U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange act of 1934 for the transition period from __________ to
______________.
Commission File No. 33-13674-LA
CIRTRAN CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 68-0121636
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4125 South 6000 West, West Valley City, Utah 84128
(Address of principal executive offices)
(801) 963-5112
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $0.001
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10- KSB. [ ]
The issuer's revenues for its most recent fiscal year: $8,862,715
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of April 14, 2005, was $14,079,818.
As of April 8, 2005, the Registrant had outstanding 564,868,569 shares of Common
Stock, par value $0.001.
Documents incorporated by reference: None
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Description of Properties 24
3. Legal Proceedings 25
4. Submission of Matters to a Vote of Security Holders 27
Part II
5. Market for Common Equity and Related Stockholder Matters 27
6. Management's Discussion and Analysis or Plan of Operation 30
7. Financial Statements 40
8. Changes in and Disagreements with Accountants on 40
Accounting and Financial Disclosure
8A. Controls and Procedures 40
Part III
9. Directors, Executive Officers, Promoters and Control 41
Persons; Compliance with Section 16(a) of the Exchange Act
10. Executive Compensation 43
11. Security Ownership of Certain Beneficial Owners and Management 47
12. Certain Relationships and Related Transactions 48
13. Exhibits 50
14. Principal Accountant Fees and Services 55
Signatures 57
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CirTran Corporation ("we" or the "Company") is a full-service contract
electronics manufacturer servicing original equipment manufactures ("OEMs") in
the following industries: communications, networking, peripherals, gaming, law
enforcement, consumer products, telecommunications, automotive, medical, and
semi-conductor. We conduct our operations through three main divisions:
electronics; consumer products; and general merchandise manufacturing. In our
electronics division, we manufacture in all areas from printed circuit board
assemblies, cables, harnesses, plastic injection molding systems and complete
box-build assemblies. Low volume manufacturing is performed at our Salt Lake
City facility. High volume manufacturing is performed through subcontractors in
Asia. In our consumer products division, we manufacture a variety of products
from fitness equipment, small home appliances, personal care and beauty
products. These products are manufactured for various marketing and distribution
companies who market products via television (infomercials), internet and
printed advertisements. We also manufacture a variety of hard goods items
ranging from furniture to small collectibles. The products are sold directly to
national retailers. All products in the consumer products and general
merchandise divisions are manufactured through sub-contractors in China.
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.
In June 2004, we established our CirTran-Asia division ("CirTran-Asia"). We
anticipate that CirTran- Asia will target the high-volume, Asian manufacturing
market. We plan to pursue manufacturing relationships beyond printed circuit
board assemblies, cables, harnesses, and injection molding systems, and look for
complete "box build" or "turn-key" relationships in the electronics, retail, and
direct consumer markets.
On June 10, 2004, CirTran-Asia, Inc., a subsidiary of CirTran Corporation (the
"Company"), signed an Exclusive Manufacturing Agreement (the "Agreement") with
Michael Casey, Michael Casey Enterprises, LTC., Charles Ho, Uking System
Industry Co., Ltd., David Hayek, and HIPMG, Inc. (each a "Developer" and
collectively, the "Developers").
Under the Agreement, the Developers, individuals and entities with marketing
rights for different products, agreed that they would work with CirTran-Asia to
identify products for which CirTran-Asia would be named the exclusive
manufacturer. The Agreement contemplated products including abdominal fitness
machines, and hot dog/sausage machines. Additionally, the Agreement contemplated
that the Developers would identify additional products for which CirTran-Asia
would become the exclusive
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manufacturer.
The Agreement provides that upon determining additional products, the Developers
and CirTran-Asia would negotiate terms for manufacturing the product, including
price per unit, and a projection on the number of units to be ordered. Following
the identification of the product, the Developer would, at its discretion, place
purchase orders with CirTran-Asia to order the products. Under the Agreement,
CirTran-Asia is entitled to reject any purchase order that does not conform to
the Agreement or for which the product is no longer available at the agreed
price.
At the time of entering into the Agreement, no purchase orders were placed, and
neither the Company nor CirTran-Asia had entered into a contract to do more than
be a manufacturer of products to be identified between the parties to the
Agreement
We anticipate that CirTran-Asia will handle most of the high-quantity business
through factories located in close proximity to our offices in ShenZhen, China.
Our staff in Asia currently consists of Mr. Ho, two full-time accounting staff
members, two full-time quality engineers who deal with customers and factories
regarding quality compliance, and two full-time design engineers who deal with
new product designs.
Since its establishment, CirTran-Asia has contributed to a large portion of the
increase in revenue for the twelve months ended December 31, 2004. This new
division provides a myriad of manufacturing services to the electronics,
consumer products (direct response) and general merchandise 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 pursues 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, consumer products general merchandise markets.
In addition, the engineering and support staff has increased to approximately 10
to 12 contracted professionals directly overseen by Mr. Ho.
Mr. Charles Ho, who became the President of our CirTran-Asia division on June
15, 2004, served for many 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 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.
Preparation for this strategic move into the Asian market began in 2003.
Management continues its opinion that this new division will elevate CirTran to
an international contract manufacturer status for multiple products in a wide
variety of industries.
Information relating to recent developments in our increasing line of fitness
products is as follows:
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, relating to the manufacture of 80,000 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 $5,288,000. On August 13, 2004, we
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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 to date. The units were
distributed to Wal-Mart stores throughout Canada.
On August 11, 2004, we announced that CirTran-Asia received a purchase order on
August 10, 2004 relating to the manufacture of a household cooking appliance for
hot dogs and sausages. Since these announcements, CirTran-Asia has manufactured,
shipped, and received payments of approximately $362,000.
On September 9, 2004, we announced that on September 6, 2004, CirTran-Asia had
been awarded the rights to manufacture a new abdominal fitness machine under the
exclusive manufacturing agreement. This new product is another type of abdominal
fitness machines. We are still awaiting production orders to begin manufacturing
and shipping.
On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had
been was awarded the rights to manufacture another type of an abdominal fitness
machine under the exclusive manufacturing agreement. Since this announcement,
CirTran-Asia has manufactured, shipped, and received payments of approximately
$720,000.
On September 14, 2004, we announced that on September 7, 2004, we had begun
manufacturing another type of abdominal fitness machine under the exclusive
manufacturing agreement. Since this announcement, CirTran-Asia has manufactured,
shipped, and received payments of approximately $390,000.
On September 30, 2004, we announced that on September 23, 2004, CirTran-Asia had
been awarded the rights to manufacture a pilates fitness machine under the
exclusive manufacturing agreement. Since this announcement, CirTran-Asia has
manufactured, shipped, and received payments of approximately $85,000.
Information relating to recent developments in new products under development
along with procuring new products for development is as follows:
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with a company relating to the manufacture of a hair product in
California. Since these announcements, CirTran-Asia has manufactured, shipped,
and received payments of approximately $366,000.
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 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
three 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 has an initial term
of six months, beginning October 1, 2004, and can be 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 through early September 2005. The parties will evaluate the relationship
at that time and decide if there needs to be
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another extension. To date, the relationship has proven successful, resulting in
multiple new manufacturing relationships.
Due to lack of performance, at management's suggestion, Mr. Michael Casey
submitted his written resignation from the board of directors of CirTran-Asia on
January 31, 2005. He was provided written acceptance by Mr. Hawatmeh, Chairman
of the parent company, CirTran Corp on February 1, 2005.
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
functional density has resulted in the emergence of SMT, which eliminates the
need for holes and allows components to be placed on both sides of a printed
circuit. SMT requires expensive, highly automated assembly equipment and
significantly more operational expertise than PTH technology. We believe the
shift to SMT from PTH technology has increased the use of contract manufacturers
by OEMs seeking to avoid the significant capital investment required for
development and maintenance of SMT expertise.
Electronics Assembly and Manufacture
Approximately 38% of our revenues are 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,
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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 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. 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.
Contract Manufacturing
Through our subsidiary, CirTran-Asia, we design, engineer, manufacture and
supply (DEMS) a myriad of products in the electronics, consumer products and
general merchandise industries for various marketers, distributors and national
retailers.
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:
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- 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 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.
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Suppliers; Raw Materials
Our sources of components for our electronics assembly business are either
manufacturers or distributors of electronic components. These components include
passive components, such as resisters, capacitors and diodes, and active
components, such as integrated circuits and semi-conductors. Our suppliers
include Siemens, Muriata-Erie, Texas Instruments, Fairchild, Harris and
Motorola. Distributors from whom we obtain materials include Avnet, Future
Electronics, Arrow Electronics, Digi-key and Force Electronics. Although we have
experienced shortages of various components used in our assembly and
manufacturing processes, we typically hedge against such shortages by using a
variety of sources and, to the extent possible, by projecting our customer's
needs.
Research and Development
During 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 2004, Racore started working more aggressively on marketing existing
products by simplifying ordering and sales processing to existing customers. We
are also working towards some cost reduced versions of existing product line and
adding new sales channels. We are also in the process of expanding the current
product line, adding new product categories to existing sales channels, along
with products with reduced development costs, quicker time to market, higher
profit margins, greatly reduced support costs, less pressure from competitors
and shorter sales cycles. We are currently developing one new product that is
unique in the market and one new product that will provide us with a more
complete product line.
In the coming months Racore will introduce several new products that will
include not only cost reduced versions of existing products, but also similar
yet unique products that will satisfy market needs which currently have no
deliverable or affordable solutions. These products will realize reduced
development costs, quicker time to market, higher profit margins, greatly
reduced support costs, less pressure from competitors, and shorter sales and
delivery cycles. These products will leverage our expertise in the areas of
fiber optics, security, and portability.
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
During 2004, we increased our internal sales staff as well as continued to
pursue sales representative relationships with firms that work as independent
contractors in generating new business. 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
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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. 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.
Our expansion into China manufacturing has allowed us to increase our sales,
manufacturing capacity and output with minimal capital investment required. By
using subcontractors we make strategic investments in Asian manufacturing
facilities capitalizing tooling, molds, equipment etc. in exchange for dedicated
manufacturing responsiveness hence eliminating the costly expense associated
with capitalizing complete proprietary facilities.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. As of April 8, 2005, our backlog was
approximately $4,700,000 with confirmed deliveries and a total of $30,000,000 of
signed contracts for blanket quantities.
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.
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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.
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
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electronics manufacturer. The January 21, 2004, press release stated that we had
entered into a Letter of Intent to purchase all the assets of a leading contract
electronics manufacturer of printed circuit board assemblies based in Orange
County, California. The March 2, 2004 press release was issued to give an update
on the due diligence process. However, the letter of intent expired on March 5,
2004, and no agreement was reached regarding an extension. We have decided not
to pursue further negotiations relating to this matter.
In March 2004, we issued two additional press releases relating to a our
potential acquisition of an interest in a manufacturer of digital fiber optic
cable equipment. On March 18, 2004, we announced that we had signed a letter of
intent to acquire a minority interest in a manufacturer based in southern
California, and that in connection with the acquisition, we anticipated that we
would enter into an exclusive manufacturing agreement. On March 26, 2004, we
announced that we anticipated that we expected to finalize the acquisition of
the interest and the exclusive agreement. On April 13, 2004, we entered into a
stock purchase agreement with Broadata Communications, Inc., a California
corporation ("Broadata") under which we purchased 400,000 shares of Broadata
Series B Preferred Stock (the "Broadata Preferred Shares") for an aggregate
purchase price of $300,000. The Broadata Preferred Shares are convertible, at
our option, into an equivalent number of shares of Broadata common stock,
subject to adjustment. The Broadata Preferred Shares are not redeemable by
Broadata. As a holder of the Broadata Preferred Shares, we have the right to
vote the number of shares of Broadata common stock into which the Broadata
Preferred Shares are convertible at the time of the vote. 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 April 8, 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.
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
12
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 70 persons: 5 in administrative
positions, 3 in engineering and design, 60 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. During the previous several years, we have
experienced significant losses, including $2,149,810 in 2002, $2,910,978 in 2003
and $658,322 in 2004.
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.
On August 6, 2001, we effected a 1:15 forward split and stock distribution which
increased the number of
13
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. 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.
Risks Related to Our Operations
We have a history of operating losses and we expect to continue to generate
losses, which could have a material adverse impact on our ability to operate
profitably.
Our expenses are currently greater than our revenues. Our accumulated deficit
was $18,799,602 and $18,141,280 at December 31, 2004, and December 31, 2003,
respectively. Our net loss from operations for the year ended December 31, 2004
and 2003, were $658,322 and $2,910,978, respectively. Our level of sales has
increase dramatically during the last year, this is due to two factors, our
electronics assembly and manufacture division has a large increase in sales and
our level of sales has increase dramatically with the addition of the Asia
division, which has small margins with a high volume in sales. 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. Until our revenues are sufficient to cover our expenses, we will need
to seek additional sources of capital to continue our operations, including
equity or debt financing. There can be no guarantee that such financing will be
available to us or on terms that will allow us to achieve profitability. Our
inability to obtain sufficient financing would have a material adverse effect on
our operations.
Our current liabilities exceed our current assets by a significant amount, and
we may not continue as a going concern.
Our financial statements indicated a trend of an increasingly larger excess of
current liabilities over current assets. Our current liabilities exceeded our
current assets by the following amounts as of the dates indicated: $4,490,623 at
December 31 2002; and by $5,529,244 at December 31, 2003 and by $3,558,826 at
December 31, 2004. This trend raised substantial doubt about our ability to
continue as a going concern. Unless we obtain additional financing through
operations, investment capital or otherwise, there is significant doubt we will
be able to meet our obligations as they come due and will be unable to execute
our long-term business plans. During 2004 the company was able to settle many of
the outstanding notes payable and other debt to reduce the liabilities.
14
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.
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. On an annualized basis, this
trend indicates a 27% decrease in sales from 2000 through the year ended
December 31, 2003. Even though our gross profit has improved substantially
during the same period, unless we are successful in increasing both sales and
net profit margins, there is significant doubt that we will be able to continue
as a going concern. 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. 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 need to raise additional capital but, due to our current financial situation,
we may not be able to do so. If we are unable to raise sufficient capital to
finance our operations, we may not be able to continue as a going concern.
As of December 31, 2004, our monthly operating costs and interest expenses
averaged approximately $320,000 per month. As income from operations is not
sufficient to meet these expenses, we must depend on other sources of capital to
fund our operations. We have operated without a line of credit since February
2000, and it is unlikely that we will be able, in our current financial
condition, to obtain additional debt financing; and if we did acquire more debt,
we would have to devote additional cash flow to pay the debt and secure the debt
with assets. Therefore, we likely will have to rely on equity financing to meet
our anticipated capital needs. We recently entered into a standby equity
distribution agreement to provide financing, but the funds available may not be
sufficient to sustain our operations beyond December 2007, assuming our current
level of activity. Additionally, the standby equity distribution agreement has a
stated term of twenty-four months from the date of effectiveness of a
registration statement covering the resale of shares by the SEDA investor. We
may need additional capital beyond the term of the standby equity distribution
agreement. There can be no assurances that we will be successful in obtaining
additional capital. If we issue additional shares in connection with debt or
equity financing, this will serve to dilute the value of our common stock and
existing shareholders' positions. If we are unsuccessful in obtaining additional
funding to finance our operations, there is serious doubt that we will be able
to continue as a going concern, and we may be forced to seek the protection of
the bankruptcy laws.
We have significant short-term debt which we are not currently able to fully
service, which could impair our ability to continue as a going concern.
15
As of December 31, 2004, we have significant short-term debt, including
approximately $1,104,392 in accounts payable, $1,549,173 in demand notes due
certain of our shareholders and related parties, and $2,066,022 in accrued
liabilities, which partially consists of delinquent federal and state payroll
taxes (see "Legal Proceedings"). As of April 8, 2005, we have been successful in
negotiating forbearance agreements with many of our creditors and restructuring
much of our short-term debt.
We have negotiated settlements with the Internal Revenue Service and the Utah
State Tax Commission. However if we are unable to pay the amounts required under
the agreements, the IRS and the Utah State Tax Commission could bring statutory
foreclosure proceedings against us.
We have entered into agreements with the Internal Revenue Service and 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 Internal Revenue Service and 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. There is substantial risk 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. If we are unable to
negotiate settlements or satisfy our obligations, we could be forced into
bankruptcy.
We are dependent on the continued services of our President and 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 year ended December 31, 2004, sales of products manufactured in the
United States accounted for 61.2 percent of our total net revenues, and sales of
products manufactured in China accounted for 38.8 percent of our total net
revenues. We anticipate that sales of our products manufactured internationally
will increase, and could represent a larger percentage of our sales for the
foreseeable future. Additionally, a significant portion of our products is
produced at facilities in close proximity to our CirTran-Asia production
facilities in ShenZhen, China. 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:
o the imposition of or changes in governmental controls, taxes, tariffs,
trade restrictions and regulatory requirements;
o the costs and risks of localizing products for foreign countries;
o longer accounts receivable payment cycles;
16
o changes in the value of local currencies relative to our functional
currency;
o import and export restrictions;
o loss of tax benefits due to international production;
o general economic and social conditions within foreign countries;
o taxation in multiple jurisdictions; and/or
o 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.
We expect that our international business operations will be subject to a number
of material risks, including, but not limited to:
o difficulties in managing foreign sales channels;
o difficulties in enforcing agreements and collecting receivables
through foreign legal systems and addressing other legal issues;
o longer payment cycles;
o taxation issues;
o differences in international telecommunications standards and
regulatory agencies;
o product requirements different from those of our current customers;
o fluctuations in the value of foreign currencies; and
o 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.
17
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.
Holders of CirTran common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of common
stock in connection with the SEDA Facility.
The following table describes the number of shares of common stock that would be
issuable, assuming that the full remaining amount under the SEDA Facility had
been drawn and shares put to Cornell (irrespective of the availability of
registered shares), and further assuming that the applicable conversion or
exercise prices at the time of such conversion or exercise were the following
amounts:
Hypothetical Conversion Shares issuable upon draws of $20,000,000 under
Price SEDA Facility
$0.01 2,000,000,000
$0.02 1,000,000,000
$0.03 666,666,667
$0.04 500,000,000
$0.05 400,000,000
$0.10 200,000,000
$0.15 133,333,333
$0.25 80,000,000
$0.50 40,000,000
Given the formulas for calculating the shares to be issued under the SEDA
Facility, there effectively is no limitation on the number of shares of common
stock which may be issued in connection with draws on the SEDA Facility, except
for the number of shares registered under prospectuses and related registration
statements. As such, holders of our common stock may experience substantial
dilution of their interests to the extent that we draw against the SEDA
Facility.
Because the number of shares issuable under the SEDA Facility is determined, in
part, on the market price of our common stock, we may experience delays in
drawing the full amount of the SEDA Facility.
The number of shares issuable under the SEDA Facility is determined, in part, on
the market price of our common stock. If the market price of the common stock
decreases, the number of shares of common stock issuable in connection with the
SEDA Facility will increase and, accordingly, the aggregate amount of draws
under the SEDA Facility will decrease. Accordingly, despite our right to draw up
to an aggregate of $20,000,000 under the SEDA Facility, we may run out of shares
registered under this prospectus and the registration statement of which it is a
part to issue to Cornell in connection with our draws. The following table
demonstrates the correlation between share price decline and decreases in
aggregate draw amounts available, given the maximum 249,900,000 shares of common
stock registered under the prospectus and registration statement, which we filed
with the SEC, but has not been declared effective, for issuance in connection
with draws against the SEDA Facility.
Shares issuable upon
Hypothetical puts, up to a maximum Maximum draws available,
Conversion Price of 249,900,000 up to $20,000,000
---------------------- --------------------- ------------------------
$0.01 249,900,000 $ 2,499,000
$0.02 249,900,000 $ 4,998,000
$0.03 249,900,000 $ 7,497,000
$0.04 249,900,000 $ 9,996,000
$0.05 249,900,000 $12,495,000
$0.10 200,000,000 $20,000,000
$0.15 133,333,333 $20,000,000
$0.25 80,000,000 $20,000,000
$0.50 40,000,000 $20,000,000
18
Our issuances of shares under the SEDA Facility likely will result in overall
dilution to market value and relative voting power of previously issued common
stock, which could result in substantial dilution to the value of shares held by
shareholders prior to sales under this prospectus.
The issuance of common stock in connection with the draws under the SEDA
Facility may result in substantial dilution to the equity interests of holders
of CirTran common stock other than Cornell. Specifically, the issuance of a
significant amount of additional common stock will result in a decrease of the
relative voting control of our common stock issued and outstanding prior to the
issuance of common stock in connection with the SEDA Facility. Furthermore,
public resales of our common stock by Cornell following the issuance of common
stock in connection with the SEDA Facility likely will depress the prevailing
market price of our common stock. Even prior to the time of actual conversions,
exercises and public resales, the market "overhang" resulting from the mere
existence of our obligation to honor such conversions or exercises could depress
the market price of our common stock.
Existing shareholders likely will experience increased dilution with decreases
in market value of common stock in relation to our issuances of shares under the
SEDA Facility, which could have a material adverse impact on the value of their
shares.
The formula for determining the number of shares of common stock to be issued
under the SEDA Facility is based, in part, on the market price of the common
stock and are equal to the lowest closing bid price of our common stock over the
five trading days after the advance notice is tendered by us to Cornell. As a
result, the lower the market price of our common stock at and around the time we
put shares under the SEDA Facility, the more shares of our common stock Cornell
will receive. Any increase in the number of shares of our common stock issued
upon puts of shares as a result of decreases in the prevailing market price
would compound the risks of dilution described in the preceding paragraphs.
As a result of our net tangible book deficit, Cornell will experience immediate
and substantial dilution to its holdings as a result of the issuances of common
stock in connection with the SEDA Facility.
The net proceeds from the Equity Line and the SEDA Facility could potentially
exceed our net tangible book deficit of $2,242,033 at December 31, 2004.
Accordingly, Cornell will experience immediate and substantial dilution between
approximately $0.0038 to $0.4668 per share, or approximately 37.90% to 93.36% of
the estimated average conversion price of $0.01 to $0.50. The dilution at
various estimated average conversion prices is as follows:
19
Average Conversion Price
Estimated Dilution Per Share Percent Dilution Per Share
$0.01 (1) $0.0038 37.90%
$0.02 (1) $0.0094 46.94%
$0.03 (1) $0.0161 53.69%
$0.04 (1) $0.0236 58.91%
$0.05 (1) $0.0315 63.08%
$0.10 $0.0755 75.50%
$0.15 $0.1225 81.66%
$0.25 $0.2195 87.80%
$0.50 $0.4668 93.36%
(1) At this conversion price, the Company would be required to register
additional shares to receive the maximum proceeds available under the SEDA
Facility.
There is an increased potential for short sales of our common stock due to the
sales of shares put to Cornell in connection with the SEDA Facility, which could
materially effect the market price of our stock.
Downward pressure on the market price of our common stock that likely will
result from sales of our common stock by Cornell issued in connection with a
draws under the SEDA Facility, could encourage short sales of common stock by
Cornell. Pursuant to the Agreement, Cornell may be permitted to sell shares of
our common stock during a pricing period in connection with an advance from the
SEDA Facility. These sales could include short sales. A "short sale" is defined
as the sale of stock by an investor that the investor does not own. Typically,
investors who sell short believe that the price of the stock will fall, and
anticipate selling at a price higher than the price at which they will buy the
stock. Significant amounts of such short selling could place further downward
pressure on the market price of our common stock.
The restrictions on the extent of draws under the SEDA Facility may have little
if any effect on the adverse impact of our issuance of shares under the SEDA
Facility, and as such, Cornell may sell a large number of shares, resulting in
substantial dilution to the value of shares held by our existing shareholders.
We are prohibited from putting shares to Cornell under the SEDA Facility if such
put would result in that investor holding more than 9.9% of the then outstanding
common stock. These restrictions, however, do not prevent Cornell from selling
shares of common stock received in connection with a draw, and then receiving
additional shares of common stock in connection with a subsequent draw. In this
way, Cornell could sell more than 9.9% of the outstanding common stock in a
relatively short time frame while never holding more than 9.9% at one time.
The trading market for our common stock is limited, and investors who purchase
shares from Cornell 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.
20
The selling shareholders under a registration statement we have filed with the
SEC may sell common stock at any price or time upon effectiveness of that
registration statement, which could result in a decrease in the market price of
our common stock and a resulting decrease in the value of shares held by
existing shareholders.
Upon effectiveness of the registration statement filed in connection with the
SEDA Facility, Cornell and Newbridge Securities Corporation, the two selling
shareholders under that registration statement, may offer and sell the shares of
common stock received in connection with the SEDA Facility and the Agreement at
a price and time determined by Cornell or Newbridge. The timing of sales and the
price at which the shares are sold by the Selling Shareholders could have an
adverse effect upon the public market for our common stock. Although Cornell is
a statutory underwriter, there is no independent or third-party underwriter
involved in the offering of the shares held by or to be received by Cornell, and
there can be no guarantee that the disposition of those shares will be completed
in a manner that is not disruptive to the market for our common stock.
We may be unable to continue to make draws or put shares to Cornell if the
trading volume in our stock is not sufficient to allow Cornell to sell the
shares issued to it.
Despite our contractual right to make draws on the SEDA Facility and sell shares
of our stock to Cornell, we are also prohibited by the Agreement from drawing
down on the SEDA Facility to the extent any put would cause Cornell to own in
excess of 9.9% of our then-outstanding common stock. Because the volume of
trading in our stock has been volatile, there can be no assurance that Cornell
will be able to sell a sufficient number of shares put to it to allow us to take
full advantage of the draws.
For example, as of April 8, 2005, we had approximately 565,000,000 shares of our
common stock outstanding. Nine and nine-tenths percent of 565,000,000 shares is
approximately 55,836,000 shares. As of April 8, 2005, our average daily trading
volume was approximately 2,100,000 shares traded per day. A hypothetical draw of
$1,000,000 the maximum amount we are entitled to draw under the Agreement, as of
April 8, 2005, would result in the issuance of approximately 33,333,333 shares
of our common stock. It could take Cornell longer than the 7 trading days we are
required to wait between puts to sell 33,333,333 shares.
If Cornell is unable to sell all of the shares it receives in connection with
draws under the SEDA Facility, once the number of unsold shares retained by
Cornell reaches 9.9% of the then-outstanding shares of our common stock, we
would be unable to make draws on the SEDA Facility until Cornell had sold
additional shares into the market. Alternatively, our waiting to make subsequent
draws on the SEDA Facility until Cornell has sold all the shares it receives
pursuant to draws will result in a delay in our access to the capital available
under the Agreement. These restrictions on our access to the capital available
under the Agreement could have a material adverse effect on our operations.
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 Cornell in this offering.
As noted above, sales by Cornell 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 Cornell 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.
21
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.
The majority of our revenue is generated from our contract manufacturing
services. 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.
Our industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able, especially given our lack of financial resources, to
effectively respond to the technological requirements of a changing market,
including the need for substantial additional capital expenditures that may be
required as a result of these changes. The electronics manufacturing services
industry is characterized by rapidly changing technology and continuing process
development. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities and
successfully anticipate or respond to technological changes on a cost- effective
and timely basis. In addition, our industry could in the future encounter
competition from new or revised technologies that render existing technology
less competitive or obsolete. 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. 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
22
the future. These shortages and price fluctuations could potentially have an
adverse effect on our results of operations.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Securities in the OTC market are generally more difficult to trade than those on
the Nasdaq National Market, the Nasdaq SmallCap Market or the major stock
exchanges. In addition, accurate price quotations are also more difficult to
obtain. The trading market for our common stock is subject to special
regulations governing the sale of penny stock.
A "penny stock," is defined by regulations of the Securities and Exchange
Commission as an equity security with a market price of less than $5.00 per
share. However, an equity security with a market price under $5.00 will not be
considered a penny stock if it fits within any of the following exceptions:
o the equity security is listed on Nasdaq or a national securities
exchange;
o the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
o the issuer of the equity security has been in continuous
operation for more than three years, and has net tangible assets
of at least $2,000,000.
If you buy or sell a penny stock, these regulations require that you receive,
prior to the transaction, a disclosure explaining the penny stock market and
associated risks. Furthermore, trading in our common stock would be subject to
Rule 15g-9 of the Exchange Act, which relates to non-Nasdaq and non- exchange
listed securities. Under this rule, broker-dealers who recommend our securities
to persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if their market price is at least $5.00 per share.
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
The price of our common stock is volatile, and an investor may not be able to
resell our shares at or above the purchase price.
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
23
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of operating results.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the only
ones facing CirTran. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the foregoing risks actually occur, our business, financial condition,
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline.
ITEM 2. DESCRIPTION OF PROPERTIES
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.
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.
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 $680,000 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.
24
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2004, the Company had accrued liabilities in the amount of
$223,660 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 liability 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. As of March 31, 2005, the Company was current in its
payments to the State of Utah.
Prior to 2004, Racore had accrued state tax liabilities of $9,913 due to the
State of Utah. In November 2003, Racore entered into an agreement with the State
of Utah whereby Racore would make monthly payments of $1,000 per month through
September 2004. Racore made all payments when due.
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 (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.
As of April 8, 2005, the Company was in default of its obligations under the
settlement agreement with
25
Sunborne, i.e., the total payment due thereunder had not been made, a
registration statement with respect to the escrowed shares was not filed, and
the Company did not replace the escrowed shares with registered, free-trading
shares as per the terms of the agreement. Accordingly, Sunborne has filed the
Confession of Judgment and proceeded with execution thereon. The Company is
continuing to negotiate with Sunborne in an attempt to settle the remaining
obligation.
C/S Utilities notified the Company that 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.
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.
Howard Salamon, dba Salamon Brothers vs. CirTran Corporation, Civil No.
2:03-00787, U.S. District Court, District of Utah. Howard Salamon originally
filed suit against the Company in the U.S. District Court, Eastern District of
New York, seeking finders fees, consisting of shares of the Company's common
stock valued at $350,000, allegedly owed in connection with Salamon's
introducing the Company to Cornell Capital Partners, L.P., the Equity Line
Investor. The Company disputes the claims in the complaint. The case was
dismissed in New York and refiled in Utah. The Company has filed its answer in
the Utah case and the lawsuit is proceeding. The Plaintiff has sought leave to
file an amended complaint, which the court granted. The Company subsequently was
served with a supplemental complaint, in which Salamon seeks additional finders
fees, 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 case is still in the discovery phase. 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. As of the date of this
report, the suit was in its initial stages, and Mindstorm had not filed its
answer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the year ended December 31, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
26
Our common stock traded sporadically on the Pink Sheets under the symbol "CIRT"
from July 2000 to July 2002. Effective July 15, 2002, the NASD approved our
shares of common stock for quotation on the NASD Over-the-Counter Electronic
Bulletin Board. The following table sets forth, for the calendar years ending
December 31, 2004, 2003, and 2002, the prices of our common stock as reported
and summarized on the Pink Sheets. These prices are based on inter-dealer bid
and asked prices, without markup, markdown, commissions, or adjustments and may
not represent actual transactions.
Calendar Quarter Ended High Bid Low Bid
December 31, 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
As of April 8, 2004, we had approximately 540 shareholders of record holding
564,868,569 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
Pursuant to the Equity Line of Credit Agreement (discussed more fully below
under "Liquidity and Financing Arrangements"), we are entitled to put to the
Equity Line Investor, in lieu of repayment of amounts drawn on the Equity Line,
shares of the Company's common stock. Although the Company has filed a
registration statement to register the resale by the Equity Line Investor of the
shares put to it by the Company, the issuances of shares to the Company are made
in reliance on Section 4(2) of the Securities Act of 1933 as a transaction not
involving any public offering. No advertising or general solicitation was
employed in offering the securities, and the shares have been and will be issued
to only one investor which has represented that it is an "accredited investor"
as that term is defined in Regulation D promulgated pursuant to the Securities
Act of 1933. Through December 31, 2003, we issued 64,253,508 shares of common
stock to the Equity Line Investor in connection with draws on the Equity Line.
Subsequent to December 31, 2003, and through March 25, 2004, we drew an
additional $2,150,000 under the Equity Line Agreement, and issued 57,464,386
additional shares of common stock to the Equity Line Investor. The shares were
issued without registration under the 1933 Act in reliance on Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
27
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock in exchange
for cancellation of an aggregate amount of $1,500,000 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of $0.05
per share, for the aggregate amount of $1,500,000. The Company did not grant
registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock in exchange
for cancellation of an aggregate amount of $1,499,090 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of
$0.075 per share, for the aggregate amount of $1,500,000. The Company did not
grant registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder.
In March 2004, the Company issued 542,495 shares of restricted common stock to a
financial institution in partial settlement of an obligation of the Company. The
shares were issued 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.
In May 2004, the Company issue 1,000,000 shares of restricted common stock to an
unrelated party in settlement of a claim that the Company owed an obligation
under a note. The shares were issued without registration under the 1933 Act in
reliance on Section 4(2) of the 1933 Act, and the rules and regulations
promulgated thereunder.
In November 2004, the Company issued 1,000,000 shares of restricted common stock
to a corporation in settlement of an obligation of the Company under a note
payable to the corporation. The shares were issued without registration under
the 1933 Act in reliance on Section 4(2) of the 1933 Act, and the rules and
regulations promulgated thereunder.
In 2004, the Company issued 45,273,989 shares of restricted common stock to
Iehab and Shaher Hawatmeh in settlement of an obligation of the Company related
to accrued compensation and accrued interest. The shares were issued 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, CirTran Corporation (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
and accrued interest on the Company's headquarters building. I&R Properties is a
company owned and controlled by individuals who are officers, directors and
principal stockholders.
28
The Company issued the shares, and the Lenders cancelled the obligations,
pursuant to subscription agreements (the "Agreements") with each of the Lenders.
Pursuant to the Agreements, the Company issued shares for a purchase price of
$0.04 per share. The shares are restricted stock, and will bear standard
restricted stock legends. No registration rights were granted to any of the
Lenders. 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.
29
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
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. This new division, is our Asian-based, wholly owned
subsidiary of CirTran Corporation and provides a myriad of manufacturing
services to the direct response and retail consumer markets. Our experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase:
engineering and design, product development and prototyping, tooling, and
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 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 recent developments in our increasing line of fitness
products is as follows:
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, relating to the manufacture of 80,000 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 $5,288,000. 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 to date. The units were distributed to Wal-Mart stores
throughout Canada.
On August 11, 2004, we announced that CirTran-Asia received a purchase order on
August 10, 2004 relating to the manufacture of a household cooking appliance for
hot dogs and sausages. Since these
30
announcements, CirTran-Asia has manufactured, shipped, and received payments of
approximately $362,000.
On September 9, 2004, we announced that on September 6, 2004, CirTran-Asia had
been awarded the rights to manufacture a new abdominal fitness machine under the
exclusive manufacturing agreement. This new product is another type of abdominal
fitness machines. We are still awaiting production orders to begin manufacturing
and shipping.
On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had
been was awarded the rights to manufacture another type of an abdominal fitness
machine under the exclusive manufacturing agreement. Since this announcement,
CirTran-Asia has manufactured, shipped, and received payments of approximately
$720,000.
On September 14, 2004, we announced that on September 7, 2004, we had begun
manufacturing an abdominal fitness machine entitled another type of under the
exclusive manufacturing agreement. Since this announcement, CirTran-Asia has
manufactured, shipped, and received payments of approximately $390,000.
On September 30, 2004, we announced that on September 23, 2004, CirTran-Asia had
been awarded the rights to manufacture a pilates fitness machine under the
exclusive manufacturing agreement. Since this announcement, CirTran-Asia has
manufactured, shipped, and received payments of approximately $85,000.
Information relating to recent developments in new products under development
along with procuring new products for development is as follows:
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with a company relating to the manufacture of a hair product in
California. Since these announcements, CirTran-Asia has manufactured, shipped,
and received payments of approximately $366,000.
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 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
three 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 has an initial term
of six months, beginning October 1, 2004, and can be 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 to an additional 6
months that will expire in early September 2005. 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.
Due to lack of performance, at management's suggestion, Mr. Michael Casey
submitted his written resignation from the board of directors of CirTran-Asia on
January 31, 2005. He was provided written acceptance by Mr. Hawatmeh, Chairman
of the parent company, CirTran Corp on February 1, 2005.
31
Significant Accounting Policies
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material and overhead costs. Overhead costs are based on indirect
costs allocated among cost of sales, work-in-process inventory and finished
goods inventory. Indirect overhead costs have been charged to cost of sales or
capitalized as inventory based on management's estimate of the benefit of
indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
The Company typically orders inventory on a customer-by-customer basis. In doing
so the Company enters into binding agreements that the customer will purchase
any excess inventory after all orders are complete. Almost 80% of the total
inventory is secured by these agreements.
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 does
not consider any of its long-lived assets to be impaired. Related Party
Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item 6
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Item 12 - Certain Relationships and Related Transactions."
Results of Operations - Comparison of Years Ended December 31, 2004 and 2003
Sales and Cost of Sales
32
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 contribution to the
increase of net sales during the 2004 was the establishment of the new division
CirTran-Asia, which has 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%, up from 16.5% from the year ended
December 31, 2003. The increase in margins is attributable to better control of
materials and scrap.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our two main areas of operations, i.e., electronics assembly
and Ethernet technology, during 2003 and 2004; and (ii) comparisons during these
two years for each division between sales generated by pre-existing customers
and sales generated by new customers.
Year Sales Cost of Sales Gross Loss/Margin
----------------- --------------- ------------------- ------------------- ----------------------
Asia 2004 $ 5,458,944 $ 4,736,479 $ 722,465
Division
----------------- --------------- ------------------- ------------------- ----------------------
2003 0 0 0
--------------- ------------------- ------------------- ----------------------
Electronics 2004 3,354,057 2,282,253(2) 1,071,804
Assembly
----------------- --------------- ------------------- ------------------- ----------------------
2003 1,050,090 929,800(1) 120,290
--------------- ------------------- ------------------- ----------------------
Ethernet 2004 49,714 25,202 24,512
Technology
----------------- --------------- ------------------- ------------------- ----------------------
2003 165,155 84,742 80,413
--------------- ------------------- ------------------- ----------------------
Year Total Pre-existing New
Sales Customers Customers
----------------- --------------- ------------------- ------------------- ----------------------
Asia 2004 $ 5,458,944 $ 0 $ 5,458,944
Division
----------------- --------------- ------------------- ------------------- ----------------------
2003 0 0 0
--------------- ------------------- ------------------- ----------------------
Electronics 2004 3,354,057 2,796,720 557,337
Assembly
----------------- --------------- ------------------- ------------------- ----------------------
2003 1,050,090 1,036,418 13,672
--------------- ------------------- ------------------- ----------------------
Ethernet 2004 49,714 30,257 19,457
Technology
----------------- --------------- ------------------- ------------------- ----------------------
2003 165,155 127,040 38,115
--------------- ------------------- ------------------- ----------------------
(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
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
us to deliver products to customers in the
33
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 is 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. As of December 31, 2004
and 2003, the amount of our liability for delinquent state and federal payroll
taxes and estimated penalties and interest thereon was $723,660 and $2,107,930,
respectively. We also had a gain on forgiveness of debt related to previously
unpaid liabilities 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 expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $18,799,602 at December 31, 2004, and
$18,141,280 at December 31, 2003. Our net loss for the year ending December 31,
2004 was $658,322, compared to $2,910,978 for the year ending December 31, 2003.
Our current liabilities exceeded our current assets by $3,558,826 as of December
31, 2004, and $5,529,244 as of December 31, 2003. The decrease in the difference
is due to the settlement of notes payable and the agreement with the Internal
Revenue Service. For the years ended December 31, 2004 and 2003, we recorded
negative cash flows from operations of $1,680,054 and $1,123,818, respectively.
Cash
We had cash on hand of $81,101 at December 31, 2004, compared to $54,135 at
December 31, 2003. The increase in cash on hand is due to a new cash management
system that was established during 2003.
Net cash used in operating activities was $1,680,054 for the fiscal year ended
December 31, 2004. During 2004, net cash used in operations was primarily
attributable to $658,322 in net losses from operations, a gain on forgiveness of
debt of $1,713,881 and an increase in accounts receivable of $1,211,799,
partially offset by increases in accrued liabilities of $538,132 and accounts
payable of $515,690. The non-cash charge was for depreciation and amortization
of $249,395.
Net cash used in investing activities during the fiscal year ended December 31,
2004, consisted of equipment purchases of $545,844 along with an investment of
$300,000 in Broadata. We also have an outstanding deposit on equipment of
$100,000.
34
Net cash provided by financing activities was $2,652,844 during the fiscal year
ended December 31, 2004. Principal sources of cash were proceeds from
stockholder notes payable of $18,500, proceeds of $2,927,000 from long-term
notes payable, proceeds from the exercise of options to purchase common stock of
$111,500 and proceeds from notes payable to related parties of $3,128,281.
Principal uses of cash during 2004 consisted of $3,523,364 principal payments of
notes payable and notes payable to related parties and stockholders and a
decrease to checks written in excess of cash in the bank of $9,623.
Accounts Receivable
At December 31, 2004, we had receivables of $1,288,719, net of a reserve for
doubtful accounts of $41,143, as compared to $89,187 at December 31, 2003, net
of a reserve of $28,876.
This increase was primarily attributed to sales having substantially increased
in the last months of the year as compared to the last two months in 2003. The
Company has implemented an aggressive process to collect past due accounts over
the past eighteen months. As such, the receivables that were past due for a
period of greater than 45 days as of December 31, 2004, were less than 3% of
total receivables. 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 December 31, 2004, related to sales that occurred in the last month of the
year. Therefore they were not deemed uncollectible.
Accounts Payable
Accounts payable were $1,104,392 at December 31, 2004, as compared to $1,300,597
at December 31, 2003. This decrease is primarily attributed to conversions of
accounts payable to notes payable in relation to settlements made by Abacas
Ventures.
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 $18,799,602 and a
total stockholders' deficit of $2,242,033 at December 31, 2004. In addition,
during 2004 and 2003, we have used, rather than provided, cash in our
operations. As of December 31, 2004, our monthly operating costs and interest
expenses averaged approximately $320,000 per month.
35
Since February 2000, we have operated without a line of credit. Abacas Ventures,
Inc., an entity whose shareholders include the Saliba Private Annuity Trust, one
of our major shareholders (see "Item 11 - Security Ownership of Certain
Beneficial Owners and Management") and a related entity, the Saliba Living
Trust, purchased our line of credit of $2,792,609, and this amount was converted
into a note payable to Abacas bearing an interest rate of 10%. As of December
31, 2001, a total of $2,405,507, plus $380,927 in accrued interest, was owed to
Abacas pursuant to this note payable. During 2002, we entered into agreements
with the Saliba Private Annuity Trust and the Saliba Living Trust to exchange
19,987,853 shares of our common stock for $1,499,090 in principal amount of this
debt and to issue an additional 6,666,667 shares to these trusts for $500,000
cash which was used for working capital for the Company. During December 2002,
an additional $1,020,154 of principal and $479,846 of accrued interest owed to
Abacas was converted to 30,000,000 shares of our common stock. We issued no
common stock to Abacas during 2003. During 2003 and 2002, the Company received
$350,000 and $845,000 of cash proceeds under the terms of a bridge loan from
Abacas. The Company made principal payments of $875,000 and 156,268 during 2003
and 2002, respectively, on the bridge loan. At December 31, 2003, the balance
owed on the bridge loan was $163,742. See "Item 12 - Certain Relationships and
Related Transactions." During 2003 and 2002, we converted approximately $34,049
and $316,762, respectively of trade payables into notes and stock. During
January 2002, in addition to the above-described transactions with the Saliba
trusts, we issued 16,666,666 shares of restricted common stock at a price of
$0.075 per share in exchange for the cancellation of $1,250,000 of notes payable
to various stockholders. See "Item 12 - Certain Relationships and Related
Transactions." We continue to work with vendors in an effort to convert other
trade payables into long-term notes and common stock and to cure defaults with
lenders with forbearance agreements that we are able to service.
Despite our efforts to make our debt-load more serviceable, significant amounts
of additional cash will be needed to reduce our debt and fund our losses until
such time as we are able to become profitable. As at December 31, 2003, we were
in default of notes payable whose principal amount, not including the amount
owing to Abacas Ventures, Inc., exceeded $635,000. In addition, the principal
amount of notes that either mature in 2003 or are payable on demand exceed
$875,000 which includes $650,000 of notes to the equity line investor. The total
amount per month that we have committed to paying pursuant to various
settlements for outstanding debt, litigation and delinquent payroll taxes is
currently approximately $38,000, all of which is against accrued liabilities and
notes payable. None of these settlements, however, have resulted in the
forgiveness of any amounts owed, but have simply resulted in a restructuring in
the terms of the various debts.
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 to
principal and accrued interest in return for the Company's issuing 51,250,000
shares of our restricted common stock to the shareholders of Abacas. No
registration rights were granted.
36
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.
Management believes that each of the related party transactions were as fair to
the Company as could have been made with unaffiliated third parties.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors and are
seeking to replace our operating line of credit. It is unlikely that we will be
able, in our current financial condition, to obtain additional debt financing;
and if we did acquire more debt, we would have to devote additional cash flow to
paying the debt and securing the debt with assets. We may therefore have to rely
on equity financing to meet our anticipated capital needs. There can be no
assurances that we will be successful in obtaining such capital. If we issue
additional shares for debt and/or equity, this will dilute the value of our
common stock and existing shareholders' positions.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock on the Over the Counter Electronic Bulletin Board was obtained in July
2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short or the long term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
Notes Payable to Equity Line Investor
During 2003, we borrowed a total of $1,830,000 from Cornell Capital Partners, LP
("Cornell"), 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.
37
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 April 8, 2005. 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 discussed 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. The
note has a one-year term, bears interest at 7.5 percent per annum, and will be
repaid along with a nine percent premium
The following table lists the notes issued to Cornell, amounts of each note,
repayment dates, and other information about each note.
Date of Amount Prepaid Equity Note Due Date Repayment Dates Value of Balance
Note Issuance of Note Line Fees Payable Payments Outstanding
Fees [date]
1 6/9/2003 230,000 9,200 20,800 8/18/2003 6/23/03 - 9/19/03 230,000 -
2 7/16/2003 100,000 4,000 7,150 10/4/2003 9/19/03 - 9/29/03 100,000 -
3 8/28/2003 100,000 4,000 10,500 1/6/2004 10/6/03 100,000 -
4 9/26/2003 200,000 8,000 14,000 11/21/2003 10/20/03 - 10/27/03 200,000 -
5 10/3/2003 300,000 12,000 20,750 1/5/2004 11/3/03 - 11/24/03 300,000 -
6 10/23/2003 250,000 10,000 13,000 12/23/2003 12/8/03 - 12/22/03 250,000 -
7 11/10/2003 250,000 10,000 13,000 1/20/2004 1/5/04 - 1/19/04 250,000 -
8 12/5/2003 250,000 10,000 13,000 2/9/2004 2/16/04 - 3/16/04 250,000 -
9 12/23/2003 150,000 6,000 8,000 3/1/2004 3/16/04 - 3/22/04 150,000 -
10 1/29/2004 250,000 10,000 13,000 4/26/2004 4/5/04 250,000 -
11 2/27/2004 250,000 10,000 13,000 5/24/2004 4/12/04 250,000 -
12 3/23/2004 1,000,000 40,000 50,500 8/2/2004 5/31/04 - 7/19/04 1,000,000 -
13 6/17/2004 1,700,000 68,000 68,500 12/27/2004 none to date 1,700,000 1,700,000
14 1/28/2005 565,000 0 61,500 1/28/2006 none to date 565,000 565,000
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short- or the long-term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
38
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 Capital Partners, LP. We subsequently terminated that agreement,
and on April 8, 2003, we entered into an amended equity line agreement (the
"Equity Line Agreement") with Cornell. Under the Equity Line Agreement, we have
the right to draw up to $5,000,000 from Cornell against an equity line of credit
(the "Equity Line"), and to put to Cornell shares of our common stock in lieu of
repayment of the draw. The number of shares to be issued is determined by
dividing the amount of the draw by the lowest closing bid price of our common
stock over the five trading days after the advance notice is tendered. Cornell
is required under the Equity Line Agreement to tender the funds requested by us
within two trading days after the five-trading-day period used to determine the
market price.
During the 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. These fees were withheld from proceeds of notes payable and are
in addition to fees paid in relation to these 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 recorded as deferred offering costs for
total deferred offering costs of $68,000 at December 31, 2004. These deferred
offering costs will be offset against additional paid-in capital as shares are
issued under the Equity Line Agreement subsequent to December 31, 2004.
The following table shows when shares were issued into escrow in connection with
the prior Equity Line Agreement with Cornell. We intend to terminate the prior
Equity Line Agreement when the registration statement covering the resale of
shares received by Cornell in connection with the SEDA facility has been
declared effective. At that point, any shares remaining in escrow will be
returned to us and will be canceled.
Date Shares Total to Date
6/9/2003 10,000,000 10,000,000
7/17/2003 10,000,000 20,000,000
8/28/2003 10,000,000 30,000,000
9/26/2003 20,000,000 50,000,000
10/2/2003 20,000,000 70,000,000
11/11/2003 10,000,000 80,000,000
12/4/2003 10,000,000 90,000,000
12/22/2003 10,000,000 100,000,000
1/15/2004 10,000,000 110,000,000
2/26/2004 10,000,000 120,000,000
39
3/22/2004 20,000,000 140,000,000
In connection with the prior Equity Line Agreement, we used the proceeds of
draws against that Equity Line to pay down the notes to Cornell.
Standby Equity Distribution Agreement
We entered into a Standby Equity Distribution Agreement (the "Agreement") dated
May 21, 2004, with Cornell. Under the Agreement, we have 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 million. The purchase price for the shares
sold to Cornell is 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 give an advance notice. The periodic sale of shares is
known as an advance. We may request an advance, by giving a written advance
notice to Cornell, and may not request advances more frequently than every seven
trading days. A closing will be held on the first trading day after the end of
the pricing period. The maximum advance amount is one million dollars
($1,000,000) per advance, with a minimum of seven trading days between advances.
In addition, we may not request advances if the shares to be issued in
connection with such advances would result in Cornell's owning more than 9.9% of
our outstanding common stock.
Cornell will retain a commitment fee of 5% of the amount of each advance under
the Agreement.
Proceeds used under the Agreement will be used for general corporate purposes
and likely will include the repayment of notes issued to Cornell. We cannot
predict the total amount of proceeds to be raised in this transaction because we
have not determined the total amount of the advances we intend to draw.
As noted above, we intend to use proceeds from the SEDA facility to repay the
outstanding balance of $1,700,000 owing to Cornell under a note payable. Doing
so will reduce the amount available to us for other corporate purposes under the
SEDA facility from $20,000,000 to $18,300,000. Management believes that the
remaining amount will be sufficient to sustain our operations for the commitment
period of the SEDA facility, which is 24 months from the date a registration
statement covering the resale of shares by Cornell is declared effective.
However, if we are able to obtain funding on better terms, or if our operations
begin to generate sufficient revenues to allow us to operate without drawing on
the SEDA facility or at reduced amounts, we may not draw the full remaining
$18,300,000 available to us. As discussed above, under the Agreement we are not
required to draw any of the amounts available to us under the SEDA facility.
Whether to draw and the extent to which we make draws is in our discretion, and
we will make draws only as needed.
Forward-looking statements
All statements made in this report, 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.
40
ITEM 7. FINANCIAL STATEMENTS
Our financial statements appear at the end of this report beginning with the
Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer,
who is also our Chief Financial Officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d- 15(e)) as of the end
of the period covered by this annual report, has concluded that our disclosure
controls and procedures are effective based on their evaluation of these
controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15
or 15d-15.
Changes in Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Section 404 Assessment. Section 404 of the Sarbanes-Oxley Act of 2002 requires
management's annual review and evaluation of our internal controls, and an
attestation of the effectiveness of these controls by our independent registered
public accountants beginning with our Form 10-K for the fiscal year ending on
December 31, 2007. We plan to dedicate significant resources, including
management time and effort, and to incur substantial costs in connection with
our Section 404 assessment. The evaluation of our internal controls will be
conducted under the direction of our senior management. We will continue to work
to improve our controls and procedures, and to educate and train our employees
on our existing controls and procedures in connection with our efforts to
maintain an effective controls infrastructure at our Company.
Limitations on Effectiveness of Controls. A system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the system will meet its objectives. The design of a control system is
based, in part, upon the benefits of the control system relative to its costs.
Control systems can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. In addition, the design of any control system is based in part upon
assumptions about the likelihood of future events.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
41
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 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 30 Director since June 2001. Senior Vice-President, Sales and Marketing
since January 2002.
IehabJ. Hawatmeh. Mr. Hawatmeh is our President and Secretary and a member of
our Board of Directors. Mr. Hawatmeh served as the President and Chief Executive
Officer of Circuit Technology, Inc. from 1993 until we acquired it in July 2000.
In this position, he was responsible for all operational, financial, marketing
and sales activities of Circuit Technology. He now performs similar functions
for us and our operating subsidiary, CirTran Corporation (Utah).
Raed Hawatmeh. Raed Hawatmeh, who is not related to Iehab Hawatmeh, has served
as a director since June 2001. Mr. Hawatmeh has been a self-employed investor
and venture capitalist for the past five years, specializing in financing
start-up companies in various industries.
Trevor Saliba. Mr. Saliba has served as a director since June 2001 and was
appointed Senior Vice- President, Sales and Marketing in January 2002. In 1997,
Mr. Saliba founded Saliba Corporation, a San Francisco construction company, and
has served as its president from the founding through June 2002. Prior to 1997,
Mr. Saliba was employed as a project engineer for Tutor-Saliba Corporation.
At this time, the Company does not have an audit committee. The Company's Board
of Directors acts as the Company's audit committee. Similarly, the Company's
Board of Directors has determined that the Company does not have an audit
committee financial expert as defined under Securities and Exchange Commission
rules.
In June 2002 Mr. Saliba filed for personal bankruptcy in the U.S. Bankruptcy
Court in Los Angeles, California, which was discharged in March 2005. The
bankruptcy was unrelated to Mr. Saliba's involvement in CirTran.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who beneficially own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and greater
than 10% shareholders are required by regulation of the Securities and Exchange
Commission to furnish us with copies of all Section 16(a) forms which they file.
Based solely on its review of the copies of such forms furnished to us during
the fiscal year ended December 31, 2004, we are aware of the following untimely
filings:
42
In January 2004, Iehab Hawatmeh received a total of 30,288,465 shares of the
Company's restricted common stock in exchange for forgiveness of debt owed to
him by the Company. The transaction should have been reported on a Form 4. It
will be reported on a Form 5 to be filed. Additionally, in January and May 2004,
Mr. Iehab Hawatmeh exercised options to purchase 1,500,000 shares of the
Company's stock and sold the shares received upon exercise of the options. The
transactions should have been reported on Forms 4. They will be reported on a
Form 5 to be filed.
In January, May, and July 2004, Mr. Saliba exercised options to purchase
2,250,000 shares of the Company's stock and sold the shares received upon
exercise of the options. The transactions should have been reported on Forms 4.
They will be reported on a Form 5 to be filed.
In January and May 2004, Mr. Raed Hawatmeh exercised options to purchase
1,500,000 shares of the Company's stock and sold the shares received upon
exercise of the options. The transactions should have been reported on Forms 4.
They will be reported on a Form 5 to be filed.
Code of Ethics. The Company has not yet adopted a code of ethics. The Board of
Directors anticipates that it will adopt a code of ethics during the second
quarter of 2005, and that we will file the code of ethics as an exhibit to our
second quarterly report.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 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.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
43
Annual Compensation Long-Term 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 CirTran Corporation 2003 127,000 - - 3,000,000 -
2002 118,000 - - 500,000 -
Raed S. Hawatmeh 2004 - - - 2,500,000 -
Director of CirTran Corporation 2003 - - - 3,000,000 -
2002 - - - 500,000 -
Option/SAR Grants in the Year Ended December 31, 2004
Number of Securities
Underlying % of Total Options
Options/SARs Granted to Employees Exercise or Base Price
Name Granted (#) in Fiscal Year ($/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 - $0.03 Jan - Dec 2009
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
Aggregated Option/SAR Exercises in the Year Ended December 31, 2004 and December
31, 2004 Option/SAR Values
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at FY-
Shares Acquired on Options/SARs at FY End ($)
Name Exercise (#) Value Realized ($) End (#) Exercisable/
Exercisable/ Unexercisable
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
----------------------- ---------------------- ----------------------- ----------------------- -----------------------
44
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
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.
45
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
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.
46
As of April 8, 2005, 35,000,000 options to purchase shares of common stock and
no stock purchase rights have been granted under the 2003 Plan. Therefore, the
2003 Plan has 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.
As of April 8, 2005, 20,000,000 options to purchase shares of common stock and
no stock purchase rights have been granted under the 2004 Plan.
ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of the 564,868,569
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of April 8, 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
47
case may be, has furnished us information with respect to beneficial ownership.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, based on the information each of them has given to
us, have sole investment and voting power with respect to their shares, except
where community property laws may apply.
Name and Address Relationship Common Percent of Class
Shares
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
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.
Securities authorized for issuance under equity compensation plans
The following table sets forth information about the Company's equity
compensation plans, including the number of securities to be issued upon the
exercise of outstanding options, warrants, and rights; the weighted average
exercise price of the outstanding options, warrants, and rights; and the number
of securities remaining available for issuance under the specified plan through
April 8, 2005.
48
------------------------------ ---------------------------- --------------------------- ----------------------------
Number of securities
Number of securities to be Weighted average exercise remaining available for
issued upon exercise of price of outstanding future issuance under
outstanding options, options, warrants, and equity compensation plans
Plan Category warrants, and rights rights
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans
approved by shareholders 0 0 0
------------------------------ ---------------------------- --------------------------- ----------------------------
Equity compensation plans
not approved by shareholders 2001 Plan: 0 options 2001 Plan: 0 options * 2001 Plan: 0 options
2002 Plan: 500 options 2002 Plan: $0.0001/share 2002 Plan: 0 options
2003 Plan: 3,750,000 options 2003 Plan: $0.01/share 2003 Plan: 0 options
2004 Plan: 10,500,000 options 2004 Plan: $0.03/share 2004 Plan: 20,000,000 options
------------------------------ ---------------------------- --------------------------- ----------------------------
Total $14,250,000 $0.03/share 20,000,000
------------------------------ ---------------------------- --------------------------- ----------------------------
* All options issued under this plan to date have been exercised.
ITEM 12. 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.
49
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,500,000 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.05 per share, for the aggregate
amount of $1,500,000.
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 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 the shareholders of Abacas. No
registration rights were granted.
As of December 31, 2001, Iehab Hawatmeh had loaned us a total of $1,390,125. The
loans were demand loans, bore interest at 10% per annum and were unsecured.
Effective January 14, 2002, we entered into four substantially identical
agreements with existing shareholders pursuant to which we issued an aggregate
of 43,321,186 shares of restricted common stock at a price of $0.075 per share
for $500,000 in cash and the cancellation of $2,749,090 principal amount of our
debt. Two of these agreements were with the Saliba Private Annuity Trust, one of
our principal shareholders, and a related entity, the Saliba Living Trust. The
Saliba trusts are also principals of Abacas Ventures, Inc., which entity
purchased our line of credit in May 2000. (See "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Liquidity and Financing Arrangements.") Pursuant to the
Saliba agreements, the trusts were issued a total of 26,654,520 shares of common
stock in exchange for $500,000 cash and the cancellation of $1,499,090 of debt.
We used the $500,000 cash from the sale of the shares for working capital. As a
result of this transaction, the percentage of our common stock owned by the
Saliba Private Annuity Trust and the Saliba Living Trust increased from
approximately 6.73% to approximately 17.76%. Mr. Trevor Saliba, one of our
directors and officers, is a passive beneficiary of the Saliba Private Annuity
Trust. Pursuant to the other two agreements made in January 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%.
50
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
accrued rent and interest of $400,000 by issuing 10,000,000 shares of
unregistered common stock in March 2005.
Management believed at the time of each of these transactions and continues to
believe that each of these transactions were as fair to the Company as could
have been made with unaffiliated third parties.
ITEM 13. EXHIBITS
Copies of the following documents are included as exhibits to this report
pursuant to Item 601 of Regulation S-B.
Exhibit No. Document
3.1 Articles of Incorporation (previously filed as Exhibit No. 2 to our
8-K dated July 1, 2000, Commission File No. 33-13674-LA, and
incorporated herein by reference).
3.2 Bylaws (previously filed as Exhibit No. 3 to our 8-K dated July 1,
2000, Commission File No. 33-13674-LA, and incorporated herein by
reference).
10. Material Contracts:
10.1 Lease Agreement dated 2 November 1996 between I & R Properties,
LLC and Circuit Technology, Inc. (previously filed as Exhibit No.
4 to our 8-K dated July 1, 2000, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.2 Financial Advisory Agreement dated 12 May 1999 between Circuit
Technology, Inc. and Cogent Capital Corp. (previously filed as
Exhibit No. 2 to our Annual Report filed on Form 10-KSB for the
year ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.3 Form of Product Representative Agreement between CirTran
Corporation and a Representative (previously filed as Exhibit No.
3 to our Annual Report filed on Form 10-KSB for the year ending
12/31/00, Commission File No. 33- 13674-LA, and incorporated
herein by reference).
51
10.4 Security and Loan Agreement dated April 6, 1998 between Imperial
Bank and Circuit Technology, Inc. (previously filed as Exhibit
No. 4 to our Annual Report filed on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.5 Line of Credit Purchase Agreement dated May 1, 2000 between
Imperial Bank and Abacas Ventures, Inc. (previously filed as
Exhibit No. 5 to our Annual Report filed on Form 10-KSB for the
year ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.6 Assignment of Loan dated May 1, 2000 from Imperial Bank to Abacas
Ventures, Inc. (previously filed as Exhibit No. 6 to our Annual
Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674- LA, and incorporated herein by
reference).
10.7 Unsecured Promissory Note for $73,000.00 dated November 3, 2000
from CirTran Corporation to Future Electronics Corporation
(previously filed as Exhibit No. 7 to our Annual Report filed on
Form 10-KSB for the year ending 12/31/00, Commission File No.
33-13674-LA, and incorporated herein by reference).
10.8 Unsecured Promissory Note for $166,000.00 dated November 3, 2000
from CirTran Corporation to Future Electronics Corporation
(previously filed as Exhibit No. 8 to our Annual Report filed on
Form 10-KSB for the year ending 12/31/00, Commission File No.
33-13674-LA, and incorporated herein by reference).
10.9 Lock-Up Agreement dated November 3, 2000 between Iehab Hawatmeh
and Future Electronics Corporation (previously filed as Exhibit
No. 9 to our Annual Report filed on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.10Lock-Up Agreement dated November 3, 2000 between Raed Hawatmeh
and Future Electronics Corporation (previously filed as Exhibit
No. 10 to our Annual Report filed on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.11Lock-Up Agreement dated November 3, 2000 between Roger Kokozyon
and Future Electronics Corporation (previously filed as Exhibit
No. 11 to our Annual Report filed on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.12Registration Rights Agreement dated November 3, 2000 between
CirTran Corporation and Future Electronics Corporation
(previously filed as Exhibit No. 12 to our Annual Report filed on
Form 10-KSB for the year ending 12/31/00, Commission File No.
33-13674-LA, and incorporated herein by reference).
10.13Promissory Note and Confession of Judgment dated September 26,
2000 by Circuit Technology Corp. in favor of Arrow Electronics,
Inc. (previously filed as Exhibit No. 13 to our Annual Report
filed on Form 10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by reference).
10.14Promissory Note and Confession of Judgment dated November 16,
2000 by Circuit Technology Corp. in favor of Sager Electronics
(previously filed as Exhibit No. 14 to our Annual Report filed on
Form 10-KSB for the year ending 12/31/00, Commission File No.
33-13674-LA, and incorporated herein by reference).
52
10.15Confession of Judgment dated November 3, 2000 by CirTran
Corporation and Iehab Hawatmeh in favor of Future Electronics
Corporation (previously filed as Exhibit No. 15 to our Annual
Report filed on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
10.16Settlement Agreement and Release of Claims dated November 3,
2000 between CirTran Corporation, Iehab Hawatmeh and Future
Electronics Corporation (previously filed as Exhibit No. 16 to
our Annual Report filed on Form 10-KSB for the year ending
12/31/00, Commission File No. 33-13674- LA, and incorporated
herein by reference).
10.17Sublease dated 30 November 1998 between Colorado Electronics
Corporation, LLC and Circuit Technology Corporation (previously
filed as Exhibit No. 10.17 to our Registration Statement on Form
SB-2, Amendment No. 1, dated October 29, 2001, and incorporated
herein by reference).
10.18Attornment Agreement dated 30 November 1998 among Sun Borne XII,
LLC et al, Colorado Electronics Corporation LLC and Circuit
Technology Corporation (previously filed as Exhibit No. 10.17 to
our Registration Statement on Form SB-2, Amendment No. 1, dated
October 29, 2001, and incorporated herein by reference).
10.19Form of Subscription Agreement entered into between CirTran
Corporation and various subscribers pursuant to a debt settlement
and private placement completed in January 2002 (previously filed
as Exhibit 10.2 to our Current Report on Form 8-K dated March 19,
2002, and incorporated herein by this reference).
10.20Settlement Agreement entered into on January 18, 2002 among
Sunborne XII, LLC, CirTran Corporation et al. (previously filed
as Exhibit 10.1 to our Current Report on Form 8-K dated March 19,
2002, and incorporated herein by this reference).
10.21Standby Equity Distribution Agreement between CirTran
Corporation and Cornell Capital Partners, LP, dated as of May 21,
2004 (previously filed as an exhibit to an amended Quarterly
Report on Form 10-QSB/A filed with the Commission on December 22,
2004, and incorporated herein by reference).
10.22Registration Rights Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of May 21, 2004
(previously filed as an exhibit to an amended Quarterly Report on
Form 10-QSB/A filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.23Placement Agent Agreement between CirTran Corporation and
Newbridge Securities Corporation, dated as of May 21, 2004
(previously filed as an exhibit to an amended Quarterly Report on
Form 10-QSB/A filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.24Placement Agent Agreement between CirTran Corporation and
Newbridge Securities Corporation, dated as of May 21, 2004
(previously filed as an exhibit to an amended Quarterly Report on
Form 10-QSB/A filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.25Exclusive 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 an amended Quarterly Report on Form 10-QSB/A
filed with the Commission on December 22, 2004, and incorporated
herein by reference).
53
10.26Appendix A-1 to Exclusive Agreement for AbKing 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 an amended Quarterly Report on Form 10- QSB/A filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.27Appendix 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 an amended Quarterly Report on Form 10- QSB/A filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.28Appendix 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)
10.29Appendix 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 an amended Quarterly Report on Form 10- QSB/A filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.30Appendix 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 an amended Quarterly Report on Form 10- QSB/A filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.31Appendix 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 an amended Quarterly Report on Form 10- QSB/A filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.32Appendix 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 an amended Quarterly Report on
Form 10-QSB/A filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.33Employment Agreement with Iehab Hawatmeh, dated as of July 1,
2004 (previously filed as an exhibit to an amended Quarterly
Report on Form 10- QSB/A filed with the Commission on December
22, 2004, and incorporated herein by reference).
10.34Employment Agreement with Shaher Hawatmeh, dated as of July 1,
2004 (previously filed as an exhibit to an amended Quarterly
Report on Form 10- QSB/A filed with the Commission on December
22, 2004, and incorporated herein by reference).
10.35Employment Agreement with Trevor Saliba, dated as of July 1,
2004 (previously filed as an exhibit to an amended Quarterly
Report on Form 10- QSB/A filed with the Commission on December
22, 2004, and incorporated herein by reference).
54
10.36Employment Agreement with Charles Ho, dated as of July 1, 2004
(previously filed as an exhibit to an amended Quarterly Report on
Form 10-QSB/A filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.37Letter Agreement between MET Advisors and CirTran Corporation,
dated August 1, 2003 (previously filed as an exhibit to an
amended Quarterly Report on Form 10-QSB/A filed with the
Commission on December 22, 2004, and incorporated herein by
reference).
10.38Consulting Agreement between CirTran Corporation and Cogent
Capital Corp., dated September 14, 2003 (previously filed as an
exhibit to an amended Quarterly Report on Form 10-QSB/A filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.39Agreement between CirTran Corporation and Transactional
Marketing Partners, Inc., dated as of October 1, 2004 (previously
filed as an exhibit to an amended Quarterly Report on Form
10-QSB/A filed with the Commission on December 22, 2004, and
incorporated herein by reference).
10.40Subscription 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).
10.41Subscription 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).
10.42Subscription 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).
10.43Subscription 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).
10.44Subscription 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).
10.45Subscription 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).
10.46Subscription 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).
10.47Subscription 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).
10.48PFE 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).
21. Subsidiaries of the Registrant
31. Certification of President and Chief Financial Officer
55
32. Certification pursuant to 18 U.S.C. Section 1350
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by Hansen Barnett &
Maxwell, for the audit of the registrant's annual financial statements and
review of the financial statements included in the registrant's Form 10-QSB or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for fiscal year 2004 and 2003
were $85,740 and $54,975, respectively.
(2) AUDIT-RELATED FEES
The aggregate fees billed for assurance and related services by Hansen Barnett &
Maxwell, that are reasonably related to the performance of the audit or review
of the registrant's financial statements for fiscal year 2004 and 2003 were $0
and $0, respectively.
(3) TAX FEES
The aggregate fees billed for each of the fiscal years ended December 31, 2004
and 2003, for professional services rendered by Hansen Barnett & Maxwell for tax
compliance, tax advice, and tax planning, for those fiscal years were $2,967 and
$2,000, respectively. Services provided included preparation of federal and
state income tax returns.
(4) ALL OTHER FEES
The aggregate fees billed in each of the fiscal years ended December 31, 2004
and 2003, for products and services provided by Hansen Barnett & Maxwell other
than those services reported above, for those fiscal years were $12,598 and $0,
respectively.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
Not applicable.
(6) If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees.
Not applicable.
56
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CIRTRAN CORPORATION
Date: April 14, 2004 By: /s/ Iehab J. Hawatmeh, President
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 14, 2005 /s/ Iehab J. Hawatmeh
Iehab J. Hawatmeh
President, Chief Financial Officer and Director
Date: April 14, 2005 /s/ Raed Hawatmeh
Raed Hawatmeh, Director
Date: April 14, 2005 /s/ Trevor Saliba
Trevor Saliba, Director
57
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 Each Multiple of Options for
Initial for Initial Units above Each Multiple
Product Units 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