------
Raed Hawatmeh 750,000 $11,250 2,250,000/0 $52,500/0
-------------- ------------ ------------ ------------------ ---------------
Options issuable in connection with Manufacturing Agreement -- On June 10, 2004,
the Company entered into an exclusive manufacturing agreement with certain
Developers, including Charles Ho, the President of CirTran-Asia. Under the terms
54
of the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
has the exclusive right to manufacture certain products developed by the
Developers or any of their affiliates. In connection with this agreement the
Company agreed to issue options to purchase 1,500,000 shares common stock to the
Developers upon the sale, shipment and payment for 200,000 units of a fitness
product. In addition, the Company agreed to issue options to purchase 300,000
shares of common stock to the Developers for each multiple of 100,000 units of
the fitness product sold in excess of the initial 200,000 units within
twenty-four months of the agreement (June 2004). The options will be exercisable
at $0.06 per share, vest on the grant date and expire one year after issuance.
As of September 30, 2005, the Company had sold, shipped and received payment
for, 257,577 units of the fitness product. In January 2005, the Company issued
1,500,000 options under the terms of the agreement, of which Mr. Ho received
500,000.
In connection with the above manufacturing agreement, the Company agreed to
issue various options to purchase shares of common stock to the Developers upon
the sale, shipment, and payment of certain quantities of additional products. In
addition, the Company agreed to issue additional options to purchase common
stock to the developers for each multiple of units sold in excess of the initial
units within the first twenty-four months of the agreements. In the following
table, Mr. Ho is the only developer that may receive the options listed. The
schedule of units and potential options that will be issued follows:
Options for Each Multiple Options for
Initial Units of Units above Each Multiple
Product Initial Units Sold Initial Units of Units
--------------------------------------------------------------------------------
1 500,000 500,000 200,000 200,000
2 25,000 500,000 15,000 100,000
3 100,000 500,000 50,000 100,000
4 300,000 1,000,000 100,000 200,000
5 200,000 250,000 100,000 100,000
6 200,000 500,000 100,000 100,000
As of December 12, 2005, the Company had not sold, shipped and received payment
for sufficient units to require the issuance of options related to the
additional products under these agreements to any of the Developers, including
Charles Ho. Through December 12, 2005, Mr. Ho had received approximately
$145,000 in commissions in connection with the manufacturing agreement.
Employment Agreements
On July 1, 2004, CirTran Corporation entered into an employment agreement with
Iehab Hawatmeh, dated as of June 26, 2004. The agreement, which is for a term of
five years and renews automatically on a year-to year basis, provides for a base
salary of $225,000, plus a bonus of 5% of our earnings before interest, taxes,
depreciation, and amortization, payable quarterly, as well as any other bonus
our board of directors may approve. Under the Agreement, Mr. Hawatmeh agreed to
serve as our Chief Executive Officer and President and to perform such other
duties as delegated by our board of directors. The agreement provides for
benefits including health insurance coverage, cell phone, car allowance, life
insurance, and D&O insurance. Under the Agreement, Mr. Hawatmeh's employment may
be terminated for cause, or upon his death or disability. In the event that Mr.
Hawatmeh is terminated without cause, we are obligated to pay him, as a
severance payment, an amount equal to five full years of his then-current annual
base compensation, half upon such termination and half one year later, together
with a continuation of insurance benefits for a period of five years.
Additionally, on July 1, 2004, CirTran Corporation entered into an employment
agreement with Trevor Saliba, dated as of June 26, 2004. The agreement, which is
for a term of three years and renews automatically on a year-to year basis,
provides for a base salary of $120,000, plus a bonus of 1% of our gross sales
generated directly by Mr. Saliba, a bonus of 5% of all gross investments made
55
into CirTran which are directly generated and arranged by Mr. Saliba, a bonus of
1% of the net purchase price of any acquisitions completed by us which are
directly generated and arranged by Mr. Saliba (payable in CirTran common stock),
as well as any other bonus our board of directors may approve. Under the
Agreement, Mr. Saliba agreed to serve as our Executive Vice President of Sales
and Marketing, and to perform such other duties as delegated by our board of
directors. The agreement provides for benefits including health insurance
coverage, cell phone, car allowance, life insurance, and D&O insurance. Under
the Agreement, Mr. Saliba's employment may be terminated for cause, or upon his
death or disability. In the event that Mr. Saliba is terminated without cause,
we are obligated to pay him, as a severance payment, an amount equal to one
years' salary. If the Agreement expires of its terms or is terminated for any
reason, Mr. Saliba may not compete with us for a period of one year from the
date of termination of the agreement. Mr. Saliba also agreed not to solicit our
employees or customers, or attempt to induce anyone to cease doing business with
us for a period of two years after the termination of the agreement.
On July 1, 2004, we also entered into an employment agreement, dated as of June
26, 2004, with Shaher Hawatmeh, the brother of Iehab Hawatmeh. The agreement,
which is for a term of three years and renews automatically on a year-to year
basis, provides for a base salary of $150,000, plus a bonus of 1% of our
earnings before interest, taxes, depreciation, and amortization, payable
quarterly, as well as any other bonus our board of directors may approve. Under
the Agreement, Mr. Shaher Hawatmeh agreed to serve as our Chief Operating
Officer, and to perform such other duties as delegated by our board of
directors. The agreement provides for benefits including health insurance
coverage, cell phone, life insurance, and D&O insurance. Under the Agreement,
Mr. Shaher Hawatmeh's employment may be terminated for cause, or upon his death
or disability. In the event that Mr. Shaher Hawatmeh is terminated without
cause, we are obligated to pay him, as a severance payment, an amount equal to
one years' salary. If the Agreement expires of its terms or is terminated for
any reason, Mr. Shaher Hawatmeh may not compete with us for a period of one year
from the date of termination of the agreement. Mr. Shaher Hawatmeh also agreed
not to solicit our employees or customers, or attempt to induce anyone to cease
doing business with us for a period of two years after the termination of the
agreement.
On June 15, 2004, our subsidiary, CirTran-Asia, entered into an employment
agreement with Charles Ho. The agreement, which is for a term of three years and
renews automatically on a year-to year basis, provides that for each additional
product that Mr. Ho procures pursuant to the agreement between CirTran-Asia and
Michael Casey Enterprises, LTD., Mr. Ho shall be entitled to receive such
compensation as provided for in that agreement in the form of options to
purchase shares of CirTran common stock. Under the Agreement, CirTran-Asia will
not provided benefits to Mr. Ho., and his employment may be terminated for
cause, or upon his death or disability. If the Agreement expires of its terms or
is terminated for any reason, Mr. Ho may not compete with us for a period of one
year from the date of termination of the agreement. Mr. Ho also agreed not to
solicit our employees or customers, or attempt to induce anyone to cease doing
business with us for a period of two years after the termination 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
56
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 April 8, 2005, 35,000,000 options to purchase shares of common stock and
no stock purchase rights had been granted under the 2003 Plan. Therefore, the
2003 Plan had been fully distributed.
2004 Stock Plan
In December 2004, our board approved and adopted our 2004 Stock Plan, or the
2004 Plan, subject to shareholder approval. An aggregate of 40,000,000 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 2004 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 2004
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 2004 Plan is administered by our board of directors, which designates from
time to time the individuals to whom awards are made under the 2004 Plan, the
amount of any such award and the price and other terms and conditions of any
such award. The 2004 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 2004
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 2004 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 2004 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.
57
As of September 21, 2005, 28,500,000 options to purchase shares of common stock
and no stock purchase rights have been granted under the 2004 Plan.
The following table sets forth information about the Company's equity
compensation plans, including the number of securities to be issued upon the
exercise of outstanding options, warrants, and rights; the weighted average
exercise price of the outstanding options, warrants, and rights; and the number
of securities remaining available for issuance under the specified plan through
September 30, 2005.
------------------------- -------------------------- ------------------------- -------------------------
Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants, and future issuance under
Plan Category warrants, and rights rights equity compensation plans
------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
approved by shareholders
0 0 0
------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 2001 Plan: 0 options 2001 Plan: 0 options * 2001 Plan: 0 options
not approved by
shareholders
2002 Plan: 500 2002 Plan: $0.0001/share 2002 Plan: 0 options
options
2003 Plan:3,750,000 2003 Plan:$0.01/share 2003 Plan: 0 options
options
2004 Plan: 9,000,000 2004 Plan: $0.03/share 2004 Plan:12,000,000
options options
------------------------- -------------------------- ------------------------- -------------------------
Total 12,750,500 $0.03/share 12,000,000
------------------------- -------------------------- ------------------------- -------------------------
* All options issued under this plan to date have been exercised.
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, 2004 and 2003 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003 F-4
Consolidated Statement of Stockholders' Deficit for the Years
Ended December 31, 2003 and 2004 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-8
Condensed Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004 (unaudited) Q-2
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 2005 and 2004
(unaudited) Q-3
Condensed Consolidated Statements of Cash Flows for the Three and
Nine Months ended September 30, 2005 and 2004 (unaudited) Q-4
Notes to Condensed Consolidated Financial Statements (unaudited) Q-6
58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following report of independent registered public accounting firm,
financial statements of CirTran Corporation and related notes thereto are filed
as part of this Form 10-KSB:
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2004 and 2003 F-4
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 2003 and 2004 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
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 ACCOUNTING FIRM
To the Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiaries as of December 31, 2004 and 2003, 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 (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 Subsidiaries as of December 31, 2004 and 2003, and the results of its
operations and its 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 sustained losses from operations,
had an accumulated deficit, had a stockholders' deficit, had negative working
capital, had negative cash flows from operations, and the Company is a defendant
in numerous legal actions. These matters raise substantial doubt about the
Company's 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.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 14, 2005
F-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 2003
--------------- --------------
ASSETS
Current Assets
Cash and cash equivalents $ 81,101 $ 54,135
Trade accounts receivable, net of
allowance for doubtful accounts of
$41,143 and $28,876, respectively 1,288,719 89,187
Inventory 1,453,754 1,247,428
Other 153,062 165,091
--------------- --------------
Total Current Assets 2,976,636 1,555,841
Property and Equipment, Net 840,793 577,603
Investment in Securities, at Cost 300,000 -
Other Assets, Net 8,000 10,390
Deposits 100,000 -
Deferred Offering Costs 68,000 26,000
--------------- --------------
Total Assets $ 4,293,429 $ 2,169,834
--------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 9,623
Accounts payable 1,104,392 1,300,597
Accrued liabilities 2,066,022 3,615,264
Current maturities of long-term notes payable 1,815,875 1,964,021
Notes payable to stockholders 18,586 31,838
Notes payable to related parties 1,530,587 163,742
--------------- --------------
Total Current Liabilities 6,535,462 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: 474,118,569 and 349,087,699 net of
3,000,000 shares held in treasury at no
cost at December 31, 2004 and 2003,
respectively 474,114 349,088
Additional paid-in capital 16,083,455 12,876,941
Accumulated deficit (18,799,602) (18,141,280)
--------------- --------------
Total Stockholders' Deficit (2,242,033) (4,915,251)
--------------- --------------
Total Liabilities and Stockholders' Deficit $ 4,293,429 $ 2,169,834
--------------- --------------
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004 2003
------------- -------------
Net Sales $ 8,862,715 $ 1,215,245
Cost of Sales (7,030,934) (854,542)
Writedown of carrying value of inventories (13,000) (160,000)
------------- -------------
Gross Profit 1,818,781 200,703
------------- -------------
Operating Expenses
Selling, general and administrative expenses 3,362,933 2,402,968
Non-cash employee compensation expense 332,181 137,500
------------- -------------
Total Operating Expenses 3,695,114 2,540,468
------------- -------------
Loss From Operations (1,876,333) (2,339,765)
------------- -------------
Other Income (Expense)
Interest (495,637) (571,044)
Other, net (233) (169)
Gain on forgiveness of debt 1,713,881 -
------------- -------------
Total Other Expense, Net 1,218,011 (571,213)
------------- -------------
Net Loss $ (658,322) $ (2,910,978)
------------- -------------
Basic and diluted loss per common share $ (0.00) $ (0.01)
------------- -------------
Basic and diluted weighted-average
common shares outstanding 451,620,617 277,068,175
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004
Common Stock Additional
-------------------------------
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
---------------- -------------- -------------- ---------------- --------------
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 conversion
of notes payable to equity
line investor 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 - - - (2,910,978) (2,910,978)
---------------- -------------- -------------- ---------------- --------------
Balance - December 31, 2003 349,087,699 $ 349,088 $ 12,876,941 $ (18,141,280) $ (4,915,251)
Shares issued for conversion
of notes payable to equity
line investor 57,464,386 57,460 2,006,540 - 2,064,000
Shares issued for settlement
of notes payable 1,542,495 1,542 53,458 - 55,000
Shares issued for
settlement expense 1,000,000 1,000 59,000 - 60,000
Shares issued as settlement
of salaries, accrued salaries
and related interest 45,273,989 45,274 498,014 - 543,288
Options granted to employees,
consultants and attorneys - - 334,952 - 334,952
Exercise of stock options
by directors and employees 14,250,000 14,250 259,500 - 273,750
Exercise of stock options by
consultants and attorneys 5,500,000 5,500 (4,950) - 550
Net loss - - - (658,322) (658,322)
---------------- -------------- -------------- ---------------- --------------
Balance - December 31, 2004 474,118,569 $ 474,114 $ 16,083,455 $ (18,799,602) $ (2,242,033)
---------------- -------------- -------------- ---------------- --------------
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004 2003
-------------- ---------------
Cash flows from operating activities
Net loss $ (658,322) $ (2,910,978)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 249,395 300,520
Provision for loss on trade receivables 12,267 (8,161)
Provision for obsolete inventory 13,000 160,000
Loss on disposal of property and equipment 33,238 -
Gain on forgiveness of debt (1,713,881) -
Non-cash compensation expense 226,250 137,500
Loan costs and fees in lieu of interest on notes payable 145,000 120,200
Note payable issued as settlement of litigation expense - 62,226
Stock issued for employee compensation 105,931 -
Stock issued for settlement expense 60,000 -
Options issued to attorneys and consultants for services 209,952 101,727
Changes in assets and liabilities:
Trade accounts receivable (1,211,799) (43,562)
Inventories (219,326) 143,125
Prepaid expenses and other assets 14,419 (63,056)
Accounts payable 515,690 (25,077)
Accrued liabilities 538,132 901,718
-------------- ---------------
Total adjustments (1,021,732) 1,787,160
-------------- ---------------
Net cash used in operating activities (1,680,054) (1,123,818)
-------------- ---------------
Cash flows from investing activities
Purchase of investment (300,000) -
Payment for property and equipment deposit (100,000) -
Purchase of property and equipment (545,824) (12,225)
-------------- ---------------
Net cash used in investing activities (945,824) (12,225)
-------------- ---------------
Cash flows from financing activities
Change in checks written in excess of cash in bank (9,623) (9,908)
Proceeds from notes payable to stockholders 18,500 41,500
Payments on notes payable to stockholders (31,752) (30,038)
Proceeds from notes payable, net of cash paid for offering costs 2,927,000 1,605,847
Principal payments on notes payable (466,463) (194,748)
Proceeds from notes payable to related parties 3,128,281 350,000
Payment on notes payable to related parties (3,025,149) (875,000)
Proceeds from exercise of options and warrants to purchase
common stock 111,500 301,500
Exercise of options issued to attorneys and consultants
for services 550 525
-------------- ---------------
Net cash provided by financing activities 2,652,844 1,189,678
-------------- ---------------
Net increase in cash and cash equivalents 26,966 53,635
Cash and cash equivalents at beginning of year 54,135 500
-------------- ---------------
Cash and cash equivalents at end of period $ 81,101 $ 54,135
-------------- ---------------
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2004 2003
-------------------- --------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 298,542 $ 54,531
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 711,894 $ 34,049
Common stock issued for settlement of note payable
and accrued interest $ 2,204,999 $ -
Common stock issuance in which proceeds were retained
as payment of notes payable $ - $ 1,134,000
Common stock issued for accrued compensation $ - $ 10,000
Accrued interest converted to notes payable $ 9,158 $ 57,424
Stock options exercised for settlement of accrued interest
and accrued compensation $ 61,000 $ 250,000
Note issued for settlement of notes payable and accrued
interest $ 551,819 $ -
Fees withheld from notes payable for Equity Line Agreement $ 86,000 $ 47,200
Loan costs included in notes payable $ - $ 120,200
Deferred offering costs withheld from notes payable proceeds $ 128,000 $ 26,000
Shares issued as settlement of salaries, accrued salaries and
related interest $ 437,357 $ -
The accompanying notes are an integral part of these financial statements.
F-7
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.
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 exclusive
manufacturing agreements. Other such agreements will be sought in the future.
Principles of Consolidation--The 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.
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.
F-8
Depreciation expense for the years ended December 31, 2004 and 2003, was
$249,394 and $300,520, respectively.
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
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, 2004, the Company did 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, 2004, the Company had 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, 2004 and 2003, the Company recognized compensation expense relating
to stock options and warrants of $226,250 and $137,500, respectively. During the
year ended December 31, 2004, the Company recognized compensation expense
relating to the issuance of common stock of $105,931. 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, Nine Months Ended September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------- ----------- -------------
Net loss, as reported $ (658,322) $ (2,910,978) $ (658,322) $ (2,910,978)
Add: Stock-based employee compensation expense
included in net loss 332,181 137,500 226,250 97,500
Deduct: Total stock-based employee compensation
benefit (expense) determined under fair value based
method for all awards (517,924) (292,247) (412,557) (274,167)
----------- ------------- ----------- -------------
Pro forma net loss $ (844,065) $ (3,065,725) $ (844,629) $ (3,087,645)
----------- ------------- ----------- -------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.01) $ (0.00) $ (0.01)
----------- ------------- ----------- -------------
Basic and diluted loss per common share pro forma $ (0.00) $ (0.01) $ (0.00) $ (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.
F-9
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.
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, 2004 and 2003, this allowance was $41,143 and $28,876, respectively.
During the year ended December 2004, sales to two customers accounted for 52
percent and 14 percent of net sales. No individual customer account receivable
balance at December 31, 2004 created a concentration of credit risk.
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.
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 14,250,500 and 3,850,500 in potentially
issuable common shares at December 31, 2004 and 2003, respectively. The
potentially issuable common shares at December 31, 2004 and 2003 were excluded
from the calculation of diluted loss per share because the effects are
anti-dilutive.
New Accounting Standards--In November 2004, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 151, "Inventory Costs." SFAS No. 151 clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). The Company will be required to apply
this statement to inventory costs incurred after December 31, 2005. The Company
is currently evaluating what effect this statement will have on the Company's
financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary
Assets." SFAS No. 153 amends APB Opinion No. 29, "Accounting for Non-monetary
Transactions," to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which is an amendment to SFAS No. 123, "Accounting for Stock-Based
F-10
Compensation." This new standard eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board (APB)
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and requires such
transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in the Company's financial statements. This new
standard is effective for interim and annual periods beginning after December
15, 2005. The Company is currently evaluating SFAS No. 123 as revised and
intends to implement it in the first quarter of 2006 and does not anticipate
that the new standard will have a material effect on the Company's financial
statements.
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 $658,322 and $2,910,978 for the years
ended December 31, 2004 and 2003, respectively. As of December 31, 2004 and
2003, the Company had an accumulated deficit of $18,799,602 and $18,141,280,
respectively, and a total stockholders' deficit of $2,242,033 and $4,915,251,
respectively. The Company also had negative working capital of $3,558,826 and
$5,529,244 as of December 31, 2004 and 2003, respectively. In addition, the
Company used, rather than provided, cash in its operations in the amounts of
$1,680,054 and $1,123,818 for the years ended December 31, 2004 and 2003,
respectively. 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 9).
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.
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 2004 and
2003, the Company successfully converted trade payables of approximately
$711,894 and $2,986, respectively, into notes. The Company intends to continue
to pursue this type of debt conversion going forward with other creditors.
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 years ended December 31, 2004 and 2003, the Company successfully converted
trade payables, notes payable, and accrued interest of approximately $1,263,713
and $2,986, respectively, into notes payable to Abacas Ventures, Inc.
("Abacas"). Accrued interest of $27,020 associated with the notes payable was
not converted to the note payable with Abacas; therefore, a gain on forgiveness
of debt was recorded for $27,020 for the year ended December 31, 2004. 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
F-11
additional proceeds under the 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
into which the Preferred Shares are convertible at the time of the vote. The
investment represents less than a 5% interest in the investee. The investment
does not have a readily determinable fair value and is stated at historical
cost, less an allowance for impairment when circumstances indicate an investment
has been impaired. The Company periodically evaluates its investments as to
whether events and circumstances have occurred which indicate possible
impairment. No indicators of impairment were noted for the year ended December
31, 2004.
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. Sales under this agreement totaled $538,233 for the year ended
December 31, 2004.
NOTE 4 - INVENTORIES
Inventories consist of the following:
Inventories Note
2004 2003
------------------- -------------------
Raw materials $ 1,095,901 $ 1,114,445
Work-in process 356,160 130,810
Finished goods 1,693 2,173
------------------- -------------------
$ 1,453,754 $ 1,247,428
------------------- -------------------
During 2004 and 2003, write downs of $13,000 and $160,000, respectively, were
recorded to reduce items considered obsolete or slow moving to their fair value.
F-12
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2004 2003 in Years
------------------- ------------------- -------------------
Production equipment $ 3,220,847 $ 3,146,488 5-10
Leasehold improvements 992,018 958,939 7-10
Office equipment 159,199 639,375 5-10
Other 47,789 118,029 3-7
------------------- -------------------
4,419,853 4,862,831
Less accumulated depreciation
and amortization 3,579,060 4,285,228
------------------- -------------------
$ 840,793 $ 577,603
------------------- -------------------
NOTE 6 - NOTES PAYABLE
During the 2004, the Company successfully converted five notes payable and
accrued interest of $551,819 into notes with Abacas (see Note 2). Accrued
interest of $27,020 associated with these notes payable was not converted to the
note payable with Abacas; therefore, a gain on forgiveness of debt was recorded
for $27,020 for the year ended December 31, 2004.
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, based on the per share fair value of the
Company's common stock on the dates of issuance. 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.
In November 2004, the Company settled a note payable with a corporation. The
outstanding loan balance and accrued interest at the time of settlement was
$75,000. The balance was settled for $50,000 in cash and 1,000,000 shares of
common stock valued at $25,000, based on the per share fair value of the
Company's common stock on the dates of issuance.
In December 2004, the Company settled a note payable with a financial
institution. The outstanding loan balance and accrued interest at the time of
settlement was $36,902. The balance was settled for $10,000 in cash. A gain on
forgiveness of debt of $26,902 was recorded on this transaction.
In December 2004, the Company settled a note payable with an individual. The
outstanding loan balance and accrued interest at the time of settlement was
$145,779. The balance was settled for $120,000 in cash. A gain on forgiveness of
debt of $25,779 was recorded on this transaction.
F-13
Notes Payable consist of the following at December 31, 2004 and 2003:
2004 2003
--------------- -------------
Notes payable to Equity Line Investor,
no periodic interest, matures 70 to 131
days after issuance, (see below). $ 1,700,000 $ 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 settled as of December 31, 2004. - 23,549
Note payable settled as of December 31, 2004. - 41,484
Note payable settled as of December 31, 2004. - 215,516
Note payable settled as of December 31, 2004. - 183,429
Note payable settled as of December 31, 2004. - 161,109
Note payable settled as of December 31, 2004. - 107,919
Note payable settled as of December 31, 2004. - 87,632
Note payable settled as of December 31, 2004. - 85,377
Note payable settled as of December 31, 2004. - 93,832
Note payable settled as of December 31, 2004. - 60,133
Note payable settled as of December 31, 2004. - 55,831
Note payable settled as of December 31, 2004. - 36,901
Note payable settled as of December 31, 2004. - 45,434
--------------- -------------
Total Notes Payable 1,815,875 1,964,021
Less current maturities 1,815,875) (1,964,021)
--------------- -------------
Long-Term Notes Payable $ - $ -
--------------- -------------
F-14
Certain of the Company's notes payable contain various covenants and
restrictions, including providing for the acceleration of principal payments in
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 11 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.
During the year ended December 31, 2004, the Company borrowed an additional
$3,200,000, before offering costs of $273,000, from Cornell, pursuant to four
additional unsecured promissory notes. In lieu of interest, the Company paid
fees at closing of 4% to 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
December 31, 2004, the Company directed the repayment of $2,150,000 of these
notes from proceeds generated under the Equity Line Agreement, discussed in Note
7 below. At December 31, 2004, the balance owing on these notes was $1,700,000.
NOTE 7 - 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. As described in Note 15, the Company
purchased the entity that owns the building in March 2005 (unaudited).
F-15
The following is a schedule of future minimum lease payments under the operating
lease:
Year Ending December 31,
-------------------
2005 225,480
2006 215,492
2007 203,688
2008 203,688
Thereafter 1,018,440
-------------------
Total $ 1,866,788
-------------------
The building lease provides for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
$213,688 and $200,492 for 2004 and 2003, respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholder -- The Company had amounts due to stockholders from
three separate notes. The balance due to stockholders at December 31, 2004 and
2003, was $18,586 and $31,838, respectively. Interest associated with amounts
due to stockholders is accrued at 10 percent. Unpaid accrued interest was $7,976
and $6,900 at December 31, 2004 and 2003, respectively, and is included in
accrued liabilities. These notes are due on demand.
Notes Payable to Related Party -- 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, 2004 and 2003, the Company was advanced $3,128,281 and
$350,000, respectively, and made cash payments of $3,025,149 and $875,000,
respectively.
During the year ended December 31, 2004, 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 notes payable
(see Note 6). The total of these obligations was $1,263,713. The Company has
recorded this transaction as a $1,263,713 non-cash increase 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 $1,530,587 and $163,742 as of December 31, 2004 and 2003,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $430,828 and $230,484 as of December 31, 2004 and 2003,
respectively, and is included in accrued liabilities.
NOTE 9 - 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.
F-16
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
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 claimed $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 judgment, in the amount of $519,052,
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. During November 2004,
the Company settled the principal and accrued interest of the remaining note
payable for $75,000. The balance was settled for $50,000 in cash and 1,000,000
shares of common stock valued at $25,000, based on the per share fair value of
the Company's common stock on the date of issuance.
During 2003 and 2004, an investment firm filed suits in the U.S. District Court,
District of Utah seeking finders fees, consisting of common stock valued at
$1,750,000 for allegedly introducing the Company to the Equity Line Investor
(Note 11). 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
F-17
the amount of $213,718. During 2004, this claim was purchased by Abacas and
recorded as an increase to the amount owed to Abacas 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
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. During 2004, this claim was purchased by Abacas and
recorded as an increase to the amount owed to Abacas 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 Abacas and recorded as an increase to
the amount owed to Abacas 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 Abacas
and recorded as an increase to the amount owed to Abacas 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. During 2004, this claim was purchased by
Abacas and recorded as an increase to the amount owed to Abacas 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 Abacas and recorded as an increase to the amount owed to Abacas
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 Abacas and recorded as an increase to the amount owed to Abacas 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. In March 2004, the balance was
settled for $90,000 in cash and 542,495 shares of common stock valued at
$30,000, based on the per share fair value of the Company's common stock on the
date of issuance.
F-18
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. In December 2004, the Company settled the
balance outstanding for $120,000 in cash.
A financial institution brought suit against the Company in June 2003 for the
non-payment of $39,367 under the terms of a note payable. The balance was
settled for $10,000 in cash. A gain on forgiveness of debt of $26,902 was
recorded on this transaction.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $147,592. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims and they are included in accounts payable.
In addition, various vendors have notified the Company that they believe they
have claims against the Company totaling $159,308. The Company has determined
the probability of realizing any loss is remote. The Company has made no accrual
for these claims 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.
Also, in connection with the Company's entering into a standby equity
distribution agreement (described in Note 11), 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 -- In November 2004, the Internal Revenue
Service (IRS) accepted the Company's Amended Offer in Compromise (Offer) to
settle delinquent payroll taxes, interest and penalties. The acceptance of the
Offer required the Company to pay $500,000 by February 3, 2005. Additionally,
F-19
the Company must remain current in its payment of taxes for 5 years, and may not
claim any net operating losses for the years 2001 through 2015, or until the
Company pays taxes in an amount equal to the taxes waived by the offer in
compromise. The Company made the required payment on February 2, 2005. The
outstanding balance of delinquent payroll taxes, interest and penalties was
$1,955,767 on the settlement date. The future cash payments specified by the
offer, including interest and principal, were less than the carrying amount of
the payable; therefore the Company reduced the carrying amount of the liability
to the total future cash payments of $500,000 and recorded a gain $1,455,767.
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 of $4,000 over a two-year period running through December 2005.
Through December 2004, the Company had made the required payments. The balance
owed to the State of Utah as of December 31, 2004, was $223,660, including
penalties and interest.
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. Approximately $1,767,253 was owed to the
Internal Revenue Service as of December 31, 2003. Approximately $10,939 was owed
to the State of Colorado as of December 31, 2003.
Marketing Agreement -- On October 1, 2004, the Company signed an agreement with
a marketing firm to provide strategic planning advice. The term of the agreement
was for six months from October 1, 2004 through March 31, 2005. The agreement
shall be automatically extended for successive six month periods unless either
party gives written notice of its intent not to renew the agreement. The Company
will pay the marketing firm a commission of ten percent of all net proceeds from
any new business brought to the Company by the marketing firm. Net proceeds are
defined in the agreement as payments actually received by the Company from new
business (net of returns, discounts, and rebates) from which costs of sales is
subtracted. The Company also agreed to pay $7,500 to the marketing firm during
each of the first three months of the agreement. These payments were
nonrefundable, but may be applied toward future commissions earned.
Manufacturing Agreement -- On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain Developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia has
the exclusive right to manufacture the certain products developed by the
Developers or any of their affiliates. The Developers will continue to provide
marketing and consulting services related to the products under the agreement.
Should the Developers early terminate the agreement, they must pay the Company
$150,000. Revenue is recognized when products are shipped. Title passes to the
customer or independent sales representative at the time of shipment.
In connection with this agreement the Company has agreed to issue options to
purchase 1,500,000 shares common stock to the Developers upon the sale, shipment
and payment for 200,000 units of a fitness product. In addition, the Company
agreed to issue options to purchase 300,000 shares of common stock to the
Developers for each multiple of 100,000 units of the fitness product sold in
excess of the initial 200,000 units within twenty-four months of the agreement
(June 2004). The options will be exercisable at $0.06 per share, vest on the
grant date and expire one year after issuance. As of December 31, 2004, the
Company had sold, shipped and received payment for, 191,702 units of the fitness
product. Because the Developers must provide future services for the options to
vest, the options are treated as unissued for accounting purposes. The cost of
these options will be recognized when the options are earned. See Note 15 for
subsequent issuance of options.
F-20
In connection with the above manufacturing agreement, the Company agreed to
issue various options to purchase shares of common stock to the Developers upon
the sale, shipment, and payment of certain quantities of additional the
products. In addition, the Company agreed to issue additional options to
purchase common stock to the developers for each multiple of units sold in
excess of the initial units within the first twenty-four months of the
agreements. The schedule of units and potential options that will be issued
follows:
Options for Each Multiple Options for
Initial Units of Units above Each Multiple
Product Initial Units Sold Initial Units of Units
--------------------------------------------------------------------------------
1 500,000 500,000 200,000 200,000
2 25,000 500,000 15,000 100,000
3 100,000 500,000 50,000 100,000
4 300,000 1,000,000 100,000 200,000
5 200,000 250,000 100,000 100,000
6 200,000 500,000 100,000 100,000
As of December 31, 2004, the Company had manufactured only nominal quantities of
the additional products under these agreements. Because the Developers must
provide future services for the options to vest, the options are treated as
unissued for accounting purposes. The cost of these options will be recognized
when the options are earned.
NOTE 10 - INCOME TAXES
The Company has paid no federal or state income taxes during the years ended
December 31, 2004 and 2003. The significant components of the Company's deferred
tax assets and liabilities at December 31, 2004 and 2003, are as follows:
2004 2003
---------------- --------------
Deferred Income Tax Assets:
Inventory reserve $ 266,026 $ 261,177
Bad debt reserve 15,346 10,771
Vacation reserve 26,809 26,177
Research and development credits 27,285 26,360
Net operating loss carryforward 4,597,493 4,465,571
Depreciation 2,668
Intellectual property 115,581 130,067
---------------- --------------
Total Deferred Income Tax Assets 5,051,208 4,920,123
Valuation allowance (5,051,208) (4,843,751)
Deferred Income Tax Liability - depreciation - (76,372)
---------------- --------------
Net Deferred Income Tax Asset $ - $ -
---------------- --------------
F-21
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, 2004 and
2003.
As of December 31, 2004, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $12,325,719. These net operating loss
carryforwards, if unused, begin to expire in 2019. As discussed in Note 9, the
Company may not claim any net operating losses for the years 2001 through 2015
due to the Offer accepted by the IRS. 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, 2004 and 2003:
2004 2003
-------------- -------------
Benefit at statuatory rate (34%) $ (223,829) $ (989,733)
Non-deductible expenses 38,099 37,225
Change in valuation allowance 207,457 1,048,572
State tax benefit, net of federal tax benefit (21,727) (96,064)
-------------- -------------
Net Benefit from Income Taxes $ - $ -
-------------- -------------
NOTE 11- STOCKHOLDER'S EQUITY
Common Stock Issuances -- As discussed in Note 6, the Company issued 542,495
shares and 1,000,000 shares of common stock in 2004 with a fair value of $30,000
and $25,000, respectively, based on the per share fair value of the Company's
common stock on the dates of issuance, as part of a settlement agreements for
notes payable.
As discussed in Note 9, during 2004, the Company settled a legal claim by
issuing 1,000,000 shares of common which resulted in a settlement expense of
$60,000, which was the fair value of the shares issued based on the per share
fair value of the Company's common stock on the date of issuance.
During 2004, the Company issued 45,273,989 shares of the Company's restricted
common stock to officers of the Company. The shares were valued at $543,288
F-22
based on the fair value of the Company's stock on the date of issuance. The
shares were issued as settlement of accrued compensation of $431,770, accrued
interest of $5,587, and compensation of $105,931.
During 2003, the Company issued 500,000 shares of the Company's restricted
common stock to a relative of a director for $10,000 of accrued compensation
owed to the director, based on the per share fair value of $0.02 per share of
the Company's common stock on the date of issuance.
Equity Line of Credit Agreement -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, 2004, the Company drew an aggregate amount of
$2,150,000 under the Equity Line Agreement, pursuant to draws on the equity
line, net of fees of $86,000, and issued a total of 57,464,386 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 year ended December
31, 2004 were $128,000. These fees were withheld from proceeds of notes payable
(see Note 6) and are in addition to fees paid in relation to those notes. Of
these payments, $86,000 was offset against additional paid in capital as shares
were issued under the Equity Line Agreement and $68,000 was classified as
deferred offering costs at December 31, 2004.
During the year ended December 31, 2003, the Company drew an aggregate amount of
$1,180,000 under the Equity Line Agreement, pursuant to draws on the equity
line, net of fees of $47,200 and prior offering costs of $44,228, and issued a
total of 64,253,508 shares of common stock to Cornell under the Equity Line
Agreement. At the Company's direction, Cornell retained the proceeds of the
draws under the Equity Line Agreement and applied them as payments on the notes
to Cornell, discussed in Note 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 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.
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
F-23
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 $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 of Credit 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. The SEC has not yet declared
the registration statement effective.
NOTE 12- 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, including the
developers mentioned in Note 5, 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. Also, during December 2004, the Company
adopted the 2004 Stock Option Plan (the "2004 Plan") with 40,000,000 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 2004, the Company granted options to purchase
6,500,000 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. Legal expense of $209,952 was recorded for the fair value of
options issued during 2004. 5,000,000 of these options were exercised in 2004
for cash proceeds of $500. An additional 500,000 of previously issued options
were exercised in 2004 for cash proceeds of $50. A total of 3,000,500
non-employee options were outstanding as of December 31, 2004.
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.
F-24
Employee Grants - During 2004, the Company granted options to purchase
24,000,000 shares of common stock to directors and employees of the Company
pursuant to the 2003 and 2004 Plans. 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. Non-cash compensation relating to the grant of these options
was recognized for $125,000 during 2004, based upon the intrinsic value of
options on the grant date. 14,250,000 of these options were exercised during
2004 for $111,500 of cash, $101,250 of compensation and $61,000 of accrued
compensation. The $101,250 of compensation was recorded in conjunction with the
cashless exercise of 4,500,000 of the options. A total of 11,250,000 employee
options were outstanding as of December 31, 2004.
During, 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.
A summary of the stock option activity for the years ended December 31, 2004 and
2003, is as follows:
Shares Weighted Average
Exercise Price
------------------ --------------------
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
Granted 30,500,000 $ 0.02
Exercised (19,750,000) $ 0.01
Cancelled (350,000) 0.14
------------------
Outstanding at December 31, 2004 14,250,500 $ 0.02
==================
Excercisable at December 31, 2004 14,250,500 $ 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 2004 and 2003:
2004 2003
--------------- -------------
Expected dividend yield - -
Risk free interest rate 3.39% 2.85%
Expected volatility 300% 338%
Expected life .10 years .10 years
Weighted average fair value per share $ 0.02 $ 0.02
F-25
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, 2004 and 2003, is as follows:
Weighted
Weighted Average
Options Average Fair Value of
Granted Exercise Price Options
------------ -------------- -------------
Year Ended - December 31, 2004
Grants with exercise prices less than the estimated
market value of the common stock 12,750,000 $ 0.01 $ 0.03
Grants with exercise prices equal to the estimated
market value of the common stock 17,750,000 $ 0.02 $ 0.01
Grants with exercise prices greater than the estimated
market value of the common stock - $ - $ -
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 $ -
A summary of the stock options outstanding and exercisable at December 31, 2004,
follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------- --------------------------
Weighted- Weighted Weighted-
Average Average Average
Range of Exercise Remaining Exercise Number Exercise
Prices Options Outstanding Contractual Life Price Exercisable Price
--------------------- ----------------------- ---------------- -------------- ------------- ------------
$0.0001 3,000,500 4.44 $0.0001 3,000,500 $0.0001
$0.02 10,500,000 4.83 $0.02 10,500,000 $0.02
$0.03 750,000 4.35 $0.03 350,000 $0.03
F-26
NOTE 13 -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
------------------- ------------------- ------------------- ---------------------
2004
Sales to external customers $ 3,354,057 $ 49,714 $ 5,458,944 $ 8,862,715
Intersegment sales 11,610 167 - 11,777
Segment income (loss) (375,864) 74,665 (357,123) (658,322)
Segment assets 3,085,208 208,043 1,000,178 4,293,429
Depreciation and amortization 220,940 2,438 26,017 249,395
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
Sales 2004 2003
------------------- -------------------
Total sales for reportable segments $ 8,874,492 $ 1,291,059
Elimination of intersegment sales (11,777) (75,814)
------------------- -------------------
Consolidated net sales $ 8,862,715 $ 1,215,245
------------------- -------------------
Total Assets 2004 2003
------------------- -------------------
Total assets for reportable segments $ 4,293,429 $ 2,169,834
Adjustment for intersegment amounts - -
------------------- -------------------
Consolidated total assets $ 4,293,429 $ 2,169,834
------------------- -------------------
NOTE 14 - GEOGRAPHIC INFORMATION
All revenue-producing assets are located in the United States of America or
China. Revenues are attributed to the geographic areas based on the location of
F-27
the customers purchasing the products. The Company's net sales and assets by
geographic area are as follows:
Revenues Revenue-producing assets
------------------------------------------------------------------------------------------
2004 2003 2004 2003
------------------- ------------------- ------------------- ---------------------
United States of America $ 8,850,775 $ 1,206,510 $ 454,610 $ 577,603
China - - 386,183 -
Other 11,940 8,735 - -
------------------- ------------------- ------------------- ---------------------
$ 8,862,715 $ 1,215,245 $ 840,793 $ 577,603
------------------- ------------------- ------------------- ---------------------
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
Notes Payable - On January 28, 2005 the Company issued an additional promissory
note to the Equity Line Investor in the amount of $565,000, with a 9% premium of
$50,850, in exchange for $503,500 of cash proceeds and $61,500 of loan costs.
The loan costs will be amortized over the one year life of the note. The note
bears interest at a rate of 7.5% per annum. Interest only payments are due for
the first six months of the note, after which the Company will be required to
pay $94,167 plus accrued interest, plus a portion of the premium each month
until the note is paid in full.
Stock Options - On January 12, 2005 the Company granted options to purchase
6,000,000 and 2,000,000 shares of the Company's common stock to directors and
employees of the Company, respectively. These options were five year options
that vested immediately and had an exercise price of $0.027 per share. The
exercise price of the options equaled the fair value of the common shares on the
date of grant therefore the options had no intrinsic value. The Company
estimated the fair value of the options at the grant date using the
Black-Scholes option-pricing model. The following 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 3.72 percent,
dividend yield of 0 percent, volatility of 278 percent, and expected lives of
0.10 years.
During January 2005, directors and employees exercised options to purchase
8,000,000 shares of commons stock with a weighted average exercise price of
$0.02 per share. These options were exercised for consideration consisting of
$37,500 in cash, $69,000 in compensation, $59,000 in accrued wages and bonuses,
and $18,500 in notes to shareholders.
In connection with the Cirtran Asia manufacturing agreement discussed in Note 9,
the Company agreed to issue options to purchase 1,500,000 shares common stock to
the Developers upon the sale, shipment and payment for 200,000 units of a
fitness product. The Company met this level of sales during January 2005 and the
options were issued at that time. The options are exercisable at $0.06 per
share, vested on the grant date and expire one year after issuance. The Company
estimated the fair value of the options at the grant date using the
Black-Scholes option-pricing model. The following assumptions were used in the
Black-Scholes model to determine the fair value of the options to purchase a
share of common stock of $0.043: risk-free interest rate of 4.00 percent,
dividend yield of 0 percent, volatility of 302 percent, and expected lives of
0.10 years. This resulted in $64,581 of expense which has been classified as
cost of sales.
On January 5, 2005, 1,500,000 options to purchase shares of the Company's common
stock, held by the Company's legal councel, were exercised for proceeds of $150.
F-28
Stockholders' Equity - On March 22, 2005, the Company issued 51,250,000 shares
of the Company's restricted common stock for $2,050,000 of principal and accrued
interest related to the related party note payable to Abacas. Because Abacas is
a related party, no gain or loss on forgiveness of debt will be recognized.
On March 22, 2005, the Company issued 10,000,000 shares of the Company's
restricted common stock for $400,000 of accrued rent and accrued interest owed
to the former owner of the facilities leased by the Company. The entity that
formerly owned the facilities is a related party through common ownership.
Because the former landlord is a related party, no gain or loss on forgiveness
of debt will be recognized.
On March 31, 2005, the Company purchased a 100% interest in PFE Properties LLC
(PFE). PFE was previously owned by an unrelated party. PFE owns the land and
building in which the Company's manufacturing facilities and administrative
offices are located. The liabilities of PFE on the date of acquisition include a
mortgage note payable of $1,050,000, secured by the building. The Company
acquired PFE by issuing 20,000,000 shares of the Company's restricted common
stock with a fair value of $680,000 on the date of acquisition.
F-29
Page
Condensed Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004 (unaudited) Q-2
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 2005 and 2004
(unaudited) Q-3
Condensed Consolidated Statements of Cash Flows for the Three and
Nine Months ended September 30, 2005 and 2004 (unaudited) Q-4
Notes to Condensed Consolidated Financial Statements (unaudited) Q-6
Q-1
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, September 30,
2005 2004
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 377,357 $ 81,101
Trade accounts receivable, net of
allowance for doubtful accounts of
$40,867 and $41,143, respectively 5,034,466 1,288,719
Other receivables 58,494 -
Inventory 1,448,585 1,453,754
Other 113,307 153,062
--------------------------------------------------------------------------------
Total Current Assets 7,032,209 2,976,636
--------------------------------------------------------------------------------
Property and Equipment, Net of accumulated
of $3,825,087 and $3,579,060 2,718,401 840,793
Investment in Securities at Cost 300,000 300,000
Other Assets, Net 284,845 8,000
Deposits 100,000 100,000
Loan Fees, Net 217,206 -
Deferred Offering Costs - 68,000
--------------------------------------------------------------------------------
Total Assets $ 10,652,661 $ 4,293,429
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 2,068,346 $ 1,104,392
Accrued liabilities 1,274,866 2,066,022
Current maturities of long-term notes payable 1,742,840 1,815,875
Notes payable to stockholders - 18,586
Notes payable to related parties - 1,530,587
--------------------------------------------------------------------------------
Total Current Liabilities 5,086,052 6,535,462
--------------------------------------------------------------------------------
Long-Term Notes Payable, Less Current Maturities 2,697,930 -
--------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, par value $0.001; authorized
750,000,000 shares; issued and outstanding
shares: 577,368,569 and 474,118,569 net of
3,000,000 shares held in treasury at no cost
at December 31, 2004 577,364 474,114
Additional paid-in capital 20,251,374 16,083,455
Accumulated deficit (17,960,059) (18,799,602)
--------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) 2,868,679 (2,242,033)
--------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity (Deficit) $ 10,652,661 $ 4,293,429
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Q-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
Net Sales $ 4,291,762 $ 2,626,770 $ 11,521,411 $ 5,230,374
Cost of Sales (2,620,109) (2,069,828) (6,962,380) (4,066,375)
---------------------------------------------------------------------------------------------------
Gross Profit 1,671,653 556,942 4,559,031 1,163,999
---------------------------------------------------------------------------------------------------
Operating Expenses
Selling, general and
administrative expenses 1,036,565 876,043 3,565,707 2,240,620
Non-cash employee
compensation expense - 147,500 69,000 226,250
---------------------------------------------------------------------------------------------------
Total Operating Expenses 1,036,565 1,023,543 3,634,707 2,466,870
---------------------------------------------------------------------------------------------------
Income (Loss) From Operations 635,088 (466,601) 924,324 (1,302,871)
---------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest (149,732) (85,446) (412,530) (400,039)
Other, net (362) (39) (217) (196)
Gain on forgiveness of debt 90,048 - 327,966 205,433
---------------------------------------------------------------------------------------------------
Total Other Income (Expense), Net (60,046) (85,485) (84,781) (194,802)
---------------------------------------------------------------------------------------------------
Net Income (Loss) $ 575,042 $ (552,086) $ 839,543 $ (1,497,673)
---------------------------------------------------------------------------------------------------
Basic income (loss) per common share $ - $ - $ - $ -
---------------------------------------------------------------------------------------------------
Diluted income (loss) per common share $ - $ - $ - $ -
---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Q-3
CIRTRAN CORPORATION AND SUBSIDIARIESCONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, 2005 2004
--------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 839,543 $(1,497,673)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 253,701 181,414
Loss on disposal of equipment - 33,238
Provision for doubtful accounts (276) (1,200)
Gain on forgiveness of debt (327,966) (205,433)
Settlement expense - 60,000
Loan costs and interest withheld from loan
proceeds 67,168 145,000
Amortization of beneficial conversion feature 59,040 -
Abandoned offering costs expensed 68,000
Amortization of loan discount and loan costs 84,409
Options exercised in lieu of board compensation 69,000 101,250
Intrinsic value of options issued to employees - 125,000
Options issued to attorneys and consultants
for services 109,728 175,602
Changes in assets and liabilities,
not of effects from purchase of PFE
Trade accounts receivable (3,686,267) (455,872)
Other receivables (58,494) -
Inventories 5,169 (197,186)
Prepaid expenses and other assets (244,764) (19,313)
Accounts payable 1,110,172 184,619
Accrued liabilities 396,441 294,597
--------------------------------------------------------------------------------
Total adjustments (2,094,939) 421,716
--------------------------------------------------------------------------------
Net cash used in operating activities (1,255,396) (1,075,957)
--------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of investment - (300,000)
Cash acquired with PFE acquisition 39,331 -
Net change in deposits (100,000) -
Purchase of property and equipment (253,196) (502,657)
--------------------------------------------------------------------------------
Net cash used in investing activities (313,865) (802,657)
--------------------------------------------------------------------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank - (9,623)
Proceeds from notes payable to stockholders 4,414 18,500
Payments on notes payable to stockholders - (31,752)
Proceeds from notes payable, net of cash paid
for debt issuance costs 1,732,067 2,927,000
Principal payments on notes payable - (298,545)
Proceeds from notes payable to related parties 95,586 2,145,233
Payment on notes payable to related parties - (2,919,622)
Proceeds from exercise of options and warrants
to purchase common stock 33,000 111,500
Exercise of options issued to attorneys and
consultants for services 450 550
--------------------------------------------------------------------------------
Net cash provided by financing activities 1,865,517 1,943,241
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 296,256 64,627
Cash and cash equivalents at beginning of period 81,101 54,135
--------------------------------------------------------------------------------
Cash and cash equivalents at end of year period $ 377,357 $ 118,762
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Q-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
For the Nine Months Ended September 30, 2005 2004
--------------------------------------------------------------------------------
Supplemental disclosure of
cash flow information
Cash paid during the period
for interest $ 112,706 $ 230,572
Noncash investing and financing activities
Notes issued for accounts payable and
capital lease obligations $ - $ 711,894
Acquisition of PFE Properties, LLC for
stock and assumption of note payable $ 1,868,974 $ -
Common stock issued for settlement of
note payable and accrued interest $ 2,148,913 $ 30,000
Common stock issuance in which proceeds
were retained as payment of notes payable $ - $ 2,150,000
Deposit applied to purchase of property
and equipment $ 100,000 $ -
Common stock issued for accrued rent and interest $ 411,402
Accrued interest converted to notes payable $ - $ 6,834
Stock options exercised for settlement of
accrued interest and accrued compensation $ 234,500 $ 61,000
Stock options exercised for settlement of notes
payable to stockholders $ 23,000 $ -
Loan fees incurred as part of convertible
debenture $ 250,765 $ -
Beneficial conversion feature on convertible
debenture $ 441,176 $ -
Convertible debenture proceeds used to settle
notes payable outstanding $ 2,265,000 $ -
Note issued for settlement of notes payable
and accrued interest $ - $ 551,819
Fees withheld from notes payable for Equity
Line Agreement $ - $ 86,000
Deferred offering costs withheld from notes
payable proceeds $ - $ 128,000
The accompanying notes are an integral part of these financial statements.
Q-5
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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. In particular, the
Company's significant accounting principles were presented as Note 1 to the
consolidated financial statements in that Annual 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 nine months
ended September 30, 2005, are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2005.
Principles of Consolidation-- On March 31, 2005, Cirtran Corporation acquired a
100% ownership interest in PFE Properties, LLC (see Note 4).
The condensed consolidated financial statements include the accounts of CirTran
Corporation, and its wholly owned subsidiaries, Racore Technology Corporation
and CirTran-Asia Inc. The accounts of PFE Properties, LLC have been included as
of March 31, 2005. All significant intercompany transactions have been
eliminated in consolidation.
Stock-Based Compensation--At September 30, 2005, the Company had one stock-based
employee compensation plan, which is described more fully in Note 11. 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 nine months ended September 30, 2005 and 2004, the
Company recognized compensation expense relating to stock options and warrants
of $69,000 and $226,250, 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Net income (loss) as reported $ 575,042 $ (552,086) $ 839,543 $(1,497,673)
Add: Stock-based employee
compensation expense included
in net income (loss) - 147,500 69,000 226,250
Deduct: Total stock-based
employee compensation benefit
(expense) determined under fair
value based method for all awards (47,850) (108,091) (271,456) (412,557)
-----------------------------------------------------------------------------------------
Pro forma net income (loss) $ 527,192 $ (512,677) $ 637,087 $(1,683,980)
-----------------------------------------------------------------------------------------
Basic and diluted income
(loss) per share
As reported - basic $ - $ - $ - $ -
As reported - diluted $ - $ - $ - $ -
Proforma - basic $ - $ - $ - $ -
Proforma - diluted $ - $ - $ - $ -
Q-6
Patents--Legal fees and other direct costs incurred in obtaining patents in the
United States and other countries are capitalized. Patents costs are amortized
over the estimated useful life of the patent. During the nine months ended
September 30, 2005, the Company capitalized $35,799 in patent related legal
costs. Amortization expense was $7,674 during the nine months ended September
30, 2005.
The realization of patents and other long-lived assets is evaluated periodically
when events or circumstances indicate a possible inability to recover the
carrying amount. An impairment loss is recognized for the excess of the carrying
amount over the fair value of the asset or the group of assets. Fair value is
determined based on expected discounted net future cash flows. The analysis
necessarily involves significant management judgment to evaluate the capacity of
an asset to perform within projections. As required, an evaluation of impairment
was made on the patents as of September 30, 2005. No indicators of impairment
were noted.
Income Taxes
The Company has no provision for income taxes as it will receive a benefit from
net operating loss carryforwards equal to its taxable income.
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. The
Company had net income of $839,543 for the nine months ended September 30, 2005,
compared to a net loss of $658,322 for the year ended December 31, 2004. As of
September 30, 2005, and December 31, 2004, the Company had an accumulated
deficit of $17,960,059 and $18,799,602, respectively, and a total stockholders'
equity (deficit) of $2,868,679 and $(2,242,033), respectively. The Company also
had working capital of $1,946,157 and $(3,558,826) as of September 30, 2005, and
December 31, 2004, respectively. In addition, the Company used, rather than
provided, cash in its operations in the amounts of $1,255,396 and $1,680,054 for
the nine months ended September 30, 2005, and the year ended December 31, 2004,
respectively. 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 7).
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.
As discussed in Note 10, the Company had entered into an equity line of credit
agreement and a standby equity distribution agreement with a private investor.
With the sale by the Company of the Convertible Debenture in May 2005, this and
all other agreements relating to the equity line and the standby equity
distribution agreement were terminated. (See Note 9.)
Q-7
NOTE 3 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the following presents
the computation of basic and diluted net income (loss) per share:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------------------------------
Basic and diluted net
income (loss) $ 575,042 $ (552,086) $ 839,543 $ (1,497,673)
---------------------------------------------------------------------------------------------
Basic weighted-average
common shares
outstanding 576,101,903 424,095,306 545,535,235 400,091,599
Effect of convertible
debenture 125,000,000 - 125,000,000 -
Effect of dilutive
stock options 4,370,619 - 5,057,565 -
Diluted weighted-average
common shares outstanding 705,472,522 424,095,306 675,592,800 400,091,599
---------------------------------------------------------------------------------------------
Basic income (loss)
per common share $ - $ - $ - $ -
---------------------------------------------------------------------------------------------
Diluted income (loss)
per common share $ - $ - $ - $ -
---------------------------------------------------------------------------------------------
NOTE 4 - ACQUISITION OF PFE PROPERTIES, LLC
On March 31, 2005, the Company purchased a 100% interest in PFE Properties LLC
(PFE). PFE was previously owned by a relative, not meeting the definition of a
related party, of the President and CEO. PFE owns the land and building in which
the Company's manufacturing facilities and administrative offices are located.
The liabilities of PFE on the date of acquisition include a mortgage note
payable of $1,050,000, secured by the building. The Company acquired PFE by
issuing 20,000,000 shares of the Company's restricted common stock with a fair
value of $800,000 on the date of acquisition and assuming the mortgage note
payable of $1,050,000 and accounts payable of $18,974. The results of operations
for PFE have been included beginning March 31, 2005. The additional $800,000 for
the purchase of PFE was allocated between the land and building value.
The balance sheet of PFE as of March 31, 2005 is presented as follows:
Current Assets $ 98,535
Property and Equipment 1,770,439
-------------
Total Assets Acquired 1,868,974
-------------
Accounts Payable 18,974
Mortgage Note Payable 1,050,000
-------------
Total Liabilities Assumed 1,068,974
-------------
Net Assets Acquired $ 800,000
=============
Q-8
NOTE 5 - 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 as
determined by the cash price per share paid by other investors, under this
offering. 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 into which the Preferred Shares are convertible at the
time of the vote. The investment represents less than a 5% interest in the
investee. The investment does not have a readily determinable fair value and is
stated at historical cost, less an allowance for impairment when circumstances
indicate an investment has been impaired. The Company periodically evaluates its
investments as to whether events and circumstances have occurred which indicate
possible impairment. No indicators of impairment were noted for the nine months
ended September 30, 2005.
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 "turn-key" manufacturing services handling a portion of the
investee's manufacturing operations from material procurement to complete
finished box-build of investee products. The initial term of the agreement is
three years, continuing month to month thereafter unless terminated by either
party. Sales under this agreement totaled $163,473 and $538,233 for the periods
ended September 30, 2005, and December 31, 2004, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders-- The Company had amounts due to stockholders from
three separate notes. The balance due to stockholders at September 30, 2005, and
December 31, 2004, was zero and $18,586, respectively. During the nine months
ended September 30, 2005, in lieu of a cash exercise price of $23,000, the
stockholders forgave the remaining $23,000 of notes payable owed to them by the
Company to exercise 1,000,000 options to purchase shares of the Company's common
stock.
Notes Payable to Related Party --During 2002, the Company entered into a verbal
bridge loan agreement with Abacas Ventures, Inc. (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 nine months ended
September 30, 2005, and the year ended December 31, 2004, the Company was
advanced $95,586 and $3,128,281, respectively, and made cash payments of zero
and $3,025,149, respectively.
During March 2005, the Company issued 51,250,000 shares of the Company's
restricted common stock for payment of $2,055,944 in principal and accrued
interest on the note. Because Abacas is a related party, no gain or loss on
forgiveness of debt was recognized.
Q-9
The total principal amount owed to Abacas between the note payable and the
bridge loan was zero and $1,530,587 as of September 30, 2005, and December 31,
2004, respectively. The total accrued interest owed to Abacas between the note
payable and the bridge loan was zero and $430,828 as of September 30, 2005, and
December 31, 2004, respectively.
NOTE 7 - 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 were held in escrow and were 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 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.
As of September 30, 2005, the Company was in default of its obligations under
the settlement agreement and the total payment due thereunder had not been made.
A registration statement with respect to the escrowed shares was not filed and
the Company did not replace the escrowed shares with registered, free-trading
shares as per the terms of the agreement. The plaintiff filed a Confession of
Judgment and proceeded with execution thereon. The shares in escrow were
released and issued as partial settlement of $92,969 on the note payable
outstanding.
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 2003 and 2004, an investment firm filed suits in the U.S.
District Court for the District of Utah seeking payment of a commission
consisting of common stock valued at 1,750,000 for allegedly introducing the
Company to the Equity Line Investor (See Note 9). 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.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $147,592. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims, and they are included in accounts payable. During the nine months ended
September 30, 2005, the Company determined that the statute of limitations had
expired for various vendors. Amounts of $165,192 were written off and recorded
as a gain on forgiveness of debt. However, there can be no assurance that any or
all of these vendors will agree with the Company's determination, and the
Company may be subject to claims or litigation in the future.
Q-10
In addition, various vendors have notified the Company that they believe they
have claims against the Company totaling $159,308. The Company has determined
the probability of realizing any loss on these claims is remote. The Company has
made no accrual for these claims 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 Company's entering into an Equity
Line of Credit Agreement (described in Note 9), the Company granted to the
equity line investor (the "Equity Line Investor") registration rights, in
connection with which the Company was required to file a registration statement
covering the resale of shares put to the Equity Line Investor under the equity
line. The Company was 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 9), the Company granted to the
investor registration rights, in connection with which the Company was required
to file a registration statement covering the resale of shares put to the
investor under the standby equity distribution agreement. The Company was also
required to keep the registration statement effective until two years following
the date of the last advance under the standby equity distribution agreement.
In connection with the Company's sale of a convertible debenture (discussed
below), the Equity Line of Credit Agreement and the Standby Equity Distribution
Agreement, together with all associated registration rights, was terminated.
In May 2005, connection with the Company's sale of a convertible debenture
(discussed below), the Company granted to the purchaser of the debenture
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The Company agreed to register the resale of up to
100,000,000 shares, and to keep such registration statement effective until all
of the shares issuable upon conversion of the debenture have been sold. The
Company filed the registration statement on September 23, 2005. As of the date
of this report, the registration statement had not been declared effective.
Accrued Payroll Tax Liabilities -- In November 2004, the Internal Revenue
Service (IRS) accepted the Company's Amended Offer in Compromise (Offer) to
settle delinquent payroll taxes, interest and penalties. The acceptance of the
Offer required the Company to pay $500,000 by February 3, 2005. The Company made
the required payment on February 2, 2005. Additionally, the Offer requires the
Company to remain current in its payment of taxes for 5 years, and the Company
may not claim any net operating losses for the years 2001 through 2015, or until
the Company pays taxes in an amount equal to the taxes waived by the offer in
compromise. The outstanding balance of delinquent payroll taxes, interest and
penalties was $1,955,767 on the settlement date. The future cash payments
specified by the Offer, including interest and principal, were less than the
carrying amount of the payable; therefore the Company reduced the carrying
amount of the liability to the total future cash payments of $500,000 and
recorded a gain of $1,455,767 during the year ended December 31, 2004.
Q-11
Further, the Utah State Tax Commission has entered into an agreement to allow
the Company to pay the tax liability owing to the State of Utah in equal monthly
installments of $4,000 over a two-year period running through December 2005.
Through September 2005, the Company had made the required payments. The balance
owed to the State of Utah as of September 30, 2005, and December 31, 2004, was
$143,627 and $223,660, respectively, including taxes, penalties and interest.
Manufacturing Agreement -- On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain Developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
has the exclusive right to manufacture the certain products developed by the
Developers or any of their affiliates. The Developers will continue to provide
marketing and consulting services related to the products under the agreement.
Should the Developers terminate the agreement early, they must pay the Company
$150,000. Revenue is recognized when products are shipped. Title passes to the
customer or independent sales representative at the time of shipment.
In connection with this agreement the Company agreed to issue options to
purchase 1,500,000 shares common stock to the Developers upon the sale, shipment
and payment for 200,000 units of a fitness product. In addition, the Company
agreed to issue options to purchase 300,000 shares of common stock to the
Developers for each multiple of 100,000 units of the fitness product sold in
excess of the initial 200,000 units within twenty-four months of the agreement
(June 2004). The options will be exercisable at $0.06 per share, vest on the
grant date and expire one year after issuance. As of September 30, 2005, the
Company had sold, shipped and received payment for, 257,577 units of the fitness
product. In January 2005, the Company issued 1,500,000 options under the terms
of the agreement. See Note 10.
In connection with the above manufacturing agreement, the Company agreed to
issue various options to purchase shares of common stock to the Developers upon
the sale, shipment, and payment of certain quantities of additional the
products. In addition, the Company agreed to issue additional options to
purchase common stock to the developers for each multiple of units sold in
excess of the initial units within the first twenty-four months of the
agreements. The schedule of units and potential options that will be issued
follows:
Options for Each Multiple Options for
Initial Units of Units above Each Multiple
Product Initial Units Sold Initial Units of Units
--------------------------------------------------------------------------------
1 500,000 500,000 200,000 200,000
2 25,000 500,000 15,000 100,000
3 100,000 500,000 50,000 100,000
4 300,000 1,000,000 100,000 200,000
5 200,000 250,000 100,000 100,000
6 200,000 500,000 100,000 100,000
As of September 30, 2005, the Company had not sold, shipped and received payment
for enough units to require the issuance of options related to the additional
products under these agreements. Because the Developers must provide future
services for the options to vest, the options are treated as unissued for
accounting purposes. The cost of these options will be recognized when the
options are earned.
Q-12
NOTE 8 - NOTES PAYABLE
Notes Payable to Equity Line Investor-- As of December 31, 2004, the Company
owed $1.7 million to Cornell Capital Partners, LP ("Cornell"), pursuant to an
unsecured promissory note. The note was repayable over 193 days and was past due
as of March 31, 2005. The note stated that if the Company did not repay the note
when due, a default interest rate of 24% would apply to the unpaid balance. The
Company recorded accrued interest of $105,074 on the note as of March 31, 2005.
In January 2005, the Company entered into an additional promissory note with
Cornell for $565,000. The Company received proceeds of $503,500, net of loan
costs of $61,500. The terms of the note included a 9% discount or $50,850,
resulting in a total note payable of $615,850 and an effective interest rate of
20.6%. The premium was amortized to interest expense over the life of the loan.
The terms of the loan stated that interest only payments would be made for the
first six months. The Company would repay the principal, interest, and premium
over the next six months. The loan was due January 2006. The Company amortized
$11,057 of the discount as interest expense for the three months ended March 31,
2005.
All notes to Cornell were paid on May 27, 2005, with funds acquired from
Highgate House Funds, Ltd. ("Highgate"), in connection with the sale of a
convertible debenture. (See Note 9.) Payment of accrued interest was not
required as part of the repayment. In connection with the repayment, the
remaining discount of $39,793 was immediately amortized as interest expense. The
gain from forgiveness of debt on both Cornell notes totaled $162,774.
The total principal amount owed to Cornell Capital Partners, LP was zero and
$1,700,000 as of September 30, 2005, and December 31, 2004, respectively.
Mortgage Note Payable-- In conjunction with the acquisition of PFE, the Company
assumed a mortgage note payable for $1,050,000. The note bears interest at 12.5%
per annum. Interest only payments are required through January 2006. Starting in
February 2006, principal and interest payments will be required based on a
twenty-year amortization of the note. The entire balance of principal and unpaid
interest will be due in December 2008.
The summary of the notes payable and convertable debenture at September 30, 2005
and December 31, 2004 is as follows:
2005 2004
--------------------------------------------------------------------------------
Mortgage payable to a bank, interest
at 12.50%, monthly payments of $10,938
to $12,699 through November 2008, unpaid
principal due in full December 2008,
secured by building $ 1,050,000 $ -
Convertible debenture net of discount of
$382,136, interest at 5.00%, due in full
December 2007, secured by Company's
property (See Note 9) 3,367,864 -
Notes payable to Equity Line Investor, no
periodic interest, matures 70 to 131 days
after issuance, (see below). - 1,700,000
Note payable to a company, interest at
8.00%, matured August 2002, in default 22,906 115,875
--------------------------------------------------------------------------------
Total Notes Payable 4,440,770 1,815,875
Less current maturities (1,742,840) (1,815,875)
Long-Term Notes Payable $ 2,697,930 $ -
================================================================================
NOTE 9 - CONVERTIBLE DEBENTURE
On May 26, 2005, the Company entered into an agreement with Highgate to issue to
Highgate a $3,750,000, 5% Secured Convertible Debenture (the "Debenture"). The
Debenture is due December 2007 and is secured by all of the Company's property.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made.
At any time, Highgate may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of our common stock for the twenty trading days immediately preceding the
conversion date. The Company has the right to redeem a portion or the entire
Debenture then outstanding by paying 105% of the principal amount redeemed plus
accrued interest thereon.
Q-13
Highgate's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Highgate may convert in
excess of the foregoing amounts if the Company and Highgate
mutually agree; and
(iii) Upon the occurrence of an event of default, Highgate may, in
its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon or may
convert the Debentures and accrued interest thereon into
shares of the Company's common stock.
Except in the event of default, Highgate may not convert the Debenture for a
number of shares that would result in Highgate owning more than 4.99% of the
Company's outstanding common stock.
As discussed in Note 7, the Company granted Highgate registration rights related
to the purchase of the debenture.
The Company determined that Highgate LLC received a beneficial conversion option
and allocated $441,402 of the proceeds received to the beneficial conversion
option that resulted in an offsetting discount to the note payable. The discount
on the note payable is being amortized to interest expense from the date
proceeds were received through December 2007, and amounted to $59,040 of
accretion of the discount during the nine months ended September 30, 2005. The
effective interest rate, after considering the discount, is 12.6%
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were paid to Cornell to repay promissory notes. Fees of $256,433 were also
withheld from the proceeds. As such, of the total Debenture of $3,750,000, the
net proceeds to the Company were $1,228,567.
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock Issuances -- During the nine months ended September 30, 2005, the
Company issued 51,250,000 shares of the Company's restricted common stock for
payment of principal and accrued interest on the note to Abacus. (See Note 6.)
During the nine months ended September 30, 2005, the Company issued 10,000,000
shares of the Company's restricted common stock for payment of accrued rent and
accrued interest of $411,402. Because the rent was owed to a related party, no
gain or loss on forgiveness of debt was recognized.
During the nine months ended September 30, 2005, the Company issued 3,000,000
shares of the Company's restricted common stock as partial payment on a note
payable for $92,969. (See Note 7.) As of the date of this report, the
registration statement had not been declared effective.
Q-14
On March 31, 2005, the Company acquired a 100% interest in PFE Properties, LLC
for 20,000,000 shares of the Company's restricted common stock. (See Note 4.)
Equity Line of Credit Agreement -On November 5, 2002, the Company entered into
an Equity Line of Credit Agreement (the "Equity Line Agreement") with 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 had 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 was determined by dividing the amount of the draw by the lowest
closing bid price of the Company's common stock over the five trading days after
the advance notice was tendered. Cornell was 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. Upon
the sale of the Convertible Debenture, the Amended Equity Line Agreement was
terminated.
Standby Equity Distribution Agreement - The Company entered into a Standby
Equity Distribution Agreement dated May 21, 2004, with Cornell. Under the
Agreement, the Company had 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 was determined by dividing the
amount of the draw by the lowest volume-weighted average price of the Company's
common stock during the five consecutive trading days after the advance was
sought. The maximum advance amount was $1,000,000 per advance, with a minimum of
seven trading days between advances. Cornell was to retain 5% of each advance as
a fee under the Agreement. The term of the Agreement was to run over a period of
twenty-four months after a registration statement related to the Agreement was
declared effective or until the full $20 million had been drawn, whichever came
first. The Company had made no draws against the SEDA Facility and issued no
shares in connection with the SEDA Facility.
With the sale of the Convertible Debenture on May 27, 2005, the SEDA Facility
and related agreements were terminated. (See Note 9.)
NOTE 11 - 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, including the
developers mentioned in Note 7, 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 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. Also, during December 2004, the Company adopted the
2004 Stock Option Plan (the "2004 Plan") with 40,000,000 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.
Q-15
Non-Employee Options - During the nine months ended September 30, 2005, the
Company granted options to purchase 3,000,000 shares of common stock to counsel
for the Company with an exercise price of $0.0001 per share. The options were
five year options and vested on the date granted. Legal expense of $88,202 was
recorded for the fair value of options issued. These options and 1,500,000
previously issued options were exercised by counsel for proceeds of $450.
Employee Options - During the nine months ended September 30, 2005, the Company
granted options to purchase 13,000,000 shares of common stock to directors and
employees of the Company pursuant to the 2004 Plan. These options are five year
options that vested on the date of grant. The related exercise prices were
$0.027 per share. The exercise price equaled the fair value of the common shares
at the time these options were granted; therefore, the options had no intrinsic
value. 14,500,000 options were exercised during the nine months ended September
30, 2005, for $33,000 in cash, $69,000 in compensation, $234,500 in accrued
compensation, and $23,000 as payment on a shareholder note payable. The $69,000
of compensation was recorded in conjunction with the cashless exercise of
3,000,000 of the options.
Developer Options - During the nine months ended September 30, 2005, the Company
granted options to purchase 1,500,000 shares of common stock to developers as
described in Note 7 at exercise prices of $0.06 per share. The options were all
five-year options and vested on the dates granted. Two of the developers were
employees and together were issued 1,000,000 of the options. The exercise price
equaled the fair value of the common shares at the time these options were
granted therefore the options had no intrinsic value. The fair value of these
options of $42,052 was estimated using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate ranging of 4.00%,
dividend yield of 0.0%, volatility of 302%, and expected average life of .5
years. None of these options were exercised during the nine months ended
September 30, 2005.
The remaining 500,000 developer options were issued to a non-employee under the
terms described above. Because the developer was a non-employee, cost of goods
sold of $21,526 was recorded for the fair value of options issued during the
three months ended March 31, 2005. These options were valued using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and
expected average life of .5 years. None of these options were exercised during
the nine months ended September 30, 2005.
A total of 11,250,000 employee options and 1,500,500 non-employee options were
outstanding as of September 30, 2005.
A summary of the stock option activity for the nine months ended September 30,
2005, is as follows:
Q-16
Weighted
Average
Exercise
Shares Price
------------ ------------
Outstanding at December 31, 2004 14,250,500 $ 0.02
Granted 17,500,000 $ 0.03
Exercised (19,000,000) $ 0.02
Cancelled - -
------------
Outstanding at June 30, 2005 12,750,500 $ 0.03
============
Exercisable at June 30, 2005 12,750,500 $ 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 nine months ended September 30, 2005:
2005
------------
Expected dividend yield -
Risk free interest rate 3.91%
Expected volatility 276%
Expected life 0.13 years
Weighted average fair value per share $ 0.02
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 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
----------------------------------------------------------------------------------------
September 30, 2005
Sales to external customers $ 2,355,655 $ 110,886 $ 9,054,870 $ 11,521,411
Intersegment sales 39,613 - - 39,613
Segment income (loss) (897,947) (157,307) 1,894,797 839,543
Segment assets 4,286,743 202,626 6,163,292 10,652,661
Depreciation and amortization 166,420 1,633 85,648 253,701
September 30, 2004
Sales to external customers $ 2,424,582 $ 46,328 $ 2,759,464 $ 5,230,374
Intersegment sales 11,325 167 - 11,492
Segment loss (1,011,083) (189,543) (297,047) (1,497,673)
Segment assets 2,875,515 204,716 457,805 3,538,036
Depreciation and amortization 168,332 1,787 11,295 181,414
Q-17
September 30,
-----------------------------------
Sales 2005 2004
------------------------------------------------------------------------------
Total sales for reportable segments $ 11,561,024 $ 5,241,866
Elimination of intersegment sales (39,613) (11,492)
------------------------------------------------------------------------------
Consolidated net sales $ 11,521,411 $ 5,230,374
------------------------------------------------------------------------------
September 30,
-----------------------------------
Total Assets 2005 2004
------------------------------------------------------------------------------
Total assets for reportable segments $ 10,652,661 $ 3,538,036
Adjustment for intersegment amounts - -
------------------------------------------------------------------------------
Consolidated total assets $ 10,652,661 $ 3,538,036
------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS
Q-18
Experts
Our consolidated balance sheets as of December 31, 2004 and 2003, and our
consolidated statements of operations, stockholders' deficit, and cash flows,
for the years then ended, have been included herein and in the registration
statement on Form SB-2 of which this prospectus forms a part, in reliance on the
report of Hansen, Barnett & Maxwell, an independent registered public
accountanting firm, 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.
59
Table of Contents
Summary about CirTran Corporation
and this offering 4
Risk factors 7
Use of proceeds 14
Determination of offering price 14
Description of business 14
Management's discussion and analysis
or plan of operation 25
Forward-looking statements 32
5% Convertible Debenture 32 CirTran Corporation
Selling Shareholders 34
Plan of distribution 36 100,000,000
Regulation M 37 SHARES
Legal Proceedings 38
Directors, executive officers, promoters and COMMON STOCK
control persons 39
Commission's position on indemnification --------------------
for Securities Act liabilities 41
Security ownership of certain beneficial PROSPECTUS
owners and management 42
Description of common stock 43 -------------------
Certain relationships and related
Transactions 44 December __, 2005
Market for common equity and related
stockholder matters 46
Executive compensation 48
Changes in and disagreements with
accountants on accounting
and financial disclosure 51
Index to financial statements 51
Experts 52
Legal matters 52
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.
60
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 $ 354.00
Transfer Agent Fees 1,000.00
Costs of Printing and Engraving 5,000.00
Legal Fees 25,000.00
Accounting Fees 25,000.00
----------------
Total Estimated Costs of Offering $ 56,354.00
Item 26. Recent Sales of Unregistered Securities
In May 2005, we entered into a securities purchase agreement with Highgate
concerning the purchase and sale of the Convertible Debenture. The sale of the
Convertible Debenture to Highgate was made in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and rules and regulations
promulgated thereunder, as a transaction not involving any public offering. No
advertising or general solicitation was employed in offering the securities, and
the Convertible Debenture was issued to only one investor which represented that
it is an "accredited investor" as that term is defined in Regulation D
promulgated pursuant to the Securities Act of 1933. Through September 21, 2005,
we had issued no shares of our common stock in connection with any conversions
of the Convertible Debentures, and we had received notice of no conversions from
Highgate. This registration statement is filed to register the resale of shares
into the market that Highgate will receive upon conversion of the Convertible
Debenture, and our issuances of shares to Highgate will be made without
registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act, and
the rules and regulations promulgated thereunder.
In March 2005, the Company entered into agreements with eight individuals or
entities (collectively, the "Lenders") to whom the Company was indebted, in an
aggregate amount of $2,450,000, pursuant to which, the Company agreed to issue
an aggregate of 61,250,000 shares of its restricted common stock in exchange for
the Lenders' agreeing to cancel the debt obligations owed by the Company. With
respect to $2,050,000 of the indebtedness, that amount was owed to Abacas
Ventures, Inc. ("Abacas"), a company that had purchased certain of the Company's
obligations. Abacas agreed to the cancellation of the Company's obligation to
II-1
Abacas in return for the Company's issuing shares to certain of Abacas's
shareholders and the other named individuals. Trevor Saliba, who is a
beneficiary of the Saliba Private Annuity Trust, has been a director of the
Company since June 2001. The remaining $400,000 was due to I&R Properties in
connection with past rent on the Company's headquarters building. I&R Properties
is a company owned and controlled by individuals who are officers, directors and
principal stockholders. The issuances of shares to the Lenders were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in the issuance of the securities.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with an estimated value of One Million Dollars
($1,000,000). No registration rights were granted. 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, as a transaction not involving any public
offering. No advertising or general solicitation was employed in the issuance of
the securities
Pursuant to the Equity Line of Credit Agreement, we were 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 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 were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in offering the securities, and the shares
were issued to only one investor which 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
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 used the proceeds of
the draws on the Equity Line to pay outstanding liabilities, including notes to
Cornell, the Equity Line Investor, discussed above. As noted above, the Company
has terminated the Equity Line of Credit Agreement.
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 1933 Act, 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.
Item 27. Exhibits
Copies of the following documents are filed with this registration statement as
exhibits:
Exhibit No. Document
5 Opinion of Durham Jones & Pinegar, P.C.
II-2
10.1 Securities Purchase Agreement between CirTran Corporation and Highgate
House Funds, Ltd., dated as of May 26, 2005 (previously filed as an
exhibit to the Company's Current Report on Form 8-K, filed with the
Commission on June 3, 2005, and incorporated herein by reference).
10.2 Form of 5% Convertible Debenture, due December 31, 2007, issued by
CirTran Corporation (previously filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on June 3, 2005,
and incorporated herein by reference).
10.3 Investor Registration Rights Agreement between CirTran Corporation and
Highgate House Funds, Ltd., dated as of May 26, 2005 (previously filed
as an exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on June 3, 2005, and incorporated herein by reference).
10.4 Security Agreement between CirTran Corporation and Highgate House
Funds, Ltd., dated as of May 26, 2005 (previously filed as an exhibit
to the Company's Current Report on Form 8-K, filed with the Commission
on June 3, 2005, and incorporated herein by reference).
10.5 Escrow Agreement between CirTran Corporation, Highgate House Funds,
Ltd., and David Gonzalez dated as of May 26, 2005 (previously filed as
an exhibit to the Company's Current Report on Form 8-K, filed with the
Commission on June 3, 2005, and incorporated herein by reference).
10.6 Termination Agreement between CirTran Corporation and Cornell Capital
Partners, LP, dated as of May 26, 2005 (previously filed as an exhibit
to the Company's Current Report on Form 8-K, filed with the Commission
on June 3, 2005, and incorporated herein by reference).
10.7 Standby Equity Distribution Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of May 21, 2004 (previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB/A,
filed with the Commission on December 22, 2004, and incorporated herein
by reference).
10.8 Registration Rights Agreement between CirTran Corporation and Cornell
Capital Partners, LP, dated as of May 21, 2004 (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed with
the Commission on December 22, 2004, and incorporated herein by
reference).
10.9 Placement Agent Agreement between CirTran Corporation and Newbridge
Securities Corporation, dated as of May 21, 2004 (previously filed as
an exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein by
reference).
10.10 Escrow Agreement by and among CirTran Corporation, Cornell Capital
Partners, LP, and Butler Gonzalez LLP, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB/A, filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.11 Exclusive Manufacturing Agreement ("Exclusive Agreement") by and among
Michael Casey; Michael Casey Enterprises, Ltd.; Charles Ho; Uking
System Industry Co., Ltd.; David Hayek; HIPMG, Inc. and CirRran-Asia,
Inc., dated as of June 10, 2004 (previously filed as an exhibit to the
Company's Quarterly Report on Form 10-QSB/A, filed with the Commission
on December 22, 2004, and incorporated herein by reference).
10.12 Appendix A-1 to Exclusive Agreement for AbKing Pro
10.13 Appendix A-2 to Exclusive Agreement for AbRoller (portions of this
exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission) (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.14 Appendix A-3 to Exclusive Agreement for AbTrainer Club Pro (portions of
this exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission) (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.15 Appendix A-4 to Exclusive Agreement for Instant Abs (portions of this
exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
II-3
Exchange Commission) (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.16 Appendix A-5 to Exclusive Agreement for Hot Dog Express (portions of
this exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission) (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.17 Appendix A-7 to Exclusive Agreement for Condiment Caddy (portions of
this exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission) (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.18 Appendix A-8 to Exclusive Agreement for Denise Austin Pilates product
(portions of this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission) (previously filed as an exhibit to
the Company's Quarterly Report on Form 10-QSB/A, filed with the
Commission on December 22, 2004, and incorporated herein by reference).
10.19 Employment Agreement with Iehab Hawatmeh, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB/A, filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.20 Employment Agreement with Shaher Hawatmeh, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB/A, filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.21 Employment Agreement with Trevor Saliba, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB/A, filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.22 Employment Agreement with Charles Ho, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB/A, filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.23 Letter Agreement between MET Advisors and CirTran Corporation, dated
August 1, 2003 (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.24 Consulting Agreement between CirTran Corporation and Cogent Capital
Corp., dated September 14, 2003 (previously filed as an exhibit to the
Company's Quarterly Report on Form 10-QSB/A, filed with the Commission
on December 22, 2004, and incorporated herein by reference).
10.25 Agreement between CirTran Corporation and Transactional Marketing
Partners, Inc., dated as of October 1, 2004 (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed with
the Commission on December 22, 2004, and incorporated herein by
reference).
10.26 Promissory Note, payable to Cornell Capital Partners, for $230,000,
dated June 9, 2003
10.27 Promissory Note, payable to Cornell Capital Partners, for $100,000,
dated July 16, 2003
10.28 Promissory Note, payable to Cornell Capital Partners, for $100,000,
dated August 28, 2003
10.29 Promissory Note, payable to Cornell Capital Partners, for $200,000,
dated September 26, 2003
10.30 Promissory Note, payable to Cornell Capital Partners, for $300,000,
dated October 3, 2003
10.31 Promissory Note, payable to Cornell Capital Partners, for $250,000,
dated October 23, 2003
10.32 Promissory Note, payable to Cornell Capital Partners, for $250,000,
dated November 10, 2003
10.33 Promissory Note, payable to Cornell Capital Partners, for $250,000,
dated December 5, 2003
10.34 Promissory Note, payable to Cornell Capital Partners, for $150,000,
dated December 23, 2003
10.35 Promissory Note, payable to Cornell Capital Partners, for $250,000,
dated January 29, 2004
10.36 Promissory Note, payable to Cornell Capital Partners, for $250,000,
dated February 27, 2004
10.37 Promissory Note, payable to Cornell Capital Partners, for $1,000,000,
dated March 23, 2004
10.38 Promissory Note, payable to Cornell Capital Partners, for $1,700,000,
dated June 17, 2004
II-4
10.39 Preferred Manufacturing Agreement between the Company and Broadata
Communications, Inc., dated as of April 13, 2004 (previously filed as
an exhibit to the Company's Quarterly Report on Form 10-QSB, filed with
the Commission on May 17, 2004, and incorporated herein by reference).
10.40 Subscription Agreement between CirTran Corporation and the Saliba
Living Trust (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and incorporated
herein by reference).
10.41 Subscription Agreement between CirTran Corporation and the Saliba
Private Annuity Trust (previously filed as an exhibit to a Current
Report on Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.42 Subscription Agreement between CirTran Corporation and Trevor M. Saliba
(previously filed as an exhibit to a Current Report on Form 8-K filed
with the Commission on April 14, 2005, and incorporated herein by
reference).
10.43 Subscription Agreement between CirTran Corporation and Basem Neshiewat
(previously filed as an exhibit to a Current Report on Form 8-K filed
with the Commission on April 14, 2005, and incorporated herein by
reference).
10.44 Subscription Agreement between CirTran Corporation and Sam Attallah
(previously filed as an exhibit to a Current Report on Form 8-K filed
with the Commission on April 14, 2005, and incorporated herein by
reference).
10.45 Subscription Agreement between CirTran Corporation and Amer Hawatmeh
(previously filed as an exhibit to a Current Report on Form 8-K filed
with the Commission on April 14, 2005, and incorporated herein by
reference).
10.46 Subscription Agreement between CirTran Corporation and Anwar Ajnass
(previously filed as an exhibit to a Current Report on Form 8-K filed
with the Commission on April 14, 2005, and incorporated herein by
reference).
10.47 Subscription Agreement between CirTran Corporation and I&R Properties,
LLC (previously filed as an exhibit to a Current Report on Form 8-K
filed with the Commission on April 14, 2005, and incorporated herein by
reference).
10.48 PFE Properties, LLC, Membership Acquisition Agreement between CirTran
Corporation and Rajayee Sayegh, dated as of March 31, 2005 (previously
filed as an exhibit to a Current Report on Form 8-K filed with the
Commission on April 14, 2005, and incorporated herein by reference).
10.49 Exclusive Manufacturing and Supply Agreement, dated as of April 21,
2005, by and between CirTran Corporation and Guthy-Renker Corporation
(portions of this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission).
10.50 Promissory Note, payable to Cornell Capital Partners, for $565,000.
23.1 Consent of Hansen Barnett & Maxwell LLP
23.2 Consent of Counsel (included in Exhibit 5 Opinion Letter)
24. Power of Attorney (see page II-4).
---------------
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,
II-5
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.
II-6
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 December 16, 2005.
CIRTRAN CORPORATION
A Nevada Corporation
By: /s/ Iehab Hawatmeh
----------------------------------------------
Iehab Hawatmeh
Its: President, Director, and Chief Financial Officer
(Principal Executive Officer and Principal Financial
Officer)
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints and hereby
authorizes Iehab Hawatmeh with the full power of substitution, as
attorney-in-fact, to sign in such person's behalf, individually and in his
capacity as a director, and to file any amendments, including post-effective
amendments to this Registration Statement.
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/ Raed Hawatmeh December 16, 2005
--------------------------
Raed Hawatmeh
Director
/s/ Trevor Saliba December 16, 2005
--------------------------
Trevor Saliba
Director
II-7
Exhibit List
Exhibit Description
5 Opinion of Durham Jones & Pinegar, P.C.
10.1 Securities Purchase Agreement between CirTran Corporation and
Highgate House Funds, Ltd., dated as of May 26, 2005 (previously
filed as an exhibit to the Company's Current Report on Form 8-K,
filed with the Commission on June 3, 2005, and incorporated
herein by reference).
10.2 Form of 5% Convertible Debenture, due December 31, 2007, issued
by CirTran Corporation (previously filed as an exhibit to the
Company's Current Report on Form 8-K, filed with the Commission
on June 3, 2005, and incorporated herein by reference).
10.3 Investor Registration Rights Agreement between CirTran
Corporation and Highgate House Funds, Ltd., dated as of May 26,
2005 (previously filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on June 3, 2005,
and incorporated herein by reference).
10.4 Security Agreement between CirTran Corporation and Highgate House
Funds, Ltd., dated as of May 26, 2005 (previously filed as an
exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on June 3, 2005, and incorporated herein by
reference).
10.5 Escrow Agreement between CirTran Corporation, Highgate House
Funds, Ltd., and David Gonzalez dated as of May 26, 2005
(previously filed as an exhibit to the Company's Current Report
on Form 8-K, filed with the Commission on June 3, 2005, and
incorporated herein by reference).
10.6 Termination Agreement between CirTran Corporation and Cornell
Capital Partners, LP, dated as of May 26, 2005 (previously filed
as an exhibit to the Company's Current Report on Form 8-K, filed
with the Commission on June 3, 2005, and incorporated herein by
reference).
10.7 Standby Equity Distribution Agreement between CirTran Corporation
and Cornell Capital Partners, LP, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.8 Registration Rights Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.9 Placement Agent Agreement between CirTran Corporation and
Newbridge Securities Corporation, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.10 Escrow Agreement by and among CirTran Corporation, Cornell
Capital Partners, LP, and Butler Gonzalez LLP, dated as of May
21, 2004 (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.11 Exclusive Manufacturing Agreement ("Exclusive Agreement") by and
among Michael Casey; Michael Casey Enterprises, Ltd.; Charles Ho;
Uking System Industry Co., Ltd.; David Hayek; HIPMG, Inc. and
CirRran-Asia, Inc., dated as of June 10, 2004 (previously filed
as an exhibit to the Company's Quarterly Report on Form 10-QSB/A,
filed with the Commission on December 22, 2004, and incorporated
herein by reference).
10.12 Appendix A-1 to Exclusive Agreement for AbKing Pro
10.13 Appendix A-2 to Exclusive Agreement for AbRoller (portions of
this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission) (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.14 Appendix A-3 to Exclusive Agreement for AbTrainer Club Pro
II-8
(portions of this exhibit have been redacted pursuant to a
request for confidential treatment and have been filed separately
with the Securities and Exchange Commission) (previously filed as
an exhibit to the Company's Quarterly Report on Form 10-QSB/A,
filed with the Commission on December 22, 2004, and incorporated
herein by reference).
10.15 Appendix A-4 to Exclusive Agreement for Instant Abs (portions of
this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission) (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.16 Appendix A-5 to Exclusive Agreement for Hot Dog Express (portions
of this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission) (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.17 Appendix A-7 to Exclusive Agreement for Condiment Caddy (portions
of this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission) (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.18 Appendix A-8 to Exclusive Agreement for Denise Austin Pilates
product (portions of this exhibit have been redacted pursuant to
a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission)
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.19 Employment Agreement with Iehab Hawatmeh, dated as of July 1,
2004 (previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB/A, filed with the Commission on December
22, 2004, and incorporated herein by reference).
10.20 Employment Agreement with Shaher Hawatmeh, dated as of July 1,
2004 (previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB/A, filed with the Commission on December
22, 2004, and incorporated herein by reference).
10.21 Employment Agreement with Trevor Saliba, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.22 Employment Agreement with Charles Ho, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.23 Letter Agreement between MET Advisors and CirTran Corporation,
dated August 1, 2003 (previously filed as an exhibit to the
Company's Quarterly Report on Form 10-QSB/A, filed with the
Commission on December 22, 2004, and incorporated herein by
reference).
10.24 Consulting Agreement between CirTran Corporation and Cogent
Capital Corp., dated September 14, 2003 (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.25 Agreement between CirTran Corporation and Transactional Marketing
Partners, Inc., dated as of October 1, 2004 (previously filed as
an exhibit to the Company's Quarterly Report on Form 10-QSB/A,
filed with the Commission on December 22, 2004, and incorporated
herein by reference).
10.26 Promissory Note, payable to Cornell Capital Partners, for
$230,000, dated June 9, 2003
10.27 Promissory Note, payable to Cornell Capital Partners, for
$100,000, dated July 16, 2003
10.28 Promissory Note, payable to Cornell Capital Partners, for
$100,000, dated August 28, 2003
10.29 Promissory Note, payable to Cornell Capital Partners, for
$200,000, dated September 26, 2003
10.30 Promissory Note, payable to Cornell Capital Partners, for
$300,000, dated October 3, 2003
10.31 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated October 23, 2003
10.32 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated November 10, 2003
10.33 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated December 5, 2003
10.34 Promissory Note, payable to Cornell Capital Partners, for
$150,000, dated December 23, 2003
II-9
10.35 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated January 29, 2004
10.36 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated February 27, 2004
10.37 Promissory Note, payable to Cornell Capital Partners, for
$1,000,000, dated March 23, 2004
10.38 Promissory Note, payable to Cornell Capital Partners, for
$1,700,000, dated June 17, 2004
10.39 Preferred Manufacturing Agreement between the Company and
Broadata Communications, Inc., dated as of April 13, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB, filed with the Commission on May 17, 2004, and
incorporated herein by reference).
10.40 Subscription Agreement between CirTran Corporation and the Saliba
Living Trust (previously filed as an exhibit to a Current Report
on Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.41 Subscription Agreement between CirTran Corporation and the Saliba
Private Annuity Trust (previously filed as an exhibit to a
Current Report on Form 8-K filed with the Commission on April 14,
2005, and incorporated herein by reference).
10.42 Subscription Agreement between CirTran Corporation and Trevor M.
Saliba (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.43 Subscription Agreement between CirTran Corporation and Basem
Neshiewat (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.44 Subscription Agreement between CirTran Corporation and Sam
Attallah (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.45 Subscription Agreement between CirTran Corporation and Amer
Hawatmeh (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.46 Subscription Agreement between CirTran Corporation and Anwar
Ajnass (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.47 Subscription Agreement between CirTran Corporation and I&R
Properties, LLC (previously filed as an exhibit to a Current
Report on Form 8-K filed with the Commission on April 14, 2005,
and incorporated herein by reference).
10.48 PFE Properties, LLC, Membership Acquisition Agreement between
CirTran Corporation and Rajayee Sayegh, dated as of March 31,
2005 (previously filed as an exhibit to a Current Report on Form
8-K filed with the Commission on April 14, 2005, and incorporated
herein by reference).
10.49 Exclusive Manufacturing and Supply Agreement, dated as of April
21, 2005, by and between CirTran Corporation and Guthy-Renker
Corporation (portions of this exhibit have been redacted pursuant
to a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission).
10.50 Promissory Note, payable to Cornell Capital Partners, for
$565,000.
23.1 Consent of Hansen Barnett & Maxwell LLP
23.2 Consent of Counsel (included in Exhibit 5 Opinion Letter)
24. Power of Attorney (see page II-4).
II-10
--------------------------------------------------------------------------------