CIRTRAN CORPORATION
A Nevada Corporation
252,562,500 Shares of Common Stock
$0.001 per share
This prospectus relates to the resale of up to 252,562,500 shares (the "Shares")
of common stock of CirTran Corporation, a Nevada corporation. Three of our
shareholders, Cornell Capital Partners, LP (the "Equity Line Investor"),
Westrock Advisors, Inc., and Butler Gonzalez LLP (collectively with the Equity
Line Investor, the "Selling Shareholders") are offering all of the Shares
covered by this prospectus. The Selling Shareholders will receive all of the
proceeds from the sale of the Shares and we will receive none of those proceeds.
The Equity Line Investor is an underwriter of the Shares.
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Investment in the Shares involves a high degree of risk. You should
consider carefully the risk factors beginning on page 5 of this prospectus
before purchasing any of the Shares offered by this prospectus.
-------------------------
CirTran Corporation common stock is quoted on the OTC Bulletin Board and
trades under the symbol "CIRT". The last reported sale price of our common stock
on the OTC Bulletin Board on April 12, 2004, was approximately $.06 per share.
Nevertheless, the Selling Shareholder does not have to sell the Shares in
transactions reported on the OTC Bulletin Board, and may offer its Shares
through any type of public or private transactions.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
April 21, 2004
CirTran has not registered the Shares for sale by the Selling Shareholders
under the securities laws of any state. Brokers or dealers effecting
transactions in the Shares should confirm that the Shares have been registered
under the securities laws of the state or states in which sales of the Shares
occur as of the time of such sales, or that there is an available exemption from
the registration requirements of the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
Shares. This prospectus is not an offer to sell securities in any circumstances
in which such an offer is unlawful.
CirTran has not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, CirTran, or the Shares
that is different from the information included or incorporated by reference in
this prospectus. You should not assume that the information in this prospectus,
or any supplement to this prospectus, is accurate at any date other than the
date indicated on the cover page of this prospectus or any supplement to it. In
this prospectus, references to "CirTran," "the Company," "we," "us," and "our,"
refer to CirTran Corporation and its subsidiaries.
TABLE OF CONTENTS
Summary about CirTran Corporation and this offering...........................2
Risk factors..................................................................5
Use of proceeds..............................................................12
Determination of offering price..............................................12
Description of business......................................................13
Management's discussion and analysis or plan of operation....................19
Forward-looking statements...................................................24
Selling Shareholders.........................................................24
Plan of distribution.........................................................26
Regulation M.................................................................27
Legal Proceedings............................................................27
Directors, executive officers, promoters and control persons.................31
Commission's position on indemnification for Securities Act liabilities......33
Security ownership of certain beneficial owners and management...............33
Description of common stock..................................................34
Certain relationships and related transactions...............................35
Market for common equity and related stockholder matters.....................36
Executive compensation.......................................................30
Changes in and disagreements with accountants on accounting
and financial disclosure.............................................40
Index to financial statements ...............................................40
Experts......................................................................40
Legal matters................................................................40
Summary about CirTran Corporation and this offering
CirTran Corporation
CirTran Corporation is a Nevada corporation engaged in providing a mixture
of high and medium size volume turnkey manufacturing services for electronics
original equipment manufacturers ("OEMs") in the communications, networking,
peripherals, gaming, consumer products, telecommunications, automotive, medical,
and semiconductor industries. These services include providing design and new
product introduction services, just-in-time delivery on low-volume to
medium-volume turnkey and consignment projects, and other value-added
manufacturing services. Our manufacturing processes include the following:
surface mount technology, ball-grid array assembly and pin-through-hole
technology, which are all methods of attaching electronic components to circuit
boards; manufacturing and test engineering support and design for
manufacturability; and in-circuit and functional test and full-system mechanical
assembly. We also design and manufacture Ethernet cards that are used to connect
computers through fiber optic networks and market these cards through an
international network of distributors, value-added resellers and system
integrators.
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We incorporated in Nevada in 1987 under the name Vermillion Ventures, Inc.,
for the purpose of acquiring other operating corporate entities. We were largely
inactive until the year 2000, when we effected a reverse split in our common
stock, reducing our issued and outstanding shares to 116,004. In July 2000, we
issued 10,000,000 shares of common stock to acquire, through our wholly owned
subsidiary, CirTran Corporation (Utah), substantially all of the assets and
certain liabilities of Circuit Technology, Inc., a Utah corporation. The shares
we issued to Circuit Technology in connection with the acquisition represented
approximately 98.6% of our issued and outstanding common stock immediately
following the acquisition.
Effective August 6, 2001, we effected a 1:15 forward split and stock
distribution which increased the number of our issued and outstanding shares of
common stock from 10,420,067 to 156,301,005. We also increased our authorized
capital from 500,000,000 to 750,000,000 shares of common stock.
Our address is 4125 South 6000 West, West Valley City, Utah 84128, and our
phone number is (801) 963-5112.
This offering
On November 5, 2002, we entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with Cornell Capital Partners, LP, a private
investor (the "Equity Line Investor"). Subsequently, as of March 31, 2003, we
agreed with the Equity Line Investor to terminate the Equity Line Agreement and
to negotiate a new agreement.
We entered into a second equity line of credit agreement (the "Second
Equity Line Agreement") with the Equity Line Investor as of April 8, 2003. Under
the Second Equity Line Agreement, we have the right to draw up to $5,000,000
from the Equity Line Investor against an equity line of credit (the "Equity
Line"), and to put to the Equity Line Investor shares of our common stock in
lieu of repayment of the draws. 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. The
Equity Line Investor is required under the Second 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.
Our right to make draws under the Second Equity Line Agreement terminates
on the earlier of our having drawn an aggregate of $5,000,000 or April 8, 2005.
The maximum amount that we can draw under the Equity Line in a single draw is
$85,000, although we are not required to draw the maximum amount each time. We
are entitled to make draws on the Equity Line every seven trading days. In
connection with each draw, we have agreed to pay to the Equity Line Investor
four percent of the amount of the draw as consideration for providing the Equity
Line.
Despite our contractual right to make draws on the equity line and put
shares of our stock to the Equity Line Investor, we are also prohibited by the
Second Equity Line Agreement from putting shares to the Equity Line Investor
which would cause the Equity Line Investor to own in excess of 9.9% of our
then-outstanding common stock. Because the volume of trading in our stock has
been volatile, there can be no assurance that the Equity Line Investor will be
able to sell a sufficient number of shares put to it to allow us to take full
advantage of the draws. For example, as of March 25, 2004, we had approximately
390,000,000 shares of our common stock outstanding. Nine and nine-tenths percent
of 390,000,000 shares is 38,610,000 shares. If the Equity Line Investor is
unable to sell all of the shares we put to it in connection with draws under the
Equity Line, once the number of unsold shares retained by the Equity Line
Investor reaches 38,610,000, we would be unable to make draws on the Equity Line
or put shares to the Equity Line Investor until it had sold additional shares
into the market.
In connection with the Second Equity Line Agreement, we granted
registration rights to the Equity Line Investor, in connection with which we
filed this prospectus and the registration statement of which it is a part. We
are required to use our best efforts to have this registration statement and
prospectus declared effective by the SEC, and we are unable to draw on the
Equity Line until this registration statement has been declared effective.
Additionally, in connection with the Second Equity Line Agreement, we
issued 2,375,000 shares of common stock to the Equity Line Investor as further
consideration for entering into the Second Equity Line Agreement; 125,000 shares
of common stock to Westrock Advisors, Inc., ("Westrock"), who acted as a finder
in connection with the Second Equity Line Agreement as compensation for its
services; and 62,500 shares to Butler Gonzalez, LLP ("Butler Gonzalez"), as
partial payment of legal fees in connection with the Second Equity Line
Agreement.
Through April 12, 2004, we have drawn $2,080,000 on the Equity Line and
have issued 98,060,366 shares of our common stock in connection with draws on
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the Equity Line.
The Equity Line Investor, Westrock, and Butler Gonzalez are the Selling
Shareholders who will be selling the shares covered by this prospectus and the
registration statement of which it is a part.
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Risk Factors
In addition to the other information in this prospectus, the following risk
factors should be considered carefully in evaluating our business before
purchasing any of our shares of common stock. A purchase of our common stock is
speculative and involves significant and substantial risks. Any person who is
not in a position to lose the entire amount of his investment should forego
purchasing our common stock.
Risks Related to Our Operations
We have a history of operating losses and we expect to continue to generate
losses, which could have a material adverse impact on our ability to operate
profitably.
Our expenses are currently greater than our revenues. Our accumulated
deficit was $18,214,480 and $15,230,302 at December 31, 2003, and December 31,
2002, respectively. Our net loss from operations for the year ended December 31,
2003, and the year ending December 31, 2002, were $2,984,178 and $2,149,810,
respectively. Although our gross profit margin has improved over the last two
years, and our level of sales has decreased during the last year, our ability to
operate profitably depends on our ability to increase our sales further and
achieve sufficient gross profit margins for sustained growth. We can give no
assurance that we will be able to increase our sales sufficiently to enable us
to operate profitably, which could have a material adverse impact on our
business.
Our current liabilities exceed our current assets by a significant amount, and
we may not continue as a going concern.
Our financial statements indicate a trend of an increasingly larger excess
of current liabilities over current assets. Our current liabilities exceeded our
current assets by the following amounts as of the dates indicated: $5,664,395 as
of December 31, 2000; $7,832,259 as of December 31, 2001; $4,490,623 at December
31 2002; and by $5,529,244 at December 31, 2003. This trend raises substantial
doubt about our ability to continue as a going concern. Unless we obtain
additional financing through operations, investment capital or otherwise, there
is significant doubt we will be able to meet our obligations as they come due
and will be unable to execute our long-term business plans.
The "going concern" paragraph in the reports of our independent public
accountants for the years ended December 31, 2003, 2002, 2001, 2000, and 1999
raises doubts about our ability to continue as a going concern.
The independent public accountants' reports for our financial statements
for the years ended December 31, 2003, 2002, 2001, 2000, and 1999 include an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. This may have an adverse effect on our ability to obtain
financing for our operations and to further develop and market our products.
Our volume of sales has decreased significantly over the last two years, and
there is no guarantee that we will be able to increase sales. This decrease in
sales volume could have a material adverse impact on our ability to operate our
business profitably.
Our sales volume has decreased in year ending 2003 as compared to the year
ending 2002. Our sales volumes for the last four years have changed as indicated
by the following levels of net sales for the periods indicated: $6,373,096 for
the year ending December 31, 2000; $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.
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, 2003, our monthly operating costs and interest expenses
averaged approximately $265,000 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
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our anticipated capital needs. We recently entered into a private equity line of
credit to provide financing, but the funds available may not be sufficient to
sustain our operations beyond June 30, 2005. There can be no assurances that we
will be successful in obtaining additional capital. If we issue additional
shares in connection with debt or equity financing, this will serve to dilute
the value of our common stock and existing shareholders' positions. If we are
unsuccessful in obtaining additional funding to finance our operations, there is
serious doubt that we will be able to continue as a going concern, and we may be
forced to seek the protection of the bankruptcy laws.
We have significant short-term debt which we are not currently able to fully
service, which could impair our ability to continue as a going concern.
As of December 31, 2003, we have significant short-term debt, including
approximately $1,300,597 in accounts payable, $195,580 in demand notes due
certain of our shareholders and related parties, and $3,615,264 in accrued
liabilities, over half of which consist of delinquent federal and state payroll
taxes (see "Legal Proceedings"). We are currently not able to fully service this
debt. We are attempting to negotiate forbearance agreements with many of our
creditors and to restructure our short-term debt. There can be no assurance that
we will be successful in these efforts.
There is substantial risk, therefore, that the existence and extent of the
debt obligations could adversely affect our business, operations and financial
condition, and we may be forced to curtail our operations, sell part or all of
our assets, or seek protection under bankruptcy laws. Additionally, there is
substantial risk that our vendors could bring lawsuits to collect the unpaid
amounts. In the event of lawsuits of this type, if we are unable to negotiate
settlements or satisfy our obligations, we could be forced into bankruptcy.
We have accrued delinquent payroll tax liabilities that we are currently not
able to fully pay, which could result in the Internal Revenue Service's pursuing
statutory foreclosure proceedings against us.
We have accrued delinquent payroll tax liabilities of approximately $2.1
million and have not yet come to a final resolution of a payment schedule with
respect to most of this amount. Though we are attempting to negotiate settlement
with respect to this amount, there can be no assurance that we will be
successful in those negotiations or that, if successful, we will be able to
service any payment obligations which may result from such settlement. If we are
unsuccessful, the Internal Revenue Service could instigate foreclosure
proceedings against us pursuant to the Service's rules and regulations.
We are involved in numerous legal proceedings that may give rise to significant
liabilities, which could impair our ability to continue as a going concern.
We are involved in numerous legal proceedings, many of which have filed
lawsuits and have obtained judgments against us. (See "Legal Proceedings.") We
are currently attempting to negotiate with each of these claimants to settle the
claims against CirTran, although in many cases, we have not yet reached final
settlements. There can be no assurance that we will be successful in those
negotiations or that, if successful, we will be able to service any payment
obligations which may result from such settlements.
There is substantial risk, therefore, that the existence and extent of
these liabilities could adversely affect our business, operations and financial
condition, and we may be forced to curtail our operations, sell part or all of
our assets, or seek protection under bankruptcy laws. Additionally, there is
substantial risk that our vendors could expand their collection efforts to
collect the unpaid amounts. If they undertake significant collection efforts, if
we are unable to negotiate settlements or satisfy our obligations, we could be
forced into bankruptcy.
We are dependent on the continued services of our President, and the untimely
death or disability of Iehab Hawatmeh could have a serious adverse effect upon
our company.
We view the continued services of our president, Iehab Hawatmeh, as
critical to the success of our company. Though we have an employment agreement
with Mr. Hawatmeh (see "Executive Compensation"), and a key-man life insurance
policy, the untimely death or disability of Mr. Hawatmeh could have a serious
adverse affect on our operations.
We have a limited product offering, and some of our key technologies are still
in the product development stage, which could have a material adverse impact on
our ability to generate revenues from operations.
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We are a full-service contract electronics manufacturer servicing OEMs in
the following industries: communications, networking, peripherals, gaming, law
enforcement, consumer products, telecommunications, automotive, medical, and
semi-conductor. We conduct our operations through two main divisions: circuit
board manufacturing and assembly, and Ethernet card design and manufacture.
Presently, there are a limited number of commercially available applications or
products incorporating our technologies. For us to be ultimately successful,
sales from these product offerings must be substantially greater. An additional
element of our business strategy is to achieve revenues through appropriate
strategic alliances, co-development arrangements, and license arrangements with
third parties. There can be no assurance that these collaboration and license
agreements will generate material revenues for our business in the future.
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly rapid
turnaround time for their OEM customers. We do not obtain firm, long-term
purchase commitments from our customers and have experienced a demand for
reduced lead-times in customer orders. Our customers may cancel their orders,
change production quantities or delay design and production for several factors.
Cancellations, reductions or delays by a customer or group of customers could
adversely affect our results of operations. Additional factors that affect the
electronics industry and that could have a material adverse effect on our
business include the inability of our customers to adapt to rapidly changing
technology and evolving industry standards and the inability of our customers to
develop and market their products. If our customers' products become obsolete or
fail to gain commercial acceptance, our results of operations may be materially
and adversely affected.
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
The majority of our revenue is generated from our contract manufacturing
services. Our customers include electronics, telecommunications, networking,
automotive, gaming, and medical device OEMs that contract with us for the
manufacture of specified quantities of products at a particular price and during
a relatively short period of time. As a result, the mix and number of our
clients varies significantly from time to time. Responding to the fluctuations
and variations in the mix and number of our clients can cause significant time
delays in the operation of our business and the realization of revenues from our
clients. These delays could have a material adverse impact on our business. Our
industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able, especially given our lack of financial resources, to
effectively respond to the technological requirements of a changing market,
including the need for substantial additional capital expenditures that may be
required as a result of these changes. The electronics manufacturing services
industry is characterized by rapidly changing technology and continuing process
development. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. In addition, our industry could in the future encounter
competition from new or revised technologies that render existing technology
less competitive or obsolete.
There may be shortages of required components which could cause us to curtail
our manufacturing or incur higher than expected costs.
Component shortages or price fluctuations in such components could have an
adverse effect on our results of operations. We purchase the components we use
in producing circuit board assemblies and other electronic manufacturing
services and we may be required to bear the risk of component price
fluctuations. In addition, shortages of electronic components have occurred in
the past and may occur in the future. These shortages and price fluctuations
could potentially have an adverse effect on our results of operations.
Risks Related to the Offering
Holders of CirTran common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of common
stock in connection with the Equity Line.
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The following table describes the number of shares of common stock that
would be issuable, assuming that the full remaining amount of the Second Equity
Line had been put to the Equity Line Investor (irrespective of the availability
of registered shares), and further assuming that the applicable conversion or
exercise prices at the time of such conversion or exercise were the following
amounts:
Shares
Hypothetical Conversion issuable upon puts
Price aggregating
$2,920,000
$0.01 292,000,000
$0.02 146,000,000
$0.03 97,333,333
$0.04 73,000,000
$0.05 58,400,000
$0.10 29,200,000
$0.15 19,466,667
$0.25 11,680,000
$0.50 5,840,000
Given the formulas for calculating the shares to be issued under the Equity
Line, there effectively is no limitation on the number of shares of common stock
which may be issued in connection with a put under the Equity Line, except for
the number of shares registered under this prospectus and the registration
statement of which it is a part. If the market price of the common stock
decreases, the number of shares of common stock issuable in connection with the
Equity Line will increase and, accordingly, the aggregate amount of draws under
the Equity Line will decrease. Accordingly, despite our right to draw up to an
aggregate of $5,000,000 under the Second Equity Line Agreement, we may run out
of shares registered under this prospectus and the registration statement of
which it is a part to issue to the Equity Line Investor in connection with our
draws. The following table demonstrates the correlation between share price
decline and decreases in aggregate draw amounts available, given the maximum
250,000,000 shares of common stock registered under this prospectus and the
registration statement of which it is a part for issuance in connection with
draws on the Equity Line:
Shares issuable upon puts, up to a Maximum draws available, up to
Hypothetical Conversion Price maximum of 250,000,000 $5,000,000
$0.01 250,000,000 $2,500,000
$0.02 250,000,000 $5,000,000
$0.03 166,666,667 $5,000,000
$0.04 125,000,000 $5,000,000
$0.05 100,000,000 $5,000,000
$0.10 50,000,000 $5,000,000
$0.15 33,333,333 $5,000,000
$0.25 20,000,000 $5,000,000
$0.50 10,000,000 $5,000,000
Our issuances of shares under the Equity Line 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 Equity
Line may result in substantial dilution to the equity interests of holders of
CirTran common stock other than the Equity Line Investor. Specifically, the
issuance of a significant amount of additional common stock will result in a
decrease of the relative voting control of our common stock issued and
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outstanding prior to the issuance of common stock in connection with the Equity
Line. Furthermore, public resales of our common stock by the Equity Line
Investor following the issuance of common stock in connection with the Equity
Line 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
Equity Line, 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 Equity Line is based, in part, on the market price of the
common stock and is equal to the lowest closing bid price of our common stock
over the five trading days after the put notice is tendered by us to the Equity
Line Investor. As a result, the lower the market price of our common stock at
and around the time we put shares under the Equity Line, the more shares of our
common stock the Equity Line Investor receives. Any increase in the number of
shares of our common stock issued upon puts of shares as a result of decreases
in the prevailing market price would compound the risks of dilution described in
the preceding paragraph.
As a result of our net tangible book deficit, the Equity Line Investor will
experience immediate and substantial dilution to its holdings as a result of the
issuances of common stock in connection with the Equity Line.
The net proceeds from the Equity Line could potentially exceed our net
tangible book deficit of $4,941,251 at December 31, 2003. Accordingly, the
Equity Line Investor will experience immediate and substantial dilution between
approximately $0.0117 to $0.2535 per share, or approximately 101.40% to 117.43%
of the estimated average conversion price of $0.01 to $0.25. The dilution at
various estimated average conversion prices is as follows:
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Estimated Average Conversion Price Dilution Per Share Percent Dilution Per Share
$0.01 (1) $0.0117 117.43%
$0.02 (1) $0.0224 111.79%
$0.03 $0.0327 108.91%
$0.04 $0.0429 107.16%
$0.05 $0.0530 105.99%
$0.10 $0.1033 103.29%
$0.15 $0.1534 102.27%
$0.25 $0.2535 101.40%
(1) At this conversion price, the Company would be required to
register additional shares to receive the maximum proceeds available under
the Equity Line.
There is an increased potential for short sales of our common stock due to the
sales of shares put to the Equity Line Investor in connection with the Equity
Line, which could materially effect the market price of our stock.
Downward pressure on the market price of our common stock that likely will
result from sales of our common stock by the Equity Line Investor issued in
connection with a put under the Equity Line could encourage short sales of
common stock by the Equity Line Investor. A "short sale" is defined as the sale
of stock by an investor that the investor does not own. Typically, investors who
sell short believe that the price of the stock will fall, and anticipate selling
at a price higher than the price at which they will buy the stock. Significant
amounts of such short selling could place further downward pressure on the
market price of our common stock.
The restrictions on the extent of puts may have little if any effect on the
adverse impact of our issuance of shares under the Equity Line, and as such, the
Equity Line Investor 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 the Equity Line Investor under the
Equity Line if such put would result in that investor holding more than 9.9% of
the then outstanding common stock. These restrictions, however, do not prevent
the Equity Line Investor from selling shares of common stock received in
connection with a put, and then receiving additional shares of common stock in
connection with a subsequent put. In this way, the Equity Line Investor could
sell more than 9.9% of the outstanding common stock in a relatively short time
frame while never holding more than 9.9% at one time.
The trading market for our common stock is limited, and investors who purchase
shares from the Equity Line Investor may have difficulty selling their shares.
The public trading market for our common stock is limited. On July 15,
2002, our common stock was listed on the OTC Bulletin Board. Nevertheless, an
established public trading market for our common stock may never develop or, if
developed, it may not be able to be sustained. The OTCBB is an unorganized,
inter-dealer, over-the-counter market that provides significantly less liquidity
than other markets. Purchasers of our common stock therefore may have difficulty
selling their shares should they desire to do so.
The selling shareholders may sell common stock at any price or time, which could
result in a decrease in the market price of our common stock and a resulting
decrease in the value of shares held by existing shareholders.
Upon effectiveness of this registration statement, the Equity Line Investor
may offer and sell the shares of common stock received in connection with puts
under the Second Equity Line Agreement at a price and time determined by the
Equity Line Investor. The other Selling Shareholders similarly may sell the
shares they received in connection with the Second Equity Line Agreement at
prices and times determined by them. The timing of sales and the price at which
the shares are sold by the Selling Shareholders could have an adverse effect
upon the public market for our common stock. Although the Equity Line Investor
is a statutory underwriter, there is no independent or third-party underwriter
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involved in the offering of the shares held by or to be received by the Equity
Line Investor, and there can be no guarantee that the disposition of those
shares will be completed in a manner that is not disruptive to the market for
our common stock.
We may be unable to continue to make draws or put shares to the Equity Line
Investor if the trading volume in our stock is not sufficient to allow the
Equity Line Investor to sell the shares put to it.
Despite our contractual right to make draws on the equity line and sell
shares of our stock to the Equity Line Investor, we are also prohibited by the
Second Equity Line Agreement from drawing down on the Equity Line to the extent
any put would cause the Equity Line Investor to own in excess of 9.9% of our
then-outstanding common stock. Because the volume of trading in our stock has
been volatile, there can be no assurance that the Equity Line Investor will be
able to sell a sufficient number of shares put to it to allow us to take full
advantage of the draws.
For example, as of April 12, 2004, we had approximately 395,000,000 shares
of our common stock outstanding. Nine and nine-tenths percent of 395,000,000
shares is 39,105,000 shares. As of April 12, 2004, our average daily trading
volume was approximately 7,000,000 shares traded per day. A hypothetical draw of
$85,000, the maximum amount we are entitled to draw under the Second Equity Line
Agreement, as of April 12, 2004, would result in the issuance of approximately
1,465,500 shares of our common stock. It could take the Equity Line Investor
longer than the 7 trading days we are required to wait between puts to sell
1,465,500 shares.
If the Equity Line Investor is unable to sell all of the shares it receives
in connection with draws under the Equity Line, once the number of unsold shares
retained by the Equity Line Investor reaches 9.9% of the then-outstanding shares
of our common stock, we would be unable to make draws on the Equity Line until
the Equity Line Investor had sold additional shares into the market.
Alternatively, our waiting to make subsequent draws on the Equity Line until the
Equity Line Investor has sold all the shares it receives pursuant to puts will
result in a delay in our access to the capital available under the Second Equity
Line Agreement. These restrictions on our access to the capital available under
the Second Equity Line 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 the Equity Line Investor in this
offering.
As noted above, sales by the Equity Line Investor likely will result in
substantial dilution to the holdings and interest of current and new
shareholders. Additionally, as noted above, the volume of shares sold by the
Equity Line Investor could depress the market price of our stock. These factors
could make it more difficult for us to raise additional capital through
subsequent offerings of our common stock, which could have a material adverse
effect on our operations.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Securities in the OTC market are generally more difficult to trade than
those on the Nasdaq National Market, the Nasdaq SmallCap Market or the major
stock exchanges. In addition, accurate price quotations are also more difficult
to obtain. The trading market for our common stock is subject to special
regulations governing the sale of penny stock.
A "penny stock," is defined by regulations of the Securities and Exchange
Commission as an equity security with a market price of less than $5.00 per
share. However, an equity security with a market price under $5.00 will not be
considered a penny stock if it fits within any of the following exceptions:
o the equity security is listed on Nasdaq or a national securities
exchange;
o the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
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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
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of operating results.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the only ones
facing CirTran. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the foregoing risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline.
Use of Proceeds
All of the shares of common stock issued in connection with the Equity
Line, if and when sold, are being offered and sold by the Selling Shareholders
or their pledgees, donnees, transferees, or other successors in interest. We
will not receive any proceeds from those sales.
We intend to use the proceeds from our draws on the Equity Line for funding
the acquisition of raw materials needed for increased production, repayment of a
portion of our outstanding indebtedness, and general corporate purposes and
working capital.
Determination of Offering Price
The Selling Shareholders may sell our common stock at prices then
prevailing or related to the then current market price, or at negotiated prices.
The offering price may have no relationship to any established criteria or
value, such as book value or earnings per share. Additionally, because we have
not generated any profits for several years, the price of our common stock is
12
not based on past earnings, nor is the price of the shares of our common stock
indicative of current market value for the assets we own. No valuation or
appraisal has been prepared for our business or possible business expansion.
DESCRIPTION OF BUSINESS
We are a full-service contract electronics manufacturer servicing original
equipment manufactures ("OEMs") in the following industries: communications,
networking, peripherals, gaming, law enforcement, consumer products,
telecommunications, automotive, medical, and semi-conductor. We conduct our
operations through two main divisions: circuit board manufacturing and assembly,
and Ethernet card design and manufacture.
Industry Background
The contract electronics manufacturing industry specializes in providing
the program management, technical and administrative supports and manufacturing
expertise required to take an electronic product from the early design and
prototype stages through volume production and distribution. The goal is to
provide a quality product, delivered on time and at the lowest cost, to the OEM.
This full range of services gives an OEM the opportunity to avoid large capital
investments in plant, inventory, equipment, and staffing, and to concentrate
instead on innovation, design, and marketing. Customers using our contract
electronics manufacturing services, can improve the return on their investment,
with greater flexibility in responding to market demands and exploiting new
market opportunities.
We believe two important trends have developed in the contract electronics
manufacturing industry. First, OEMs increasingly require contract manufacturers
to provide complete turnkey manufacturing and material handling services, rather
than working on a consignment basis, where the OEM supplies all materials and
the contract manufacturer supplies only labor. Turnkey contracts involve design,
manufacturing, and engineering support, the procurement of all materials, and
sophisticated in-circuit and functional testing and distribution. The
manufacturing partnership between OEMs and contract manufacturers involves an
increased use of "just-in-time" inventory management techniques which minimize
an OEM's investment in component inventories, personnel, and related facilities,
thereby reducing costs.
A second trend in the industry has been the increasing shift from
pin-through-hole, or PTH, to surface mount technology, or SMT, interconnection
technologies. SMT and PTH printed circuit board assemblies are printed circuit
boards on which various electronic components, such as integrated circuits,
capacitors, microprocessors, and resistors are mounted. These assemblies are key
functional elements of many types of electronic products. PTH technology
involves the attachment of electronic components to printed circuit boards with
leads or pins that are inserted into pre-drilled holes in the boards. The pins
are then soldered to the electronic circuits. The drive for increasingly greater
functional density has resulted in the emergence of SMT, which eliminates the
need for holes and allows components to be placed on both sides of a printed
circuit. SMT requires expensive, highly automated assembly equipment and
significantly more operational expertise than PTH technology. We believe the
shift to SMT from PTH technology has increased the use of contract manufacturers
by OEMs seeking to avoid the significant capital investment required for
development and maintenance of SMT expertise.
Electronics Assembly and Manufacture
Approximately 85% of our revenues are generated by our electronics assembly
activities, which consist primarily of the placement and attachment of
electronic and mechanical components on printed circuit boards and flexible
(i.e., bendable) cables. We also assemble higher-level sub-systems and systems
incorporating printed circuit boards and complex electromechanical components
that convert electrical energy to mechanical energy, in some cases manufacturing
and packaging products for shipment directly to our customers' distributors. In
addition, we provide other manufacturing services, including refurbishment and
remanufacturing. We manufacture on a turnkey basis, directly procuring any of
the components necessary for production where the OEM customer does not supply
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all of the components that are required for assembly. We also provide design and
new product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more value-added
services, and price-sensitive, high-volume production. Our goal is to offer
customers significant competitive advantages that can be obtained from
manufacturing outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management and increased
purchasing power.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation ("Racore"), we
design, manufacture, and distribute Ethernet cards. These components are used to
connect computers through fiber optic networks. In addition, we produce private
label, custom designed networking products and technologies on an OEM basis. Our
products serve major industrial, financial, and telecommunications companies
worldwide. We market our products through an international network of
distributors, value added resellers, and systems integrators who sell, install,
and support our entire product catalogue.
Additionally, we have established, and continue to seek to establish, key
business alliances with major multinational companies in the computing and data
communications industries for which we produce private label, custom designed
networking products and technologies on an OEM basis. These alliances generally
require that Racore either develop custom products or adapt existing Racore
products to become part of the OEM customer's product line. Under a typical
contract, Racore provides a product with the customer's logo, packaging,
documentation, and custom software and drivers to allow the product to appear
unique and proprietary to the OEM customer. Contract terms generally provide for
a non-recurring engineering charge for the development and customization
charges, together with a contractual commitment for a specific quantity of
product over a given term.
In June 2001, Racore received a $225,000 order for specially designed
Ethernet cards for a federal law enforcement agency. In September 2001, Racore
submitted a bid for business with the same agency that, if accepted, would have
resulted in a contract valued at over $2.0 million over three years. This bid
was ultimately not accepted, but Racore remains committed to actively pursuing
government contracts for its Ethernet card technology. These contracts are
generally awarded in September of each year, the last month of the government's
fiscal year. In February of 2003, Racore received additional orders from GTSI
Corp., a leading business to government (B2G) provider of information technology
solutions to the Department of Defense and Federal, State and Local Governments
worldwide, for another government agency in the amount of $40,000. Racore is
continually pursuing contacts with additional government agencies. In August of
2003, Racore received an order from the United States Air Force for over
$13,000. Further, Racore expects to receive additional orders through 2003 and
into 2004.
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and
reliance upon, the use of manufacturing specialists by many electronics OEMs. We
believe the trend towards outsourcing manufacturing will continue. OEMs utilize
manufacturing specialists for many reasons including the following:
o To Reduce Time to Market. Due to intense competitive pressures in
the electronics industry, OEMs are faced with increasingly
shorter product life-cycles and, therefore, have a growing need
to reduce the time required to bring a product to market. We
believe OEMs can reduce their time to market by using a
manufacturing specialist's manufacturing expertise and
infrastructure.
o To Reduce Investment. The investment required for internal
manufacturing has increased significantly as electronic products
have become more technologically advanced and are shipped in
greater unit volumes. We believe use of manufacturing specialists
allows OEMs to gain access to advanced manufacturing capabilities
while substantially reducing their overall resource requirements.
14
o To Focus Resources. Because the electronics industry is
experiencing greater levels of competition and more rapid
technological change, many OEMs are focusing their resources on
activities and technologies which add the greatest value to their
operations. By offering comprehensive electronics assembly and
related manufacturing services, we believe manufacturing
specialists allow OEMs to focus on their own core competencies
such as product development and marketing.
o To Access Leading Manufacturing Technology. Electronic products
and electronics manufacturing technology have become increasingly
sophisticated and complex, making it difficult for OEMs to
maintain the necessary technological expertise to manufacture
products internally. We believe OEMs are motivated to work with a
manufacturing specialist to gain access to the specialist's
expertise in interconnect, test and process technologies.
o To Improve Inventory Management and Purchasing Power. Electronics
industry OEMs are faced with increasing difficulties in planning,
procuring and managing their inventories efficiently due to
frequent design changes, short product life-cycles, large
required investments in electronic components, component price
fluctuations and the need to achieve economies of scale in
materials procurement. OEMs can reduce production costs by using
a manufacturing specialist's volume procurement capabilities. In
addition, a manufacturing specialist's expertise in inventory
management can provide better control over inventory levels and
increase the OEM's return on assets.
An important element of our strategy is to establish partnerships with
major and emerging OEM leaders in diverse segments across the electronics
industry. Due to the costs inherent in supporting customer relationships, we
focus our efforts on customers with which the opportunity exists to develop
long-term business partnerships. Our goal is to provide our customers with total
manufacturing solutions for both new and more mature products, as well as across
product generations.
Another element of our strategy is to provide a complete range of
manufacturing management and value-added services, including materials
management, board design, concurrent engineering, assembly of complex printed
circuit boards and other electronic assemblies, test engineering, software
manufacturing, accessory packaging and post-manufacturing services. We believe
that as manufacturing technologies become more complex and as product life
cycles shorten, OEMs will increasingly contract for manufacturing on a turnkey
basis as they seek to reduce their time to market and capital asset and
inventory costs. We believe that the ability to manage and support large turnkey
projects is a critical success factor and a significant barrier to entry for the
market it serves. In addition, we believe that due to the difficulty and long
lead-time required to change manufacturers, turnkey projects generally increase
an OEM's dependence on its manufacturing specialist, which can result in a more
stable customer base.
Suppliers; Raw Materials
Our sources of components for our electronics assembly business are either
manufacturers or distributors of electronic components. These components include
passive components, such as resisters, capacitors and diodes, and active
components, such as integrated circuits and semi-conductors. Our suppliers
include Siemens, Muriata-Erie, Texas Instruments, Fairchild, Harris, and
Motorola. Distributors from whom we obtain materials include Avnet, Future
Electronics, Arrow Electronics, Digi-key, and Force Electronics. Although we
have experienced shortages of various components used in our assembly and
manufacturing processes, we typically hedge against such shortages by using a
variety of sources and, to the extent possible, by projecting our customer's
needs.
Research and Development
During 2003 and 2002, CirTran Corporation spent approximately $52,200 and
$43,272, respectively, on research and development of new products and services.
The costs of that research and development were paid for by our customers. In
addition, during the same periods, our subsidiary, Racore, spent approximately
15
$45,244 and $45,000, respectively. None of Racore's expenses were paid for by
its customers. We remain committed, particularly in the case of Racore, to
continuing to develop and enhance our product line as part of our overall
business strategy
Sales and Marketing
Historically, we have had substantial recurring sales from existing
customers, and continue to seek out new customers to generate increased sales.
We treat sales and marketing as an integrated process involving direct
salespersons and project managers, as well as senior executives. We also use
independent sales representatives in certain geographic areas.
During a typical sale process, a customer provides us with specifications
for the product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity, and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
In 2003, 96% of our net sales were derived from pre-existing customers,
whereas during the year ended December 31, 2002, over 94% of our net sales were
derived from customers that were also customers during 2001. Historically, a
small number of customers accounted for a significant portion of our net sales.
In 2003 our three largest customers accounted for approximately 60% of our total
sales compared to 2002 where our three largest customers accounted for
approximately 45% of our total sales. However in 2001 no single customer
accounted for more than 10% of our total sales.
During 2001 and 2002, we operated without a line of credit and many of our
vendors stopped credit sales of components used by us in the manufacturing of
products, thus hampering our ability to attract and retain turnkey customer
business. In addition, although our sales in 2002 were higher than 2001,
financial constraints experienced in 2001 and 2002 mandated a reduction in our
general work force, which experienced a 50% reduction in size. These factors, as
well as general economic conditions during the second half of 2002, resulted in
a significant decrease in sales during 2002. The year 2003 was devoted to
getting prepared for 2004 as is demonstrated by our back log. Although our sales
were down, we spent the last half of the year aggressively pursuing new
businesses, pricing new projects, and approaching new turnkey customers. Funds
became available from the equity line of credit as of June of 2003, we are in a
position to be able to service turnkey customers along with our consigned
customers.
Backlog consists of contracts or purchase orders with delivery dates
scheduled within the next twelve months. At December 31, 2003, our backlog was
approximately $809,000. At December 31, 2002, our backlog was approximately
$450,000. As of March 25, 2004, our backlog has increased to $1,107,000.
In September and October 2001, we issued several press releases relating
to:
- Our "partnership with an offshore Malaysian entity . . . expects
to commence bidding for multi-million dollar contracts through
this entity in the very near future" in our September 19, 2001
press release;
- InterMotive Products and the "two contracts for new products and
the vehicle orders that are "projected to blossom into a million
dollar contract manufacturing opportunity" for CirTran in our
October 10, 2001 press release; and
- The "implementation of . . . [new] software . . . bring CirTran
the potential for multi-million dollar revenue relationships" in
our October 16, 2001 press release.
We entered into the partnership with the Malaysian entity outlined in the
September 19, 2001, press release, to enable us to submit more competitive bids
for larger production contracts. The Company also implemented the software
16
referenced in the October 16, 2001, press release to enable us to bid more
competitively for larger contracts. Through December 31, 2002, in connection
with the relationship with the Malaysian entity, we bid on large-scale contracts
ranging from approximately $2 million to $4 million. Although we feel that our
relationship with the Malaysian entity will enable us to continue to bid
competitively for the larger contracts, to date we have been unsuccessful at
being selected as a supplier on any of the larger bids we submitted.
Nevertheless, management feels that the Company's continued involvement in
these relationships enables the Company to continue to bid competitively for
these larger bids.
In December 2002, CirTran and SVI, an independent electronic manufacturing
service company based in Thailand, announced a manufacturing accord. The two
companies will work together to support mutual customers from product design to
volume manufacturing. Under the agreement, both parties will work jointly as
each other's respective vendor and/or partner on pursuing business contracts in
the United States utilizing both parties' resources providing the contract
manufacturing of electronics.
With respect to the contracts with Intermotive, Inc. ("Intermotive"),
referenced in the October 10, 2001, press release, through December 31, 2002, we
had entered into purchase orders with Intermotive ranging from approximately
$4,607 to $34,077. The Company's relationship with Intermotive remains
productive, and management believes that this relationship should continue to
produce revenue for the Company, although there can be no guarantee that
Intermotive will continue to order from us or that any future orders will be
substantial.
In the last quarter of 2001 and into 2002, we also took steps to increase
our sales volume by adding three new sales representatives, hiring a sales
manager, implementing software to access databases containing potential new
customers and sales opportunities, and continuing our efforts to improve our
competitive position by installing additional surface-mount technology equipment
that had previously been at our Colorado location and by seeking ISO
(International Organization for Standardization) 9002 certification, which we
hope to obtain by the end of 2003. This certification would allow us to ensure
to prospective customers that we comply with internationally-recognized quality
production standards.
In February 2003, CirTran received Certification Approval under the Joint
Certification Program ("JCP") from the United States/Canada Joint Certification
Office, Defense Logistics Information Service. Certification under the JCP
establishes the eligibility of a U.S. or Canadian contractor to receive
technical data governed, in the U.S. by Department of Defense ("DoD") directive
5230.25 and, in Canada, by the Technical Data Control Regulations ("TDCR"). We
feel JCP benefits the U.S. and Canadian defense and high technology industries
by facilitating their continued access to unclassified technical data disclosing
critical technology in the possession of, or under the control of the U.S. DoD
or the Canadian Department of National Defense ("DND"). This is an important
recognition for CirTran and is consistent with our efforts to expand our revenue
opportunities. Our approved access to technologies in the U.S. DoD and the
Canadian DND will allow us to support the commercial activities of the broad
range of manufacturers working with both governments.
Material Contracts and Relationships
We generally use form agreements with standard industry terms as the basis
for our contracts with our customers. The form agreements typically specify the
general terms of our economic arrangement with the customer (number of units to
be manufactured, price per unit and delivery schedule) and contain additional
provisions that are generally accepted in the industry regarding payment terms,
risk of loss and other matters. We also use a form agreement with our
independent marketing representatives that features standard terms typically
found in such agreements.
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
17
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
Regulation
We are subject to typical federal, state, and local regulations and laws
governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee safety laws and
regulations, and labor practices laws and regulations. We are not required under
current laws and regulations to obtain or maintain any specialized or
agency-specific licenses, permits, or authorizations to conduct our
manufacturing services. Other than as discussed in "Legal Proceedings"
concerning delinquent payroll taxes, we believe we are in substantial compliance
with all relevant regulations applicable to our business and operations.
Employees
We employ 65 persons, 4 in administrative positions, 3 in engineering and
design, 56 in clerical and manufacturing, and 2 in sales.
Corporate Background
Our core business was commenced by Circuit Technology, Inc. ("Circuit"), in
1993 by our president, Iehab Hawatmeh. Circuit enjoyed increasing sales and
growth in the subsequent five years, going from $2.0 million in sales in 1994 to
$15.4 million in 1998, leading to the purchase of two additional SMT assembly
lines in 1998 and the acquisition of Racore Computer Products, Inc., in 1997.
During that period, Circuit hired additional management personnel to assist in
managing its growth, and Circuit executed plans to expand its operations by
acquiring a second manufacturing facility in Colorado. Circuit subsequently
determined in early 1999, however, that certain large contracts that accounted
for significant portions of our total revenues provided insufficient profit
margins to sustain the growth and resulting increased overhead. Furthermore,
internal accounting controls then in place failed to apprise management on a
timely basis of our deteriorating financial position. During the last several
years, we have experienced significant losses, including $4,179,654 in 2000,
$2,933,084 in 2001,$2,149,810 in 2002, and $2,984,178 in 2003.
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until July 1, 2000, when we issued a total of 10,000,000 shares
of our common stock (150,000,000 of our shares as presently constituted) to
acquire, through our wholly-owned subsidiary, CirTran Corporation (Utah),
substantially all of the assets and certain liabilities of Circuit.
In 1987, Vermillion Ventures, Inc. filed an S-18 registration statement
with the United States Securities and Exchange Commission ("SEC") but did not at
that time become a registrant under the Securities Exchange Act of 1934 ("1934
Act"). From 1989 until 2000, Vermillion did not make any filings with the SEC
under the 1934 Act. In July 2000, we commenced filing regular annual, quarterly,
and current reports with the SEC on Forms 10-KSB, 10-QSB, and 8-K, respectively,
and have made all filings required of a public company since that time. In
February 2001, we filed a Form 8-A with the SEC and became a registrant under
the 1934 Act. We may be subject to certain liabilities arising from the failure
of Vermillion to file reports with the SEC from 1989 to 1990, but we believe
these liabilities are minimal because there was no public market for the common
shares of Vermillion from 1989 until the third quarter of 1990 (when our shares
began to be traded on the Pink Sheets).
18
On August 6, 2001, we effected a 1:15 forward split and stock distribution
which increased the number of our issued and outstanding shares of common stock
from 10,420,067 to 156,301,005. We also increased our authorized capital from
500,000,000 to 750,000,000 shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
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
19
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
The Company typically orders inventory on a customer-by-customer basis. In doing
so the Company enters into binding agreements that the customer will purchase
any excess inventory after all orders are complete. Almost 80% of the total
inventory is secured by these agreements.
Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out more funds
than were in our accounts under existing lines of credit with those banks.
Subsequent to May 2000, when Abacas purchased our line of credit obligation, the
Company no longer had lines of credit with banks, and those loans were no longer
available or made to us. The Company acquired an equity line of credit effective
as of June of 2003.
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in "Liquidity
and Capital Resources - Liquidity and Financing Arrangements," and in "Certain
Relationships and Related Transactions."
Results of Operations - Comparison of Years Ended December 31, 2003 and 2002
Sales and Cost of Sales
Net sales decreased 47.2 % to $1,215,245 for the year ended December 31, 2003 as
compared to $2,299,668 for the year ended December 31, 2002. Due to a lack of
funds we could not pursue turnkey business. As a result our sales decreased
because we had to rely on pre-existing customers and more consigned business.
For CirTran Corporation, we had two pre-existing customers that have generated
approximately 51% of the sales for 2003.
Cost of sales for the year ended December 31, 2003 was $854,542, as compared to
$1,966,851 during the prior year. Those costs as a percentage of net sales were
70.3% during 2003 as compared to 85.5% during 2002. The improvement in the cost
of sales was attributed to the higher margin contracts the company completed and
additional consigned business, where the customer supplies all materials needed
and our costs are for direct labor only.
Additionally, improvement of inventory management and control has positively
affected our gross margins. We traditionally tracked inventory by customer
rather than by like-inventory item, and, as a result, we often purchased new
inventory to produce products for a new customer, when we likely had the
necessary inventory on hand under a different customer name. This prior practice
led to a reserve for obsolescence and excess inventory, which for the year 2003
was $700,207, as compared to $540,207 in 2002. However, because of the higher
margin sales, our cost of sales decreased. We have changed our method of
managing and controlling our inventory so that we can identify inventory by a
general part number, rather than a customer number, and we have instituted
monthly reviews to better update and control our inventory. We believe these
improvements have led to better inventory control and will contribute to
decreased cost of sales. If we are successful in decreasing our cost of sales
further, and if we are able to maintain and increase our levels of sales, we
believe we will be successful in generating sufficient gross profit to cover our
selling, general and administrative expenses.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our two main areas of operations, i.e., electronics assembly
and Ethernet technology, during 2002 and 2003; and (ii) comparisons during these
two years for each division between sales generated by pre-existing customers
and sales generated by new customers.
20
-------------------- ----------------- ---------------------- ----------------------- -------------------------
Year Sales Cost of Sales Gross Loss/Margin
-------------------- ----------------- ---------------------- ----------------------- -------------------------
Electronics 2003 1,050,090 929,800(1) 120,290
Assembly
-------------------- ----------------- ---------------------- ----------------------- -------------------------
2002 1,838,781 1,673,739 165,042
-------------------- ----------------- ---------------------- ----------------------- -------------------------
Ethernet 2003 165,155 84,742 80,413
Technology
-------------------- ----------------- ---------------------- ----------------------- -------------------------
2002 460,887 293,112 167,775
-------------------- ----------------- ---------------------- ----------------------- -------------------------
-------------------- ----------------- ---------------------- ----------------------- -------------------------
Year Total Pre-existing Customers New
Sales Customers
-------------------- ----------------- ---------------------- ----------------------- -------------------------
Electronics 2003 1,050,090 1,036,418 13,672
Assembly
-------------------- ----------------- ---------------------- ----------------------- -------------------------
2002 1,838,781 1,817,312 21,469
-------------------- ----------------- ---------------------- ----------------------- -------------------------
Ethernet 2003 165,155 127,040 38,115
Technology
-------------------- ----------------- ---------------------- ----------------------- -------------------------
2002 460,887 338,927 121,960
-------------------- ----------------- ---------------------- ----------------------- -------------------------
(1) Includes the writedown of carrying value of inventories of
$160,000
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
us to deliver products to customers in the quantities and time frame required.
This manufacturing technique requires us to maintain an inventory of component
parts to meet customer orders. Inventory at December 31, 2003 was $1,247,428, as
compared to $1,550,553 at December 31, 2002. The decrease is due to the increase
in the reserve of obsolete and slow moving inventory of $160,000 and increased
efforts to use inventory on hand.
Selling, General and Administrative Expenses
During the year ended December 31, 2003, selling, general and administrative
expenses were $2,586,868 versus $2,180,226 for 2002, a 18.7% increase. The
increase was due to an increase in the legal fees and financing fees for our
equity line of credit, along with our efforts to aggressively market our
products during a period of economic downturn.
Other Income and Expense
Interest expense for 2003 was $460,344 as compared to $437,074 for 2002, an
increase of 5.3%. This increase is primarily attributable to an increase in
interest for the accrued liabilities and in delinquent payroll tax liabilities,
the penalties on which were previously recorded as part of interest expense. As
of December 31, 2003 and 2002, the amount of our liability for delinquent state
and federal payroll taxes and estimated penalties and interest thereon was
$2,107,930 and $2,029,626, respectively.
As of December 31, 2002 there was a gain on the settlement of the sub-lease in
Colorado Springs of $152,500, which was the majority of the other income of
$159,673 for the year ending December 31, 2002.
As a result of the above factors, our overall net loss increased 38.8% to
$2,984,178 for the year ended December 31, 2003, as compared to $2,149,810 for
the year ended December 31, 2002.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
21
losses and our accumulated deficit was $18,214,480 at December 31, 2003 and was
$15,230,302 at December 31, 2002. Our net loss for the year ending December 31,
2003 was $2,984,178, compared to $2,149,810 for the year ending December 31,
2002. Our current liabilities exceeded our current assets by $5,529,244 as of
December 31, 2003 and $4,490,623 as of December 31, 2002. The increase in the
difference is mostly attributed to an increase in accrued liabilities. For the
years ended December 31, 2003 and 2002, we recorded negative cash flows from
operations of $1,123,818 and $1,142,148, respectively.
Cash
We had cash on hand of $54,135 at December 31, 2003 compared to $500 at December
31, 2002. The increase in cash on hand is due to a new cash management system
that was established during 2003.
Net cash used in operating activities was $1,123,818 for the fiscal year ended
December 31, 2003. During 2003, net cash used in operations was primarily
attributable to $2,984,978 in net losses from operations, partially offset by
increases in accrued liabilities of $901,718 and in decreases to inventories of
$143,125. The non-cash charge was for depreciation and amortization of $300,520.
Net cash used in investing activities during the fiscal year ended December 31,
2003, consisted of equipment purchases of $12,225.
Net cash provided by financing activities was $1,189,678 during the fiscal year
ended December 31, 2003. Principal sources of cash were proceeds from
stockholder notes payable of $41,500, proceeds of $1,605,847 from long-term
notes payable, proceeds from the exercise of options to purchase common stock of
$301,500 and proceeds from notes payable to related parties of $350,000.
Principal uses of cash during 2003 consisted of $1,099,786 principal payments of
notes payable and notes payable to related parties and stockholders and a
decrease to checks written in excess of cash in the bank of $9,908.
Accounts Receivable
At December 31, 2003, we had receivables of $89,187, net of a reserve for
doubtful accounts of $28,876, as compared to $37,464 at December 31, 2002, net
of a reserve of $37,037. The smaller reserve for doubtful accounts in 2003 is
attributable to increased efforts to improve the aging and quality of our
current receivables.
Accounts Payable
Accounts payable were $1,300,597 at December 31, 2003 as compared to $1,359,723
at December 31, 2002. This decrease is a very nominal amount.
Liquidity and Financing Arrangements
We sustained substantial losses from operations in 2003 and 2002. We had an
accumulated deficit of $18,214,480 and a total stockholders' deficit of
$4,941,251 at December 31, 2003. In addition, during 2003 and 2002, we have
used, rather than provided, cash in our operations. As of December 31, 2003, our
monthly operating costs and interest expenses averaged approximately $265,000
per month.
Since February 2000, we have operated without a line of credit. Abacas Ventures,
Inc., an entity whose shareholders include the Saliba Private Annuity Trust, one
of our major shareholders (see "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
22
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 "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 "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.
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 line of credit. It is unlikely that we will be able, in
our current financial condition, to obtain additional debt financing; and if we
did acquire more debt, we would have to devote additional cash flow to pay the
debt and secure the debt with assets. We may therefore have to rely on equity
financing to meet our anticipated capital needs. There can be no assurances that
we will be successful in obtaining such capital. If we issue additional shares
for debt and/or equity, this will serve to dilute the value of our common stock
and existing shareholders' positions.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock was obtained in July 2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short- or the long-term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
In conjunction with our efforts to improve our results of operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with Cornell Capital Partners, LP, a private
investor ("Cornell"). We subsequently terminated the Equity Line Agreement, and
on April 8, 2003, we entered into an amended equity line agreement (the "Amended
Equity Line Agreement") with Cornell. Under the Amended Equity Line Agreement,
we have the right to draw up to $5,000,000 from Cornell against an equity line
of credit (the "Equity Line"), and to put to Cornell shares of our common stock
in lieu of repayment of the draw. The number of shares to be issued is
determined by dividing the amount of the draw by the lowest closing bid price of
23
our common stock over the five trading days after the advance notice is
tendered. Cornell is required under the Amended Equity Line Agreement to tender
the funds requested by us within two trading days after the five-trading-day
period used to determine the market price. Through April 12, 2004 we had
received advances of $3,330,000 in the form of notes payable to Cornell. Of the
$3,330,000, $3,000,100 was for cash and $329,900 was for fees. Through April 12,
2004, we issued 98,060,366 shares of common stock to Cornell for payment of
$2,080,000 in notes payable less deferred offering costs of $44,228.
Our issuances of shares of our common stock pursuant to the Amended Equity Line
Agreement will serve to dilute the value of our common stock and existing
shareholders' positions.
Forward-looking statements
All statements made in this prospectus, other than statements of historical
fact, which address activities, actions, goals, prospects, or new developments
that we expect or anticipate will or may occur in the future, including such
things as expansion and growth of operations and other such matters are
forward-looking statements. Any one or a combination of factors could materially
affect our operations and financial condition. These factors include competitive
pressures, success or failure of marketing programs, changes in pricing and
availability of parts inventory, creditor actions, and conditions in the capital
markets. Forward-looking statements made by us are based on knowledge of our
business and the environment in which we currently operate. Because of the
factors listed above, as well as other factors beyond our control, actual
results may differ from those in the forward-looking statements.
Selling shareholders
Three of our investors are the Selling Shareholders in connection with this
prospectus and the registration statement of which it is a part. None of the
Selling Shareholders is affiliated in any way with CirTran or any of our
affiliates other than in connection with the Second Equity Line Agreement, and
neither the Selling Shareholders nor any of their affiliates have any
relationship of any type with us and our affiliates other than the presently
established Second Equity Line Agreement relationships between the Selling
Shareholders, on the one hand, and CirTran, on the other hand. This prospectus,
and the registration statement of which it is a part, cover the shares to be
issued to the Selling Shareholders in connection with the Second Equity Line
Agreement.
The following table provides information about the actual and potential
ownership of shares of our common stock by the Selling Shareholders in
connection with the Equity Line as of April 12, 2004, and the number of our
shares registered for sale in this prospectus. The number of shares of common
stock issuable to the Equity Line Investor under the Second Equity Line
Agreement varies according to the market price at and immediately preceding the
put date. Solely for purposes of estimating the number of shares of common stock
that would be issuable to the Equity Line Investor as set forth in the table
below, we have assumed a hypothetical put by us on April 12, 2004, of the full
remaining amount of $2,920,0000 under the Equity Line at a per share price of
approximately $0.06. The actual per share price and the number of shares
issuable upon actual puts by us could differ substantially. This prospectus and
the registration statement of which it is a part covers the resale of up to
252,562,500 shares of our common stock, of which 250,000,000 are registered in
connection with shares issued to the Equity Line Investor in lieu of repayment
of draws on the Second Equity Line.
Under the terms and conditions of the Second Equity Line Agreement, the
Equity Line Investor is prohibited from having shares put to it under the Equity
Line to the extent such put by us would result in that person beneficially
owning more than 9.9% of the then outstanding shares of our common stock
following such put. This restriction does not prevent the Equity Line Investor
from receiving and selling put shares and thereafter receiving additional put
shares. In this way, the Equity Line Investor could sell more than 9.9% of our
outstanding common stock in a relatively short time frame while never
beneficially owning more than 9.9% of the outstanding CirTran common stock at
any one time. For purposes of calculating the number of shares of common stock
issuable to the Equity Line Investor assuming a put of the full amount under the
24
Equity Line, as set forth below, the effect of such 9.9% limitation has been
disregarded. The number of shares issuable to the Equity Line Investor as
described in the table below therefore may exceed the actual number of shares
such Selling Shareholder may be entitled to beneficially own under the Equity
Line. The following information is not determinative of the Selling
Shareholder's beneficial ownership of our common stock pursuant to Rule 13d-3 or
any other provision under the Securities Exchange Act of 1934, as amended.
------------------------ --------------- ---------------- ------------------ --------------- -------------- -----------------
Shares of Percentage of
Shares of Common Stock Common Stock
Common Stock Issuable to Issuable to
Owned by Selling Selling
Selling Shareholder In Shareholder In Number of Number of Percentage of
Share-holder Connection Connection Shares of Shares of Common Stock
Name of Selling Prior to with Equity with Equity Common Stock Common Stock Beneficially
Shareholder Offering Line Line Registered Owned After Owned After the
Transaction Transaction(1) Hereunder (2) Offering Offering
------------------------ --------------- ---------------- ------------------ --------------- -------------- -----------------
Cornell Capital 2,375,0000 158,835,366 (3) 35.02% 252,375,000 0 (4) 0% (4)
Partners, LP
------------------------ --------------- ---------------- ------------------ --------------- -------------- -----------------
Butler Gonzalez, LLP 62,500 (5) 0 0.02% 62,500 0 (6) 0% (6)
------------------------ --------------- ---------------- ------------------ --------------- -------------- -----------------
Westrock Advisors, Inc. 125,000 (7) 0 0.03% 125,000 0 (6) 0% (6)
------------------------ --------------- ---------------- ------------------ --------------- -------------- -----------------
_____________________
(1) As noted above, the Selling Shareholder is prohibited by the terms of
the Second Equity Line Agreement from having shares put to it under the Second
Equity Line to the extent that such put of shares by us would result in that
person beneficially owning more than 9.9% of the then outstanding shares of our
common stock following such put. The percentages set forth are not determinative
of the Selling Shareholder's beneficial ownership of our common stock pursuant
to Rule 13d-3 or any other provision under the Securities Exchange Act of 1934,
as amended.
(2) The registration statement of which this prospectus is a part covers up
to 250,000,000 shares of common stock issuable under the Second Equity Line.
Because the specific circumstances of the issuances under the Second Equity Line
are unascertainable at this time, the precise total number of shares of our
common stock offered by the Selling Shareholder cannot be fixed at this time,
but cannot exceed 250,000,000 unless we file additional registration statements
registering the resale of the additional shares. The amount set forth below
represents the number of shares of our common stock that have been issued and
that would be issuable, and hence offered in part hereby, assuming a put of the
full remaining amount under the Second Equity Line as of April 12, 2004. The
actual number of shares of our common stock offered hereby may differ according
to the actual number of shares issued upon such conversions.
(3) Includes:
98,060,366 shares of common stock issued to the Equity Line Investor in
connection with draws on the Second Equity Line through
April 12, 2004.
58,400,000 shares of common stock issuable upon a hypothetical put of
the full remaining $2,920,000 available under the Equity
Line as of April 12, 2004. This prospectus registers only up
to 250,000,000 shares of common stock issuable under the
Equity Line. Accordingly, we may not issue shares in excess
of 250,000,000 unless we file additional registration
statements registering the resale of the additional shares.
2,375,000 additional shares issued to the Equity Line Investor as
further consideration for entering into the Second Equity
Line Agreement.
(4) Assumes a hypothetical draw of the full remaining $2,920,000 available
25
under the Equity Line as of April 12, 2004, and the issuance of 58,400,000
shares of our common stock, together with the sale by the Equity Line Investor
of the 98,060,366 shares and the full 2,375,000 additional shares issued in
connection with the Second Equity Line Agreement. There is no assurance that the
Equity Line Investor will sell any or all of the shares offered hereby. However,
the Equity Line Investor is contractually prohibited from holding shares, and we
are contractually prohibited from putting shares to the Equity Line Investor
that would cause it to hold shares, in excess of 9.9% of the then-issued and
shares of our common stock. This number and percentage may change based on the
Equity Line Investor's decision to sell or hold the Shares.
(5) Consisting of 62,500 shares issued to Butler Gonzalez, LLP, in
connection with legal services rendered in connection with the Second Equity
Line Agreement transaction.
(6) There is no assurance that the Selling Shareholders will sell any or
all of the shares offered hereby. If the Selling Shareholders sell all of the
shares issued to them in connection with the Second Equity Line, the number of
shares held following such sales would be 0 and the percentage of ownership
would be 0%.
(7) Consisting of 125,000 shares issued to Westrock Advisors, Inc., as
payment for its services as placement agent.
The following table lists the natural person who has or shares voting or
investment control of each of the Selling Shareholders:
Selling Stockholder Name of Natural Person(s)
Cornell Capital Partners LP Mark Angelo*
Butler Gonzalez, LLP Thomas Butler and David Gonzalez
Westrock Advisors, Inc. Greg Martino
* Mark Angelo is the President of Yorkville Advisors, which is the general
partner of Cornell, and exercises voting and investment control over Yorkville
Advisors, which exercises voting and investment control over Cornell.
Plan of Distribution
Once the registration statement of which this prospectus is part becomes
effective with the Commission, the Shares covered by this prospectus may be
offered and sold from time to time by the Selling Shareholders or their
pledgees, donees, transferees or successors in interest. Such sales may be made
on the OTC Bulletin Board, in the over-the-counter market or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The Shares may be sold by any means
permitted under law, including one or more of the following:
o a block trade in which a broker-dealer engaged by a Selling
Shareholder will attempt to sell the Shares as agent, but may
position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus;
o an over-the-counter distribution in accordance with the rules of
the OTC Bulletin Board;
o ordinary brokerage transactions in which the broker solicits
purchasers; and
o privately negotiated transactions.
In effecting sales, broker-dealers engaged by the Selling Shareholders may
arrange for other broker-dealers to participate in the resales.
26
In connection with distributions of the Shares or otherwise, a Selling
Shareholder may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares covered by this prospectus in the course of hedging the positions
they assume with the Selling Shareholder. A Selling Shareholder may also sell
the Shares short and redeliver the Shares to close out such short positions. A
Selling Shareholder may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares,
which the broker-dealer may resell or otherwise transfer under this prospectus.
A Selling Shareholder may also loan or pledge the Shares registered hereunder to
a broker-dealer and the broker-dealer may sell the shares so loaned or upon a
default the broker-dealer may effect sales of the pledged shares pursuant to
this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Shareholder in amounts to
be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers are deemed to be "underwriters" within the meaning
of the Securities Act, in connection with such sales and any such commission,
discount or concession may be deemed to be underwriting discounts or commissions
under the Securities Act. The Selling Shareholder is an underwriter with respect
to its resales of the Shares.
We have advised the Selling Shareholders that the anti-manipulation rules
under the Securities Exchange Act of 1934 may apply to sales of shares in the
market and to the activities of the Selling Shareholders and their affiliates.
In addition, we will make copies of this prospectus available to the Selling
Shareholders and have informed them of the need for delivery of copies of this
prospectus to purchasers at or prior to the time of any sale of the Shares
offered hereby.
All costs, expenses and fees in connection with the registration of the
Shares will be borne by us. Commissions and discounts, if any, attributable to
the sales of the Shares will be borne by the appropriate Selling Shareholder. A
Selling Shareholder may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the Shares against certain
liabilities, including liabilities arising under the Securities Act of 1933. We
will not receive any proceeds from the sale of the Shares.
We have agreed with the Selling Shareholders to keep the registration
statement of which this prospectus constitutes a part effective for a period of
2 years from the date of the last advance under the Second Equity Line
Agreement. Trading of any unsold shares after the expiration of such period will
be subject to compliance with all applicable securities laws, including Rule
144.
The Selling Shareholders are not obligated to sell any or all of the Shares
covered by this prospectus.
In order to comply with the securities laws of certain states, the Shares
will be sold in such jurisdictions only through registered or licensed brokers
or dealers. In addition, the sale and issuance of Shares may be subject to the
notice filing requirements of certain states.
Regulation M
We have informed the Selling Shareholders that Regulation M promulgated
under the Securities Exchange Act of 1934 may be applicable to them with respect
to any purchase or sale of our common stock. In general, Rule 102 under
Regulation M prohibits any person connected with a distribution of our common
stock from directly or indirectly bidding for, or purchasing for any account in
which it has a beneficial interest, any of the Shares or any right to purchase
the Shares, for a period of one business day before and after completion of its
participation in the distribution.
During any distribution period, Regulation M prohibits the Selling
Shareholders and any other persons engaged in the distribution from engaging in
any stabilizing bid or purchasing our common stock except for the purpose of
preventing or retarding a decline in the open market price of the common stock.
27
None of these persons may effect any stabilizing transaction to facilitate any
offering at the market. As the Selling Shareholders will be offering and selling
our common stock at the market, Regulation M will prohibit them from effecting
any stabilizing transaction in contravention of Regulation M with respect to the
Shares.
Legal Proceedings
As of December 31, 2003, the Company had accrued liabilities in the amount
of $2,107,930 for delinquent payroll taxes, including interest estimated at
$393,311 and penalties estimated at $230,927. Of this amount, approximately
$329,739 was due the State of Utah. During the first quarter of 2003, no
payments were made to the State of Utah. During the third and fourth quarter of
2003, partial payments were made to the State of Utah. Approximately $1,767,253
was owed to the Internal Revenue Service as of December 31, 2003. As discussed
below, the Company has reached an agreement with the Internal Revenue Service's
Appeals Office to allow the Company to file an offer in compromise to resolve
the Company's tax liability on a compromise basis. Further, the Utah State Tax
Commission has entered into an agreement to allow the Company to pay the
liability owing to the State of Utah in equal monthly installments over an
extended period of time, yet to be determined.
Approximately $10,939 was owed to the State of Colorado as of December 31,
2003.
We (as successor to Circuit Technology, Inc.) were a defendant in an action
in El Paso County, Colorado District Court, brought by Sunborne XII, LLC, a
Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Our liability in this action was
originally estimated to range up to $2.5 million, and we subsequently filed a
counter suit in the same court against Sunborne in an amount exceeding $500,000
for missing equipment. Effective January 18, 2002, we entered into a settlement
agreement with Sunborne with respect to the above-described litigation. The
settlement agreement required us to pay Sunborne the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the agreement, and the balance of
$225,000, together with interest at 8% per annum, was payable by July 18, 2002.
As security for payment of the balance, we executed and delivered to Sunborne a
Confession of Judgment and also issued to Sunborne 3,000,000 shares of our
common stock, which are held in escrow and have been treated as treasury stock
recorded at no cost. Because, 75% of the balance owing under the agreement was
not paid by May 18, 2002, we were required to prepare and file with the
Securities & Exchange Commission, at our expense, a registration statement with
respect to the shares that were escrowed. The payment was not made, nor was a
registration statement filed with respect to the escrowed shares.
Pursuant to a Termination of Sublease Agreement dated as of May 22, 2002
among the Company, Sunborne and other parties, the sublease agreement that was
the subject of our litigation with Sunborne was terminated and a payment of
approximately $109,000 was credited against the amount owed by the Company to
Sunborne under the Company's settlement agreement with them. Sunborne has filed
a claim that this amount was to be an additional rent expense rather than a
payment on the note payable. The Company disputes this claim and intends to
vigorously defend the action.
As of May 16, 2003, the Company was in default of its obligations under the
settlement agreement with Sunborne, i.e., the total payment due thereunder had
not been made, a registration statement with respect to the escrowed shares was
not filed, and the Company did not replace the escrowed shares with registered,
free-trading shares as per the terms of the agreement. Accordingly, Sunborne
filed a foreign judgment in Salt Lake City and proceeded with execution thereon.
The Company is continuing to negotiate with Sunborne in an attempt to settle the
remaining obligation.
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.
28
Advanced Component Labs adv. Circuit Technology Corporation Civil No.
990912318, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against the Company on or about December
8, 1999, under allegations that the Company owed $44,269.43 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Claims are asserted for breach of implied contract and unjust enrichment. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Initial discovery is beginning. No
trial date has been set.
Arrow Electronics adv. Circuit Technology Corporation, Civil No. 010406732,
Third Judicial District Court, Sandy Department, Salt Lake County, State of
Utah. Suit was brought against the Company on or about June 28, 2001, under
allegations that the Company owes $41,486.26. Judgment was entered against the
Company on January 7, 2002. Subsequent to year end, this claim was purchased by
Abacas and recorded as an increase to the amount owed to Abacas under terms of
the bridge loan.
Contact East has notified the Company that it believes it has a claim
against the Company in the amount of $32,129.89 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
C/S Utilities has notified the Company that it believes it has a claim
against the Company in the amount of $32,472 regarding utilities services. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
Future Electronics Corp v. Circuit Technology Corporation, Civil No.
000900296, Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about January 12, 2000, under allegations
that the Company owed $646,283.96 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims were asserted for breach
of contract, fraud, negligent misrepresentation, unjust enrichment, account
stated and dishonored instruments. The Company answered the complaint, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Partial Summary Judgment was entered in the amount of $646,783.96
as to certain claims against the Company. Negotiations for settlement resulted
in an agreement for settlement of all claims of Future against the Company
subject to performance by the Company under the agreement. The Company also
issued to Future 352,070 shares of its restricted common stock. The Company did
not perform its obligations under the settlement agreement, and a Confession of
Judgment was entered in January 2002 in the amount of $519,052.00. The Company
disputes the amount of the judgment entered. No collection efforts have been
made. The Company is negotiating settlement.
Christine Hindenes v. Racore Network, Inc., and CirTran Corporation,
Superior Court of California, County of Santa Clara, Civil No. CV811051. Ms.
Hindenes brought suit against the Company and Racore for unpaid wages seeking
$40,516.44. The parties reached a settlement agreement under which the Company
agreed to pay $10,000 in monthly installments of $1,000. The parties also agreed
to a confession of judgment in the amount of $52,961, less payments made, which
could be entered if the Company defaulted under its obligations under the
settlement agreement. The Company has made the required payments through March,
2004.
John J. La Porta v. Circuit Technology, Inc. et al., Case No. 010900785,
Third Judicial District Court, Salt Lake Department, Salt Lake County, State of
Utah. Mr. La Porta filed suit on or about January 23, 2001, seeking to recover
the principal sum of $135,941 plus interest on a promissory note given by Racore
Technology Corp. Mr. La Porta claims that the Company is a guarantor of the
promissory note and the Company should be held liable because of Racore's
default on the note. The Company denies liability and will defend the suit. The
parties have engaged in settlement negotiations.
Molex has notified the Company that it believes it has a claim against the
Company in the amount of $90,000.00 for the cost of goods or services provided
to the Company for the Company's use and benefit. The Company is reviewing its
records in an effort to confirm the validity of the claims and has been involved
in settlement negotiations.
29
Signal Transformer Co., Inc., has notified the Company that it believes it
has a claim against the Company in the amount of $38,989 for the cost of goods
or services provided to the Company for the Company's use and benefit.
Negotiations for settlement of this claim have resulted in an agreement in
principal whereby the Company will arrange for a cash payment to this creditor.
The parties are presently negotiating the terms of the settlement documents.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditor's claims will be settled nor that the terms will
be favorable to the Company.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No.
00L14505, Circuit Court of Cook County Department, Law Division, State of
Illinois. Suit was brought against the Company on or about December 23, 1999,
under allegations that the Company owed $213,717.70 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for breach of contract, unjust enrichment and account stated. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Judgment was subsequently entered
against the Company on May 29, 2002. The parties are presently negotiating the
terms of settlement documents, pursuant to which the Company will facilitate a
payment to this creditor a cash payment and issue a promissory note and shares
of its restricted common stock in satisfaction of the creditors' claims.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditors claims will be settled nor that the terms will
be favorable to the Company.
University of Utah v. CirTran Corporation, Third District Court, Salt Lake
County, Civil No. 020900494 . The University of Utah filed a claim against the
Company on January 18, 2002, seeking $37,473.10 in damages. Summary judgment was
entered against the Company. The Company entered into a settlement agreement on
September 16, 2003, under which the Company is required to make monthly payments
of $5,185.47. The total settlement amount under the agreement is $62,225.64. The
Company is making payments pursuant to the settlement agreement.
Volt Temporary Services has notified the Company that it believes it has a
claim against the Company in the amount of $30,986 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
Wells Fargo Equipment Finance adv. Circuit Technology Corporation, Civil
No. 901207 Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about February 10, 2000, under allegations
that the Company owed $439,493.56 for a loan provided to the Company for the
Company's use and benefit. Claims are asserted for breach of contract, breach of
guarantee and replevin. The Company has answered, admitting that it owed certain
sums for conforming goods and services and denying all other claims. Initial
discovery is beginning. Judgment has been entered against the Company and
certain guarantors in the amount of $427,291.69 plus interest at the rate of
8.61% per annum from June 27, 2000. The parties reached a settlement agreement
under which the Company agreed to pay approximately $12,000 per month beginning
in January 2003 to resolve this claim. The parties are presently negotiating a
settlement to supercede their prior agreements because the Company did not
perform all its obligations under the prior agreements.
Zion's First National Bank has notified the Company that it believes it has
a claim against the Company in the amount of $240,000.00 for loans made to the
Company for the Company's use and benefit. The Company has entered into a Fifth
Forbearance and Loan Modification Agreement, requiring monthly payments of
$20,000.00. The Company subsequently renegotiated a settlement with Zions Bank
under which the Company will pay approximately $12,000 per month beginning in
January 2003.
George M. Madanat, Civil No. KC 035616, Superior Court of the State of
California for the County of Los Angeles, East District. Suit was brought
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
30
under the settlement agreement, and judgment was entered against the Company. As
of March 24, 2004, the Company is not aware of any collection efforts.
Internal Revenue Service. The Internal Revenue Service has notified the
Company that the Company owes approximately $1.7 million in payroll taxes. The
Company, in response to collection notices, filed a due process appeal with the
Internal Revenue Service's Appeals Office. The appeal was resolved by an
agreement with the Appeals Office that allowed the Company to file an offer in
compromise of all federal tax liabilities owed by the Company based on its
ability to pay. The Company filed its offer in compromise with the IRS, which
has gone through the initial stages of consideration by the IRS and will now be
assigned to an IRS offer specialist for consideration.
Cardio Pulmonary Technologies, Inc., vs. Patrick M. Volz, Peripheral
Systems, Inc., and CirTran Corporation, Civil No. 03090501B, Third Judicial
District Court, Salt Lake County, State of Utah. On April 4, 2003, suit was
brought against the Company and two other named defendants by plaintiff Cardio
Pulmonary Technologies ("CPT"), alleging a breach of contract between CPT and
the other two named defendants. Plaintiff's claims against the Company arise out
of an alleged breach of an alleged agreement between the Company and Peripheral
Systems, Inc. The Company has answered the Complaint, and intends to defend
vigorously against these claims. The parties are also attempting to negotiate
settlement.
Howard Salamon, dba Salamon Brothers vs. CirTran Corporation, Civil No.
2:03-00787, U.S. District Court, District of Utah. Howard Salamon originally
filed suit against the Company in the U.S. District Court, Eastern District of
New York, seeking finders fees, consisting of shares of the Company's common
stock valued at $350,000, allegedly owed in connection with Salamon's
introducing the Company to Cornell Capital Partners, L.P., the Equity Line
Investor. The Company disputes the claims in the complaint. The case was
dismissed in New York and refiled in Utah. The Company has filed its answer in
the Utah case and the lawsuit is proceeding. The Company is also currently
conducting settlement negotiations.
P R Newswire Association, Inc., v. CirTran, Superior Court of New Jersey,
DC-000359-04. On March 9, 2004, a judgment was entered against CirTran in the
amount of $5,106.28, with fees of $171.13. The Parties are presently negotiating
settlement of this matter.
KPP Family Limited Partnership v. Circuit Technology, Inc., Case No.
040907278, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against Circuit Technology alleging that
Circuit had stopped paying amounts due under a note entered into in June 1998.
The suit seeks $90,500 plus fees and costs. The Summons and Complaint were
served April 14, 2004. As of April 12, 2004, Circuit Technology had not filed
its answer, and was reviewing its records regarding the allegations.
Directors, Executive Officers, Promoters and Control Persons
Directors and Officers
The following sets forth the names, ages and positions of our directors and
officers and the officers of our operating subsidiary, CirTran Corporation
(Utah), along with their dates of service in such capacities.
Name Age Positions
Iehab J. Hawatmeh 37 President, Chief Financial Officer, Secretary
and Director of CirTran Corporation; President of CirTran Corporation (Utah). Served
since July 2000.
Raed Hawatmeh 38 Director since June 2001.
Trevor Saliba 29 Director since June 2001. Senior Vice-President, Sales and Marketing
Served since January 2002.
31
Iehab J. Hawatmeh, MBA
Chairman, President & CEO
Mr. Hawatmeh founded CirTran Corporation in 1993 and has been its Chairman,
President and CEO since its inception. Mr. Hawatmeh oversees all daily operation
including financial, technical, operational and sales functions for the company.
Under Mr. Hawatmeh's direction, the company has seen its annual sales exceed $20
million, its employment exceed 360 and completed two strategic acquisitions.
Prior to forming the company, Mr. Hawatmeh was the Processing Engineering
Manager for Tandy Corporation overseeing the company's entire contract
manufacturing printed circuit board assembly division. In addition, Mr. Hawatmeh
was responsible for developing and implementing Tandy's facility Quality Control
and Processing Plan model which is used by CirTran today. Mr. Hawatmeh received
his Master's of Business Administration from University of Phoenix and his
Bachelor's of Science in Electrical and Computer Engineering from Brigham Young
University
Shaher J. Hawatmeh, MBA
Vice President of Operations,
Operations
Mr. Hawatmeh joined the company in 1993 as its Controller shortly after it's
founding. Today, Mr. Hawatmeh directly oversees all daily manufacturing
production, customer service, budgeting and forecasting for the company.
Following the company's acquisition of Pro Cable Manufacturing in 1996, Mr.
Hawatmeh directly managed the entire company, supervising all operations for
approximately two years and successfully oversaw the integration of this new
division into the company. Prior to joining CirTran, Mr. Hawatmeh worked for the
Utah State Tax Commission. Mr. Hawatmeh earned his Master's of Business
Administration with an emphasis in Finance from the University of Phoenix and
his Bachelor's of Science in Business Administration and a Minor in Accounting.
Trevor M. Saliba, MS
Senior Vice President,
Worldwide Business Development
Mr. Saliba is responsible for sales and marketing activities worldwide and is
responsible for overseeing all worldwide business development strategies for the
company. Mr. Saliba was elected to the Board of Directors in 2001. From 1997 -
2001 he was President and CEO of Saliba Corp., a privately held contracting firm
he founded. From 1995-1997 he was an Associate with Morgan Stanley. From 1992 -
1995 he was Vice President of Sales and Marketing for SNJ Industries. Mr. Saliba
holds a Bachelors Degree in Business Administration and a Masters Degree in
Finance from La Salle University and has completed an Advanced Graduate Program
in Engineering and Management at the University of California, Berkeley.
James Snow
Vice President,
Product Development
President - Racore Technology Corporation
Mr. Snow is the Vice President of Product Development for CirTran Corporation
and also President of Racore Technology Corp., a wholly owned subsidiary of the
company. Mr. Snow directly oversees the design, planning and management of
Racore's proprietary Local Area Network (LAN) products and provides network
consulting services to clients. Mr. Snow held the position of Director of
Forward Planning and Project Engineering for Phillips Telecommunications and
Data Systems (a Division of N.V. Phillips) from 1982 - 1992. In addition he was
a Principle Engineer for Digital Equipment Corp. from 1992 - 1994. Mr. Snow
holds a Bachelor's degree in Electrical Engineering from Brigham Young
University and Business Management from Brookhaven College.
32
In June 2002 Mr. Saliba filed for personal bankruptcy in the U.S.
Bankruptcy Court in Los Angeles, California, which has not yet been discharged.
The bankruptcy was unrelated to Mr. Saliba's involvement in CirTran.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
Commission's Position on Indemnification for Securities Act Liabilities
Our Bylaws provide, among other things, that our officers or directors are
not personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of the 395,187,052
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of April 12, 2004, by (i) each
person who is currently a director, (ii) each executive officer, (iii) all
current directors and executive officers as a group and (iv) each person who, to
our knowledge, is the beneficial owner of more than 5% of our outstanding common
stock. None of the individuals listed below own any options or warrants to
purchase our common stock.
Except as otherwise indicated, the persons named in the table have sole
voting and dispositive power with respect to all shares beneficially owned,
subject to community property laws where applicable. Beneficial ownership is
determined according to the rules of the Securities and Exchange Commission, and
generally means that person has beneficial ownership of a security if he or she
possesses sole or shared voting or investment power over that security. Each
director, officer, or 5% or more shareholder, as the case may be, has furnished
us information with respect to beneficial ownership. Except as otherwise
indicated, we believe that the beneficial owners of the common stock listed
below, based on the information each of them has given to us, have sole
investment and voting power with respect to their shares, except where community
property laws may apply.
33
Name and Address Relationship Common Shares Percent of Class
Saliba Private Annuity Trust (1) 5% 52,173,990 13.38%
115 S. Valley Street Shareholder
Burbank, CA 91505
Roger Kokozyon 5% 27,715,620 7.11%
4539 Haskell Avenue Shareholder
Encino, CA 91436
Iehab J. Hawatmeh Director, 60,048,621(2) 14.29%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5% Shareholder
Raed Hawatmeh Director 27,790,530 7.13%
10989 Bluffside Drive & 5%
Studio City, CA 91604 Shareholder
Trevor Saliba (1) Director 1,750,000 *
13848 Valleyheart Drive
Sherman Oaks, CA 91423
All Officers and Directors as a Group 89,589,151 21.32%
(3 persons)
___________________
* Less than 1%.
(1) Includes 7,164,620 shares held by the Saliba Living Trust. Thomas L.
Saliba and Betty R. Saliba are the trustees of The Saliba Living Trust and
Thomas L. Saliba is the sole trustee of The Saliba Private Annuity Trust. These
persons control the voting and investment decisions of the shares held by the
respective trusts. Mr. Thomas L. Saliba is a nephew of the grandfather of Mr.
Trevor Saliba, one of our directors and officers. Mr. Trevor Saliba is one of
five passive beneficiaries of Saliba Private Annuity Trust and has no control
over its operations or management. Mr. Saliba disclaims beneficial control over
the shares indicated.
(2) Includes 30,288,465 shares issuable in connection with an agreement
between Mr. Hawatmeh and the Company for cancellation of debt owed to Mr.
Hawatmeh. As of the date of this report, the shares had not been issued.
Description of Common Stock
Effective August 6, 2001, our authorized capital was increased from
500,000,000 to 750,000,000 shares of common stock, $0.001 par value, and we also
effected, effective the same date, a 1:15 forward split of our issued and
outstanding shares of common stock through a forward split and share
distribution. As of April 12, 2004, 395,187,052 (post forward-split) shares of
our common stock were issued and outstanding. We are not authorized to issue
preferred stock.
Each holder of our common stock is entitled to a pro rata share of cash
distributions made to shareholders, including dividend payments, and are
entitled to one vote for each share of record on all matters to be voted on by
shareholders. There is no cumulative voting with respect to the election of our
directors or any other matter. Therefore, the holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of our common stock are entitled to receive dividends when, as and if
declared by our board of directors, in its sole discretion, from funds legally
34
available for such use. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities
and after provision has been made for each class of stock, if any, having any
preference in relation to our common stock. Holders of our common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to our common stock.
We have never declared or paid a cash dividend on our capital stock, nor do
we expect to pay cash dividends on our common stock in the foreseeable future.
We currently intend to retain our earnings, if any, for use in our business. Any
dividends declared in the future will be at the discretion of our board of
directors and subject to any restrictions that may be imposed by our lenders.
We have elected not to be governed by the terms and provisions of the
Nevada Private Corporations Law that are designed to delay, defer or prevent a
change in control of the Company.
Registration Rights and Related Matters
Pursuant to an agreement dated November 3, 2000, and as part of our debt
settlement with Future Electronics Corporation ("Future"), we granted certain
registration rights to Future with respect to 5,281,050 (352,070 pre-forward
split) shares of our common stock. These rights provide Future with the
opportunity, subject to certain terms and conditions, to include up to 50% of
our common stock that it holds in any registration statement filed by us. Among
other things, we have agreed to pay any costs incurred with the registration of
such stock and to keep any registration statement we file active for a period of
180 days or until the distribution contemplated in the registration statement
has been completed. Future's registration rights are assignable and transferable
to any individual or entity that does not directly compete with us. These
registration rights are not exercisable, however, with respect to registration
statements relating solely to the sale of securities to participants in a
company stock plan or relating solely to corporate reorganizations. In addition,
the rights would not be fully exercisable if an underwriter managing a public
offering determined in good faith that market factors required a limitation on
the number of shares that Future (or its assignee) would otherwise be entitled
to have registered.
In connection with our debt settlement with Future, our three largest
shareholders, Iehab Hawatmeh, Raed Hawatmeh and Roger Kokozyon (see "Security
Ownership of Certain Beneficial Owners and Management"), entered into lock-up
agreements with Future, whereby they agreed not to sell to the public any shares
of our common stock held by them until June 27, 2002, unless previously
consented to by Future.
Certain Relationships and Related Transactions
In January, 2002, the Company entered into an agreement with Abacas under
which the Company issued an aggregate of 19,987,853 shares of common stock to
four of Abacas's shareholders in exchange for cancellation by Abacas of an
aggregate amount of $1,499,090 in senior debt owed to the creditors by the
Company. The shares were issued with an exchange price of $0.075 per share, for
the aggregate amount of $1,500,000.
In December, 2002, the Company entered into an agreement with Abacas under
which the Company issued an aggregate of 30,000,000 shares of common stock to
four of Abacas's shareholders in exchange for cancellation by Abacas of an
aggregate amount of $1,500,000 in senior debt owed to the creditors by the
Company. The shares were issued with an exchange price of $0.05 per share, for
the aggregate amount of $1,500,000.
During 2002, the Company entered into a bridge loan agreement with Abacas.
This agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 2003 and 2002, the Company was advanced $350,000 and
$845,000, respectively, and made cash payments of $875,000 and $156,258,
respectively, for an outstanding balance on the bridge loan of $163,742 and
35
$688,742, respectively.
As of December 31, 2001, Iehab Hawatmeh had loaned us a total of
$1,390,125. The loans were demand loans, bore interest at 10% per annum and were
unsecured. Effective January 14, 2002, we entered into four substantially
identical agreements with existing shareholders pursuant to which we issued an
aggregate of 43,321,186 shares of restricted common stock at a price of $0.075
per share for $500,000 in cash and the cancellation of $2,749,090 principal
amount of our debt. Two of these agreements were with the Saliba Private Annuity
Trust, one of our principal shareholders, and a related entity, the Saliba
Living Trust. The Saliba trusts are also principals of Abacas Ventures, Inc.,
which entity purchased our line of credit in May 2000. (See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Liquidity and Financing
Arrangements.") Pursuant to the Saliba agreements, the trusts were issued a
total of 26,654,520 shares of common stock in exchange for $500,000 cash and the
cancellation of $1,499,090 of debt. We used the $500,000 cash from the sale of
the shares for working capital. As a result of this transaction, the percentage
of our common stock owned by the Saliba Private Annuity Trust and the Saliba
Living Trust increased from approximately 6.73% to approximately 17.76%. Mr.
Trevor Saliba, one of our directors and officers, is a passive beneficiary of
the Saliba Private Annuity Trust. Pursuant to the other two agreements made in
January, we issued an aggregate of 16,666,666 shares of restricted common stock
at a price of $0.075 per share in exchange for the cancellation of $1,250,000 of
notes payable by two shareholders, Mr. Iehab Hawatmeh (our president, a director
and our principal shareholder) and Mr. Rajai Hawatmeh. Of these shares,
15,333,333 were issued to Iehab Hawatmeh in exchange for the cancellation of
$1,150,000 in debt. As a result of this transaction, the percentage of our
common stock owned by Mr. Hawatmeh increased from 19.9% to approximately 22.18%.
In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a
public company, Circuit Technology, Inc., while still a private entity, redeemed
680,145 shares (as presently constituted) of common stock held by Raed Hawatmeh,
who was a director of Circuit Technology, Inc. at that time, in exchange for
$80,000 of expenses paid on behalf of the director. No other stated or unstated
rights, privileges, or agreements existed in conjunction with this redemption.
This transaction was consistent with other transactions where shares were
offered for cash.
In 1999, Circuit entered into an agreement with Cogent Capital Corp., or
"Cogent," a financial consulting firm, whereby Cogent agreed to assist and
provide consulting services to Circuit in connection with a possible merger or
acquisition. Pursuant to the terms of this agreement, we issued 800,000
(pre-forward split) restricted shares (12,000,000 post-forward split shares) of
our common stock to Cogent in July 2000 in connection with our acquisition of
the assets and certain liabilities of Circuit. The principal of Cogent was
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
Also, as of December 31, 2003 the company owed I&R Properties, LLC, the
previous owner of our principal office and manufacturing facility, a total
amount of $374,001 in accrued rent. I&R Properties is a company owned and
controlled by individuals who are officers, directors and principal
stockholders.
Management believed at the time of each of these transactions and continues
to believe that each of these transactions were as fair to the Company as could
have been made with unaffiliated third parties.
Market for Common Equity and Related Stockholder Matters
Our common stock traded sporadically on the Pink Sheets under the symbol
"CIRT" from July 2000 to July 2002. Effective July 15, 2002, the NASD approved
our shares of common stock for quotation on the NASD Over-the-Counter Electronic
Bulletin Board. The following table sets forth, for the respective periods
indicated, the prices of our common stock as reported and summarized on the Pink
Sheets. These prices are based on inter-dealer bid and asked prices, without
markup, markdown, commissions, or adjustments and may not represent actual
transactions.
36
Calendar Quarter Ended High Bid Low Bid
March 31, 2004 $0.08 $0.01
December 31, 2003 $0.03 $0.02
September 30, 2003 $0.03 $0.01
June 30, 2003 $0.04 $0.01
March 31, 2003 $0.04 $0.01
December 31, 2002 $0.12 $0.03
September 30, 2002 $0.16 $0.03
June 30, 2002 $0.07 $0.02
March 31, 2002 $0.08 $0.02
Our 15-for-1 forward stock split was made effective August 6, 2001, and our
stock price decreased accordingly.
As of April 12, 2004, we had approximately 540 shareholders of record
holding 395,187,052 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 received an
additional $500,000 related to notes payable under the Equity Line of which
$454,000 was cash and $46,000 was for fees, and issued 30,075,515 additional
shares of common stock to the Equity Line Investor. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
In December, 2002, the Company entered into an agreement with Abacas under
which the Company issued an aggregate of 30,000,000 shares of common stock in
exchange for cancellation of an aggregate amount of $1,500,000 in senior debt
owed to the creditors by the Company. The shares were issued with an exchange
price of $0.05 per share, for the aggregate amount of $1,500,000. The Company
did not grant registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
In January, 2002, the Company entered into an agreement with Abacas under
which the Company issued an aggregate of 19,987,853 shares of common stock in
exchange for cancellation of an aggregate amount of $1,499,090 in senior debt
37
owed to the creditors by the Company. The shares were issued with an exchange
price of $0.075 per share, for the aggregate amount of $1,500,000. The Company
did not grant registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Executive Compensation
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2003, 2002,
and 2001, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
Annual Compensation Long-Term Compensation
Awards
Name and Salary Bonus Restricted
Principal Position Year ($) ($) Stock Stock
Awards Options All Other
($) (#) Compensation
Iehab J. Hawatmeh 2003 175,000 - - 6,500,000 -
President, Secretary 2002 175,000 - - 1,850,000 -
Treasurer, and Director 2001 175,000 - - - -
Trevor M. Saliba 2003 127,000 - - 3,000,000 -
Sr. Vice President and Director 2002 118,000 - - 500,000 -
of CirTran Corporation 2001 - - - - -
Raed S. Hawatmeh 2003 - - - 3,000,000 -
Director of CirTran 2002 - - - 500,000 -
Corporation 2001 - - - - -
38
Option/SAR Grants in the Year Ended December 31, 2003
----------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying % of Total Options
Options/SARs Granted to Employees in Exercise or Base
Granted (#) Fiscal Year Price ($/Sh)
Name Expiration Date
----------------------------------------------------------------------------------------------------------------------------
Iehab Hawatmeh 6,500,000 15.95% $0.02 - $0.03 Feb - Nov 2008
----------------------------------------------------------------------------------------------------------------------------
Trevor Saliba 3,000,000 7.36% $0.02 - $0.03 Feb - Nov 2008
----------------------------------------------------------------------------------------------------------------------------
Raed Hawatmeh 3,000,000 7.36% $0.02 - $0.03 Feb - Nov 2008
----------------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in the Year Ended December 31, 2003 and
December 31, 2003 Option/SAR Values
-------------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at FY End (#) Options/SARs at FY-End
Exercisable/ ($)
Unexercisable Exercisable/
Shares Acquired on Unexercisable
Name Exercise (#) Value Realized ($)
-------------------------------------------------------------------------------------------------------------------------------
Iehab Hawatmeh 6,500,000 $140,000 - $ -
-------------------------------------------------------------------------------------------------------------------------------
Trevor Saliba 3,000,000 $65,000 - $ -
-------------------------------------------------------------------------------------------------------------------------------
Raed Saliba 500,000 $15,000 1,500,000/0 $30,000/0
-------------------------------------------------------------------------------------------------------------------------------
Employment Agreements
Iehab Hawatmeh entered into an employment agreement with Circuit in 1993
that was assigned to us as part of the reverse acquisition of Circuit in July
2000. This agreement, which is of indefinite term, provides for a base salary
for Mr. Hawatmeh, plus a bonus of 2% of our net profits before taxes, payable
quarterly, and any other bonus our board of directors may approve. The agreement
also provides that, if Mr. Hawatmeh is terminated without cause, we are
obligated to pay him, as a severance payment, an amount equal to five times his
then-current annual base compensation, in one lump-sum payment or otherwise, as
Mr. Hawatmeh may direct.
Trevor Saliba entered into an agreement with us in January 2002 pursuant to
which we retained Mr. Saliba as Senior Vice-President, Sales and Marketing. The
agreement provides for remuneration to Mr. Saliba of $6,000 per month, plus
reimbursement for all pre-approved business expenses. In addition, we agreed to
pay Mr. Saliba an amount equal to 5.0% of all gross investments made into our
company that are generated and arranged by Mr. Saliba. The agreement has an
initial term of one year, renewable upon agreement of the parties, but is
terminable by either party for any reason upon 90 days written notice to the
other party. In addition, we may terminate the agreement upon 30 days written
notice if Mr. Saliba fails to comply with the terms of the agreement.
2001 Stock Plan
The 2001 Stock Plan has been fully distributed.
39
2002 Stock Plan
The 2002 Stock Plan has been fully distributed.
2003 Stock Plan
In November 2003, our board approved and adopted our 2003 Stock Plan, or
the 2003 Plan, subject to shareholder approval. An aggregate of 35,000,000
shares of our common stock are subject to the 2003 Plan, which provides for
grants to employees, officers, directors and consultants of both non-qualified
(or non-statutory) stock options and "incentive stock options" (within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended). The
2003 Plan also provides for the grant of certain stock purchase rights, which
are subject to a purchase agreement between us and the recipient. The purpose of
the 2003 Plan is to enable us to attract and retain the best available personnel
for positions of substantial responsibility, to provide additional incentive to
such persons, and to promote the success of our business.
The 2003 Plan is administered by our board of directors, which designates
from time to time the individuals to whom awards are made under the 2003 Plan,
the amount of any such award and the price and other terms and conditions of any
such award. The 2003 Plan shall continue in effect until the date which is ten
years from the date of its adoption by the board of directors, subject to
earlier termination by our board. The board may suspend or terminate the 2003
Plan at any time.
The board determines the persons to whom options are granted, the option
price, the number of shares to be covered by each option, the period of each
option, the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the 2003 Plan for more than an aggregate of 15,000,000
shares in any given fiscal year. We do not receive any monetary consideration
upon the granting of options. Options are exercisable in accordance with the
terms of an option agreement entered into at the time of grant.
The board may also award our shares of common stock under the 2003 Plan as
stock purchase rights. The board determines the persons to receive awards, the
number of shares to be awarded and the time of the award. Shares received
pursuant to a stock purchase right are subject to the terms, conditions and
restrictions determined by the board at the time the award is made, as evidenced
by a restricted stock purchase agreement. As of March 25, 2004, 26,750,000 stock
purchase rights have been granted under the 2003 Plan.
Changes in and disagreements with accountants
on accounting and financial disclosure
None.
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2002 F-4
Consolidated Statement of Stockholders' Deficit for the Years Ended December 31, 2002 and 2003 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-8
Experts
Our consolidated balance sheets as of December 31, 2003 and 2002, and the
consolidated statements of operations, stockholders' deficit, and cash flows,
for the years then ended, have been included in the registration statement on
40
Form SB-2 of which this prospectus forms a part, in reliance on the report of
Hansen, Barnett & Maxwell, independent certified public accountants, given on
the authority of that firm as experts in auditing and accounting.
Legal matters
The validity of the Shares offered hereby will be passed upon for us by
Durham Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City, Utah
84111.
41
Table of Contents
Summary about CirTran Corporation
and this offering 2
Risk factors 5
Use of proceeds 12
Determination of offering price 12
Description of business 13
Management's discussion and analysis
or plan of operation 19
Forward-looking statements 24
Selling Shareholders 24
Plan of distribution 26
Regulation M 27
Legal Proceedings 27
Directors, executive officers, promoters and
control persons 31
Commission's position on indemnification
for Securities Act liabilities 33
Security ownership of certain beneficial
owners and management 33
Description of common stock 34
Certain relationships and related
transactions 35
Market for common equity and related
stockholder matters 36
Executive compensation 38
Changes in and disagreements with
accountants on accounting
and financial disclosure 40
Index to financial statements 40
Experts 40
Legal matters 40
____________________
Dealer Prospectus Delivery Obligation. Until July 20, 2004, all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
CirTran Corporation
252,562,500
SHARES
COMMON STOCK
____________________
PROSPECTUS
___________________
April 21, 2004
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of CirTran Corporation and related
notes thereto and auditors' report thereon are filed as part of this Form
10-KSB:
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2002 F-4
Consolidated Statement of Stockholders' Deficit for the Years Ended December 31, 2002
and 2003 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-8
HANSEN, BARNETT & MAXWELL
A Professional Corporation Registered with the Public Company
CERTIFIED PUBLIC ACCOUNTANTS Accounting Oversight Board
AND
BUSINESS CONSULTANTS
5 Triad Center, Suite 750 [GRAPHIC OMITTED]
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CirTran Corporation
and Subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit, has
suffered losses from operations and has negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 11, 2004
F-2
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BANANCE SHEETS
December 31, December 31,
2003 2002
--------------------------------------------------------------- --------------- --------------
ASSETS
Current Assets
Cash and cash equivalents $ 54,135 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $28,876 and $37,037, respectively 89,187 37,464
Inventory 1,247,428 1,550,553
Other 165,091 100,189
--------------------------------------------------------------- --------------- --------------
Total Current Assets 1,555,841 1,688,706
--------------------------------------------------------------- --------------- --------------
Property and Equipment, Net 577,603 865,898
Other Assets, Net 10,390 12,236
Deferred Offering Costs - 13,475
--------------------------------------------------------------- --------------- --------------
Total Assets $ 2,143,834 $ 2,580,315
--------------------------------------------------------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 9,623 $ 19,531
Accounts payable 1,300,597 1,359,723
Accrued liabilities 3,615,264 3,030,970
Current maturities of long-term notes payable 1,964,021 1,059,987
Notes payable to stockholders 31,838 20,376
Notes payable to related parties 163,742 688,742
--------------------------------------------------------------- --------------- --------------
Total Current Liabilities 7,085,085 6,179,329
--------------------------------------------------------------- --------------- --------------
Long-Term Notes Payable, Less Current Maturities - 295,083
--------------------------------------------------------------- --------------- --------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 349,087,699 and 247,184,691
net of 3,000,000 shares held in treasury at no cost at
December 31, 2003 and 2002, respectively 349,088 247,185
Additional paid-in capital 12,924,141 11,089,020
Accumulated deficit (18,214,480) (15,230,302)
--------------------------------------------------------------- --------------- --------------
Total Stockholders' Deficit (4,941,251) (3,894,097)
--------------------------------------------------------------- --------------- --------------
Total Liabilities and Stockholders' Deficit $ 2,143,834 $ 2,580,315
--------------------------------------------------------------- --------------- --------------
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003 2002
---------------------------------------------------------------------------------- ------------------------ ----------------
Net Sales $ 1,215,245 $ 2,299,668
Cost of Sales (854,542) (1,966,851)
Writedown of carrying value of inventories (160,000) -
---------------------------------------------------------------------------------- ------------------------ ----------------
Gross Profit 200,703 332,817
---------------------------------------------------------------------------------- ------------------------ ----------------
Operating Expenses
Selling, general and administrative expenses 2,586,868 2,180,226
Non-cash employee compensation expense 137,500 25,000
---------------------------------------------------------------------------------- ------------------------ ----------------
Total Operating Expenses 2,724,368 2,205,226
---------------------------------------------------------------------------------- ------------------------ ----------------
Loss From Operations (2,523,665) (1,872,409)
---------------------------------------------------------------------------------- ------------------------ ----------------
Other Income (Expense)
Interest (460,344) (437,074)
Other, net (169) 159,673
---------------------------------------------------------------------------------- ------------------------ ----------------
Total Other Expense, Net (460,513) (277,401)
---------------------------------------------------------------------------------- ------------------------ ----------------
Net Loss $ (2,984,178) $ (2,149,810)
---------------------------------------------------------------------------------- ------------------------ ----------------
Basic and diluted loss per common share $ (0.01) $ (0.01)
---------------------------------------------------------------------------------- ------------------------ ----------------
Basic and diluted weighted-average
common shares outstanding 277,068,175 208,236,039
---------------------------------------------------------------------------------- ------------------------ ----------------
The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
Common Stock Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Balance - December 31, 2001 160,951,005 $ 160,951 $ 5,977,164 $ (13,080,492) $ (6,942,377)
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Shares issued for cash 6,666,667 6,667 493,333 - 500,000
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Shares issued for conversion
of notes payable 36,654,519 36,654 2,712,436 - 2,749,090
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Exercise of stock options
by employees 10,350,000 10,350 438,650 - 449,000
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Shares issued for conversion
of notes payable and accrued
interest to related parties 30,000,000 30,000 1,470,000 - 1,500,000
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Shares issued to placement
agent for equity line of credit 2,562,500 2,563 (2,563) - -
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Net loss - - - (2,149,810) (2,149,810)
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Balance - December 31, 2002 247,184,691 $ 247,185 $ 11,089,020 $ (15,230,302) $ (3,894,097)
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Shares issued for accrued wages 500,000 500 9,500 - 10,000
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Shares issued for conversion
of notes payable to equity
line investor 64,253,508 64,254 1,071,518 - 1,135,772
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
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 - - - (2,984,178) (2,984,178)
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
Balance - December 31, 2003 349,087,699 $ 349,088 $ 12,924,141 $ (18,214,480) $ (4,941,251)
-------------------------------------- ----------------- ------------- ---------------- ---------------- --------------
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003 2002
-------------------------------------------------------------------------------- ------------------------ -------------------
Cash flows from operating activities
Net loss $ (2,984,178) $ (2,149,810)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 300,520 470,849
Provision for loss on trade receivables (8,161) -
Provision for obsolete inventory 160,000 -
Cash paid for settlement of litigation - (25,000)
Non-cash compensation expense 137,500 25,000
Amortization of loan costs 193,400 -
Note payable issued as settlement of litigation expense 62,226 -
Options issued to attorneys and consultants for services 101,727 -
Payments made on behalf of the Company
as settlement of a sublease agreement - (152,500)
Legal fees paid on behalf of lender - (120,000)
Changes in assets and liabilities:
Trade accounts receivable (43,562) 361,065
Inventories 143,125 194,056
Prepaid expenses and other assets (63,056) 2,498
Accounts payable (25,077) (513,786)
Accrued liabilities 901,718 765,480
-------------------------------------------------------------------------------- ------------------------ -------------------
Total adjustments 1,860,360 1,007,662
-------------------------------------------------------------------------------- ------------------------ -------------------
Net cash used in operating activities (1,123,818) (1,142,148)
-------------------------------------------------------------------------------- ------------------------ -------------------
Cash flows from investing activities
Purchase of property and equipment (12,225) (2,822)
-------------------------------------------------------------------------------- ------------------------ -------------------
Net cash used in investing activities (12,225) (2,822)
-------------------------------------------------------------------------------- ------------------------ -------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank (9,908) (140,433)
Proceeds from notes payable to stockholders 41,500 618,305
Payments on notes payable to stockholders (30,038) (738,054)
Proceeds from notes payable, net of cash paid for offering costs 1,605,847 845,000
Principal payments on notes payable (194,748) (363,848)
Proceeds from notes payable to related parties 350,000 -
Payment on notes payable to related parties (875,000) -
Proceeds from exercise of options and warrants to purchase
common stock 301,500 424,000
Exercise of options issued to attorneys and consultants
for services 525 -
Proceeds from issuance of common stock - 500,000
-------------------------------------------------------------------------------- ------------------------ -------------------
Net cash provided by financing activities 1,189,678 1,144,970
-------------------------------------------------------------------------------- ------------------------ -------------------
Net increase in cash and cash equivalents 53,635 -
Cash and cash equivalents at beginning of year 500 500
-------------------------------------------------------------------------------- ------------------------ -------------------
Cash and cash equivalents at end of year $ 54,135 $ 500
-------------------------------------------------------------------------------- ------------------------ -------------------
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2003 2002
-------------------------------------------------------------------------------------- --------------------- -----------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 54,531 $ 152,093
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 34,049 $ 316,762
Common stock issued for notes payable to stockholders $ - $ 1,250,000
Common stock issued for deferred offering costs $ - $ 205,000
Common stock issued upon conversion of notes payable $ 1,134,000 $ -
Common stock issued for notes payable to related parties $ - $ 2,519,244
Common stock issued for accrued interest payable to
related parties $ - $ 479,846
Accrued and deferred offering costs $ - $ 13,475
Accrued interest converted to notes payable $ 57,424 $ 52,955
Stock options exercised for settlement of accrued interest
and accrued compensation $ 250,000 $ -
Common stock issued for accrued compensation $ 10,000 $ -
Loan costs included in notes payable $ 193,400 $ -
The accompanying notes are an integral part of these financial statements.
F-7
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Nature of Operations - CirTran Corporation (the "Company") provides turnkey
manufacturing services using surface mount technology, ball-grid array assembly,
pin-through-hole, and custom injection molded cabling for leading electronics
original equipment manufacturers ("OEMs") in the communications, networking,
peripherals, gaming, consumer products, telecommunications, automotive, medical,
and semiconductor industries. The Company also designs, develops, manufactures,
and markets a full line of local area network products, with emphasis on token
ring and Ethernet connectivity.
Principles of Consolidation--The consolidated financial statements include the
accounts of CirTran Corporation and its wholly owned subsidiary, Racore
Technology Corporation. All significant intercompany transactions have been
eliminated in consolidation.
Revenue Recognition--Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses experienced with such returns have not been
significant and have been recognized as incurred.
Cash and Cash Equivalents--The Company considers all highly-liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.
Inventories -- Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead costs. Overhead costs are
based on indirect costs allocated among cost of sales, work-in-process inventory
and finished goods inventory. Indirect overhead costs have been charged to cost
of sales or capitalized as inventory based on management's estimate of the
benefit of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
Property and Equipment --Depreciation is provided in amounts sufficient to
relate the cost of depreciable assets to operations over the estimated service
lives. Leasehold improvements are amortized over the shorter of the life of the
lease or the service life of the improvements. The straight-line method of
depreciation and amortization is followed for financial reporting purposes.
Maintenance, repairs, and renewals which neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in operating results.
Depreciation expense for the years ended December 31, 2003 and 2002 was $300,520
and $470,849.
Impairment of Long-Lived Assets --The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
F-8
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
occurred that indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
over their remaining life in measuring whether the assets are recoverable. As of
December 31, 2003, the Company does not consider any of its long-lived assets to
be impaired.
Checks Written in Excess of Cash in Bank--Under the Company's cash management
system, checks issued but not presented to banks frequently result in overdraft
balances for accounting purposes. These overdrafts are included as a current
liability in the balance sheets.
Stock-Based Compensation -- At December 31, 2003, the Company has one
stock-based employee compensation plan, which is described more fully in Note
12. The Company accounts for the plan under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. During the years ended
December 31, 2003 and 2002, the Company recognized compensation expense relating
to stock options and warrants of $137,500 and $25,000, respectively. The
following table illustrates the effect on net loss and basic and diluted loss
per common share as if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation:
Years Ended December 31,
-------------------------------------------
2003 2002
-------------------------------------------------------------------- ----------------------- -------------------
Net loss, as reported $ (2,984,178) $ (2,149,810)
Add: Stock-based employee compensation expense
included in net loss 137,500 25,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (292,247) (193,387)
-------------------------------------------------------------------- ----------------------- -------------------
Pro forma net loss $ (3,138,925) $ (2,318,197)
-------------------------------------------------------------------- ----------------------- -------------------
Basic and diluted loss per common share as reported $ (0.01) $ (0.01)
-------------------------------------------------------------------- ----------------------- -------------------
Basic and diluted loss per common share pro forma $ (0.01) $ (0.01)
-------------------------------------------------------------------- ----------------------- -------------------
Income Taxes --The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and the carryforward of operating losses and tax credits
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. An allowance against deferred tax
assets is recorded when it is more likely than not that such tax benefits will
not be realized. Research tax credits are recognized as utilized.
Use of Estimates --In preparing the Company's financial statements in accordance
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
F-9
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Risk --Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of trade accounts
receivable. The Company sells substantially to recurring customers, wherein the
customer's ability to pay has previously been evaluated. The Company generally
does not require collateral. Allowances are maintained for potential credit
losses, and such losses have been within management's expectations. At December
31, 2003 and 2002, this allowance was $28,876 and $37,037, respectively.
During the year ended December 2003, sales to two customers accounted for 29
percent and 11 percent of net sales. No individual customer account receivable
balance at December 31, 2003 created a concentration of credit risk.
During the year ended December 2002, sales to three customers accounted for 11
percent, 12 percent, and 13 percent, each, of net sales. No individual customer
account receivable balance at December 31, 2002 created a concentration of
credit risk.
Fair Value of Financial Instruments --The carrying value of the Company's cash
and cash equivalents and trade accounts receivable, approximates their fair
values due to their short-term nature. The carrying value of the Company's notes
payable also approximates fair value because notes are recorded at fair value
plus any default provisions.
Loss Per Share --Basic loss per share is calculated by dividing loss available
to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted loss per share is similarly calculated,
except that the weighted-average number of common shares outstanding would
include common shares that may be issued subject to existing rights with
dilutive potential when applicable. The Company had 3,850,500 and zero in
potentially issuable common shares at December 31, 2003 and 2002, respectively.
The potentially issuable common shares at December 31, 2003 were excluded from
the calculation of diluted loss per share because the effects are anti-dilutive.
Reclassifications -- Certain 2002 amounts have been reclassified to conform
with the 2003 presentation. These reclassifications had no effect on the
previously reported net loss.
New Accounting Standards - In May 2003 the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity", which requires that certain financial instruments be presented as
liabilities that were previously presented as equity or as temporary equity.
Such instruments include mandatory redeemable preferred and common stock, and
certain options and warrants. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and is generally effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
adopted the requirements of SFAS 150 in the accompanying financial statements.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 sets forth the disclosures
required by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Company adopted
the requirements FIN 45 in the accompanying financial statements.
F-10
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 $2,984,178 and $2,149,810 for the years
ended December 31, 2003 and 2002, respectively. As of December 31, 2003 and
2002, the Company had an accumulated deficit of $18,214,480 and $15,230,302,
respectively, and a total stockholders' deficit of $4,941,251 and $3,894,097,
respectively. In addition, the Company used, rather than provided, cash in its
operations in the amounts of $1,123,818 and $1,142,148 for the years ended
December 31, 2003 and 2002, respectively.
Since February of 2000, the Company has operated without a line of credit. Many
of the Company's vendors stopped credit sales of components used by the Company
to manufacture products, and as a result, the Company converted certain of its
turnkey customers to customers that provide consigned components to the Company
for production. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In addition, the Company is a defendant in numerous legal actions (see Note 8).
These matters may have a material impact on the Company's financial position,
although no assurance can be given regarding the effect of these matters in the
future.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit from the
lender. During 2002, the Company has entered into agreements whereby the Company
has issued common stock to certain principals of Abacas in exchange for a
portion of the debt. The Company's plans include working with vendors to convert
trade payables into long-term notes payable and common stock and cure defaults
with lenders through forbearance agreements that the Company will be able to
service. During 2003 and 2002, the Company successfully converted trade payables
of approximately $2,986 and $316,762, respectively, into notes. The Company
intends to continue to pursue this type of debt conversion going forward with
other creditors. As discussed in Note 10, the Company has entered into an equity
line of credit agreement with a private investor. Realization of any proceeds
under the equity line of credit is not assured.
F-11
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories consist of the following:
2003 2002
------------------------------------------ ------------------------ ----------------------
Raw Materials $ 1,114,445 $ 1,363,276
Work-in-process 130,810 170,724
Finished goods 2,173 16,553
------------------------------------------ ------------------------ ----------------------
$ 1,247,428 $ 1,550,553
------------------------------------------ ------------------------ ----------------------
During 2003, write downs of $160,000 were recorded to reduce items considered
obsolete or slow moving to their fair market value.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2003 2002 in Years
---------------------------------------------------------------------- ---------------- -------------------
Production equipment $3,146,488 $3,141,993 5-10
Leasehold improvements 958,939 958,940 7-10
Office equipment 639,375 631,645 5-10
Other 118,029 118,029 3-7
---------------------------------------------------------------------- ----------------
4,862,831 4,850,607
Less accumulated depreciation
and amortization 4,285,228 3,984,709
---------------------------------------------------------------------- ----------------
$ 577,603 $ 865,898
---------------------------------------------------------------------- ----------------
NOTE 5 - NOTES PAYABLE Notes Payable consist of the following:
Notes Payable
2003 2002
--------------------------------------------------------------------- -------------------- -------------------
Notes payable to Equity Line Investor, no interest,
matures 70 days after issuance, to be paid with
procedes from the equity line of credit. $ 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
F-12
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note payable to a company, due in monthly installments
of $1,323, interest at 8.00%, matures May 2005,
unsecured. 23,549 -
Note payable to a company, due in monthly installments
of $5,185, interest at 8.00%, matures September 2004,
unsecured. 41,484 -
Note payable to a financial institution, due in monthly
installments of $9,462, interest at 8.61%, matures
April 2004, collateralized by equipment. 215,516 258,644
Note payable to a company, due in monthly installments
of $6,256, interest at 8.00%, matured July 2003,
collateralized by equipment, in default. 183,429 183,429
Note payable to a financial institution, due in monthly
installments of $9,000, interest at 13.50%, matures
December 2004, collateralized by equipment. 161,109 199,023
Note payable to an individual, due in monthly installments
of $12,748, matures February 2006, interest at 10.00%
unsecured, in default. 107,919 107,919
Note payable to a company, due in monthly installments
of $1,972, matures November 2005, interest at 8.00%,
unsecured, in default. 87,632 87,632
Note payable to an individual, due in monthly installments
of $5,000, interest at a rate of 9.5%, matured May
2000, collateralized by all assets of the Company,
in default. 85,377 85,377
Note payable to a finance corporation, due in monthly
installments of $4,127, interest at prime plus 3.00%
(7.25% at December 31, 2002), matures December
2004, collateralized by equipment. 93,832 92,097
Note payable to a company, due in 18 monthly installments
of $1,460 followed by six monthly installments of
$2,920, interest at 6.00%, matured April 2003,
unsecured, in default. 60,133 60,133
Note payable to a finance corporation, due in monthly
installments of $2,736, interest at 9.00%, matures
December 2004, collateralized by equipment and
trade accounts receivable. 55,831 60,005
F-13
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note payable to a finance corporation, due in monthly
installments of $562, interest at 9.00%, matures
December 2004, collateralized by equipment and
trade accounts receivable. - 12,252
Note payable to a finance corporation, due in monthly
installments of $637, interest at 9.00%, matures
December 2004, collateralized by equipment and
trade accounts receivable. - 13,949
Note payable to a bank, payable on demand, interest
at 10.00%, unsecured. 36,901 36,901
Note payable to a finance corporation, due in increasing
monthly installments of $50 to $5,443, interest at
12.00%, matures December 2004, collateralized by
equipment and trade accounts receivable. 45,434 41,834
--------------------------------------------------------------------- -------------------- -------------------
Total Notes Payable 1,964,021 1,355,070
Less current maturities (1,964,021) (1,059,987)
--------------------------------------------------------------------- -------------------- -------------------
Long-Term Notes Payable $ - $ 295,083
--------------------------------------------------------------------- -------------------- -------------------
Certain of the Company's notes payable contain various covenants and
restrictions, including providing for the acceleration of principal payments in
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.
NOTE 6 - LEASES
The Company conducts a substantial portion of its operations utilizing leased
facilities consisting of a warehouse and a manufacturing plant. The lease was
originally with a related party. In December of 2003, the related party sold the
facilities to an unrelated party. The Company entered into a new ten-year lease
agreement with an unrelated party.
F-14
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of future minimum lease payments under the operating
lease:
Year Ending December 31,
----------------------------------------------------- ------------
2004 $ 203,688
2005 203,688
2006 203,688
2007 203,688
2008 203,688
Thereafter 1,018,440
----------------------------------------------------- ------------
Total $ 2,036,880
----------------------------------------------------- ------------
The building lease provides for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
$200,492 and $200,992 for 2003 and 2002, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable --The Company had amounts due to stockholders from two
separate notes. The balance due to stockholders at December 31, 2003 and 2002,
was $31,838 and $20,376, respectively. Interest associated with amounts due to
stockholders is accrued at 10 percent. Unpaid accrued interest was $6,900 and
$2,378 at December 31, 2003 and 2002, respectively, and is included in accrued
liabilities. These notes are due on demand.
Related Party Notes Payable -- The Company had amounts due to Abacas Ventures,
Inc., a related party, under the terms of a note payable and a bridge loan.
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 2003 and 2002, the Company was advanced $350,000 and
$845,000, respectively, and made cash payments of $875,000 and $156,258,
respectively, for an outstanding balance on the bridge loan of $163,742 and
$688,742, respectively.
The balance due to Abacas related to the note payable was paid in full at
December 31, 2002. The note accrued interest at 10%. The amounts owed were due
on demand with no required monthly payments. This note was collateralized by
assets of the Company. As discussed in Note 10, a significant amount of the
Abacas note was converted to shares of the Company's common stock during 2002.
During the year ended December 31, 2002, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as capital leases.
The total of these obligations was $316,762. In addition, Abacas agreed to
deduct as an offset of the amount owed to Abacas of $120,000, constituting the
amounts paid by the Company as legal fees incurred by the Company as part of its
negotiations with the Company's vendors. The Company has recorded this
transaction as a $316,762 non-cash increase and a $120,000 non-cash payment to
the note payable owed to Abacas, pursuant to the terms of the Abacas agreement.
F-15
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total principal amount owed to Abacas between the note payable and the
bridge loan was $163,742 and $688,742 as of December 31, 2003 and 2002,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $230,484 and $71,686 as of December 31, 2003 and 2002,
respectively, and is included in accrued liabilities.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation -- During January 2002, the Company settled a lawsuit
that had alleged a breach of facilities sublease agreement involving facilities
located in Colorado. The Company's liability in this action was originally
estimated to range up to $2.5 million. The Company had filed a counter suit in
the same court for an amount exceeding $500,000 for missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which are currently held in escrow and have been treated as treasury
stock recorded at no cost. The fair value of the 3,000,000 shares was less than
the carrying amount of the note payable. Because 75 percent of the balance had
not been paid by May 18, 2002, the Company was required to prepare and file with
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. The remaining balance has not
been paid, and the registration statement with respect to the escrowed shares
has not been declared effective and the Company has not replaced the escrowed
shares with registered free-trading shares pursuant to the terms of the
settlement agreement; therefore, the plaintiff filed the Confession of Judgment
and proceeded with execution thereon. The Company is currently negotiating with
the plaintiff to settle this obligation without the release of the shares held
in escrow.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which has been recorded as other income. The Company did not
receive cash from this settlement, but certain obligations of the Company were
paid directly. $109,125 of the principal balance of the note related to the
settlement mentioned above was paid. Also, $7,000 was paid to the Company's
legal counsel as a retainer for future services. The remaining $36,375 was paid
to the above mentioned plaintiff as a settlement of rent expense.
During September 2002, the plaintiff filed a claim that the $109,125 portion of
the payment was to be applied as additional rent expense rather than a principal
payment on the note payable. The Company estimates that the probability of the
$109,125 being considered additional rent expense is remote and disputes the
claim. The Company intends to vigorously defend the action.
Litigation - During 2000, the Company settled a lawsuit filed by a vendor by
issuing 5,281,050 shares of the Company's common stock valued at $324,284,
paying $83,000 in cash and issuing two notes payable totaling $239,000. During
2002, the vendor filed a confession of judgement claiming that the Company
defaulted on its agreement and claims the 2000 lawsuit was not properly
satisfied. At December 31, 2003, the Company owed $60,133 of principal under the
terms of the remaining note payable. The Company denies the vendor's claims and
intends to vigorously defend itself against the confession of judgement.
During 2003, an investment firm filed suit in the U.S. District Court, District
of Utah seeking finders fees, consisting of common stock valued at $350,000 for
allegedly introducing the Company to the Equity Line Investor. The case was
F-16
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
previously dismissed in a New York court. The Company estimates that the risk of
loss is remote, therefore no accrual has been made.
In December 1999, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $213,000 of punitive
damages from the Company related to the Company's non-payment for materials
provided by the vendor. Judgment was entered against the Company in May 2002 in
the amount of $213,718. The Company has accrued the entire amount due under the
judgment.
The Company has been a party to a lawsuit with a customer stemming from an
alleged breach of contract. In July 2002, the Company reached a settlement with
the customer in which the customer was to make payments from August 1, 2002,
through October 29, 2002, to the Company totaling $265,000. As part of the
settlement, the Company returned inventory valued at $158,010, settled
receivables from the customer of $287,277, settled payables owed to the customer
in the amount of $180,287 and sold inventory to a Company related to the
customer for $13,949. During 2002, the Company received the entire $265,000.
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and pursuant to the terms of a promissory note. The Company entered a
settlement agreement under which the Company is to pay $6,256 each month until
the obligation and interest thereon are paid. This did not represent the
forgiveness of any obligation, but rather the restructuring of the terms of the
previous agreement. At December 31, 2003, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. Subsequent to year end, this claim was purchased by Abacus
and recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2003, the Company had accrued the entire amount of the claim.
The Company is currently in settlement negotiations with the vendor.
In December 1999, a vendor of the Company filed a lawsuit that seeks payment in
the amount of $44,269 for the cost of goods provided to the Company. The Company
admits owing certain amounts to the vendor and has accrued the entire amount
claimed as of December 31, 2003. No trial date has been set and the Company is
currently negotiating a settlement of these claims.
During 2002, a vendor of the Company filed a lawsuit that seeks payment in the
amount of $31,745 for the cost of goods provided to the Company. The Company has
accrued the entire amount claimed. No trial date has been set. Subsequent to
year end, this claim was purchased by Abacus and recorded as an increase to the
amount owed to Abacus under the terms of the bridge loan.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. The parties are presently
negotiating settlement.
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. At December 31, 2003, the Company
owed $87,632 on this settlement agreement. The Company is currently in default
on this obligation and is currently negotiating a new settlement agreement.
F-17
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has made payments to the
financial institution, reducing the obligation to $215,516 at December 31, 2003,
plus interest accruing from January 1, 2002. The Company is in default on this
obligation and is negotiating for settlement of the remaining claims.
Suit was brought against the Company during April 2001, by a former shareholder
alleging that the Company owed $121,825 under the terms of a promissory note. A
Stipulation for Settlement and for Entry of Judgment was executed by the parties
wherein the Company agreed to arrange for payment of a principal amount of
$145,000 in 48 monthly installments. The Company made seven payments and then
failed to make subsequent payments, at which time the shareholder obtained a
consent judgment against the Company. The Company is currently in settlement
negotiations with the former shareholder regarding the judgment.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $193,604. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims and it is included in accounts payable.
The Company is the defendant in numerous legal actions, primarily resulting from
nonpayment of vendor invoices for goods and services received, that it has
determined the probability of realizing any loss is remote. The total amount of
these legal actions is $159,908. The Company has made no accrual for the legal
actions and is currently in the process of negotiating the dismissal of these
claims with the various vendors.
The Company is also the defendant in numerous immaterial legal actions primarily
resulting from nonpayment of vendors for goods and services received. The
Company has accrued the payables and is currently in the process of negotiating
settlements with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity during 2000, the Company has granted the holders of 5,281,050 shares of
common stock the right to include 50% of the common stock of the holders in any
registration of common stock of the Company, under the Securities Act for offer
to sell to the public (subject to certain exceptions). The Company has also
agreed to keep any filed registration statement effective for a period of 180
days at its own expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 11), the Company granted to the equity line
investor (the "Equity Line Investor") registration rights, in connection with
which the Company is required to file a registration statement covering the
resale of shares put to the Equity Line Investor under the equity line. The
Company is also required to keep the registration statement effective until two
years following the date of the last advance under the equity line. The Company
has not yet filed such registration statement.
Accrued Payroll Tax Liabilities -- As of December 31, 2003, the Company had
accrued liabilities in the amount of $2,107,930 for delinquent payroll taxes,
including interest estimated at $393,311 and penalties estimated at $230,927. Of
this amount, approximately $329,739 was due the State of Utah. During 2002, the
Company negotiated a monthly payment schedule of $4,000 to the State of Utah,
which did not provide for the forgiveness of any taxes, penalties or interest.
Approximately $1,767,253 was owed to the Internal Revenue Service as of December
F-18
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31, 2003. During 2002, the Company negotiated a payment schedule with respect to
this amount, pursuant to which monthly payments of $25,000 were required. The
Company is currently renegotiating the terms of the payment schedule with the
Internal Revenue Service. Approximately $10,939 was owed to the State of
Colorado as of December 31, 2003.
As of December 31, 2002, the Company had accrued liabilities in the amount of
$2,029,626 for delinquent payroll taxes, including interest estimated at
$304,917 and penalties estimated at $229,285. Of this amount, approximately
$301,741 was due the State of Utah. Approximately $1,716,946 was owed to the
Internal Revenue Service as of December 31, 2002. Approximately $10,939 was owed
to the State of Colorado as of December 31, 2002.
NOTE 9 - INCOME TAXES
The Company has paid no federal or state income taxes. The significant
components of the Company's deferred tax assets and liabilities at December 31,
2003 and 2002, are as follows:
2003 2002
--------------------------------------------------------------------- -------------------- -------------------
Deferred Income Tax Assets:
Inventory reserve $ 261,177 $ 216,305
Bad debt reserve 10,771 13,815
Vacation reserve 26,177 17,356
Research and development credits 26,360 17,979
Net operating loss carryforward 4,460,660 3,443,676
Intellectual property 130,067 144,553
--------------------------------------------------------------------- -------------------- -------------------
Total Deferred Income Tax Assets 4,915,212 3,853,684
Valuation allowance (4,838,840) (3,795,179)
Deferred Income Tax Liability - depreciation (76,372) (58,505)
--------------------------------------------------------------------- -------------------- -------------------
Net Deferred Income Tax Asset $ - $ -
--------------------------------------------------------------------- -------------------- -------------------
The Company has sufficient long-term deferred income tax assets to offset the
deferred income tax liability related to depreciation. The long-term deferred
income tax assets relate to the net operating loss carryforward and the
intellectual property.
The Company has sustained net operating losses in both periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero and consequently, there is no income
tax provision or benefit presented for the years ended December 31, 2003 and
2002.
As of December 31, 2003, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $11,958,873. These net operating loss
F-19
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carryforwards, if unused, begin to expire in 2019. Utilization of approximately
$1,193,685 of the total net operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate return limitation
rules and limitations on the carryforward of net operating losses after a change
in ownership.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2003 and 2001:
2003 2002
------------------------------------------------ -------------- ----------------
Benefit at statuatory rate (34%) $ (985,256) $ (730,935)
Non-deductible expenses 37,225 39,752
Change in valuation allowance 1,043,661 762,129
State tax benefit, net of federal tax benefit (95,630) (70,946)
------------------------------------------------ -------------- ----------------
Net Benefit from Income Taxes $ - $ -
------------------------------------------------ -------------- ----------------
NOTE 10 - STOCKHOLDER'S EQUITY
Common Stock Issued for Cash and Debt - Effective January 14, 2002, the Company
entered into four substantially identical agreements with existing shareholders
pursuant to which the Company issued an aggregate of 43,321,186 shares of
restricted common stock at a price of $0.075 per share, the fair value of the
shares, for $500,000 in cash and the reduction of principal of $1,499,090 of
notes payable and $1,250,000 of notes payable to stockholders. No gain or loss
has been recognized on these transactions as the fair value of the stock issued
was equal to the consideration given by the shareholders. The Company used the
$500,000 cash as working capital.
Common Stock Issued for Conversion of Debt - Effective December 23, 2002, the
Company entered into four substantially identical agreements with existing
shareholders pursuant to which the Company issued an aggregate of 30,000,000
shares of restricted common stock at a price of $0.05 per share, the fair value
of the shares, for the reduction of principal of $1,020,154 of notes payable and
$479,846 of accrued interest. No gain or loss has been recognized on these
transactions as the fair value of the stock issued was equal to the
consideration given by the shareholders.
Common Stock Issuance -- During June 2003, the Company issued 500,000 shares of
restricted common stock to a relative of a director for $10,000 of accrued
compensation owed to the director. The $0.02 cost per share was equal to the
market value of the Company's stock on the date the shares were issued.
Equity Line of Credit -- On April 8, 2003, the Company entered into a revised
Equity Line of Credit Agreement (the "Equity Line Agreement") with a private
investor (the "Equity Line Investor"). Under the Equity Line Agreement, the
Company has the right to draw up to $5,000,000 from the Equity Line Investor
against an equity line of credit (the "Equity Line"). As part of the Equity Line
Agreement, the Company may issue shares of the Company's common stock to the
Equity Line Investor 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
F-20
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
bid price of the Company's common stock over the five trading days after the
advance notice is tendered. The maximum amount of any single draw is $85,000
The Equity Line Investor is required under the Equity Line Agreement to tender
the funds requested by the Company within two trading days after the
five-trading-day period used to determine the market price.
In order to facilitate the issuance of shares of common stock to the Equity Line
Investor, the Company placed 100,000,000 shares of common stock into an escrow
account held by its transfer agent. All shares issued to the Equity Line
Investor are to be issued from these escrowed shares.
In connection with the Equity Line Agreement, the Company issued 2,562,500
shares of the Company's common stock as placement shares at no cost in 2002. The
Company also granted registration rights to the Equity Line Investor, in
connection with which the Company has filed a registration statement and had it
declared effective by the Securities and Exchange Commission.
In order to facilitate the Company's receiving cash proceeds in excess of the
single draw limit of $85,000, the Company has entered into a series of note
payable agreements with the Equity Line Investor. Rather than receiving cash for
each individual put, the proceeds are used to pay down the note payable to the
Equity Line Investor. Because the number of shares to be issued is determined
based upon the stock price within five days of actual issuance, the shares are
deemed to be issued at market and there is no beneficial conversion feature.
During the year ended December 31, 2003, the Company issued $1,830,000 of notes
payable to the Equity Line Investor for $1,636,600 cash and $193,400 in fees and
offering costs. The notes are due seventy days after issuance and bear no
interest. Because of the short term of the notes, no interest rate has been
imputed. Should the Company fail to pay the notes in full, within seventy days;
the notes will accrue interest at 24% per annum. The Company will use proceeds
from the Equity Line Agreement to pay the balance due.
During the year ended December 31, 2003, the Company issued 64,253,508 shares of
common stock from the escrowed shares under the Equity Line Agreement in lieu of
payments of $1,180,000 on notes payable, which was offset by prior offering
costs of $44,228, leaving a balance at December 31, 2003 of $650,000.
Subsequent to December 31, 2003, the Company placed an additional 40,000,000
common shares in escrow to fund conversions related to the Equity Line Agreement
and issued 30,0075,575 shares of common stock from the escrowed shares under the
Equity Line Agreement as note payable payments of $650,000.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
F-21
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan - During February 2003, the Company adopted the 2002 Stock
Option Plan (the "2002 Plan") with 25,000,000 shares of common stock reserved
for issuance there under. Also, during November 2003, the Company adopted the
2003 Stock Option Plan (the "2003 Plan") with 35,000,000 shares of common stock
reserved for issuance there under. The Company's Board of Directors administers
the plans and has discretion in determining the employees, directors,
independent contractors and advisors who receive awards, the type of awards
(stock, incentive stock options or non-qualified stock options) granted, and the
term, vesting and exercise prices.
Non-Employee Grants - During 2003, the Company granted options to purchase
5,250,000 shares of common stock to non-employees for services, prepaid services
and in settlement of amounts owed for previous services at exercise prices of
$0.0001 per share. The options were all five year options and vested on the
dates granted. 3,249,500 of these options were exercised for cash proceeds of
$525, leaving 2,000,500 options to non-employees outstanding at December 31,
2003.
Employee Grants - During the year ended December 31, 2003, the Company granted
options to purchase 40,750,000 shares of common stock to directors and employees
of the Company pursuant to the 2002 and 2003 Plans. These options are five year
options that vested on the date of grant. The related exercise prices range from
$0.01 to $0.14 per share. As of September 30, 2003, the Company had granted
5,000,000 more options under the 2002 Plan than were available under that plan.
Prior to December 31, 2003, the Company rescinded the grant of those options
through agreements with three option holders. 33,900,000 of these options were
exercised during 2003 for $301,500 of cash, $175,000 of accrued interest and
$75,000 of accrued compensation, leaving 1,850,000 options outstanding at
December 31, 2003.
During the year ended December 31, 2002, the Company granted options to purchase
10,350,000 shares of common stock to certain officers and employees of the
Company pursuant to the 2002 and 2001 Plan. These options were five year options
and vested on the date of grant. The related exercise prices range from $0.03 to
$0.05 per share. During 2002 these options were exercised for $424,000 of cash
and $25,000 of non-cash compensation leaving no options outstanding at December
31, 2002.
A summary of the stock option activity for the years ended December 31, 2003 and
2002 is as follows:
F-22
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Average
Shares Exercise Price
-------------------- -------------------
Outstanding at December 31, 2001 - $ -
Granted 10,350,000 $ 0.04
Exercised (10,350,000) 0.04
-------------------- -------------------
Outstanding at December 31, 2002 - -
Granted 46,000,000 $ 0.02
Exercised (37,149,500) 0.01
Cancelled (5,000,000) 0.01
-------------------- -------------------
Outstanding at December 31, 2003 3,850,500 $ 0.02
==================== ===================
Excercisable at December 31, 2002 - $ -
==================== ===================
Excercisable at December 31, 2003 3,850,500 $ 0.02
==================== ===================
The fair value of stock options was determined at the grant dates using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended 2003 and 2002:
2003 2002
-------------------- -------------------
Expected dividend yield - -
Risk free interest rate 2.85% 3.78%
Expected volatility 338% 399%
Expected life .10 years .10 years
Weighted average fair value per share $ 0.02 $ 0.02
A summary of stock option and warrant grants with exercise prices less than,
equal to or greater than the estimated market value on the date of grant during
the years ended December 31, 2003 and 2002 is as follows:
F-23
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted
Weighted Average
Options Average Fair Value of
Granted Exercise Price Options
-------------------- ------------------- -------------------
Year Ended - December 31, 2003
Grants with exercise prices less than the estimated
market value of the common stock 21,750,000 $ 0.01 $ 0.01
Grants with exercise prices equal to the estimated
market value of the common stock 23,000,000 $ 0.02 $ 0.01
Grants with exercise prices greater than the estimated
market value of the common stock 1,250,000 $ 0.05 $ -
Year Ended - December 31, 2002
Grants with exercise prices less than the estimated
market value of the common stock 2,500,000 $ 0.03 $ 0.02
Grants with exercise prices equal to the estimated
market value of the common stock 5,850,000 $ 0.04 $ 0.02
Grants with exercise prices greater than the estimated
market value of the common stock 2,000,000 $ 0.05 $ 0.01
A summary of the stock options outstanding and exercisable at December 31, 2003
follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ---------------------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Range of Options Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------- ------------------ -------------- ------------ ------------------ -------------
$0.0001 2,000,500 4.89 $0.0001 2,000,500 $0.0001
$0.02 1,500,000 4.89 $0.02 1,500,000 $0.02
$0.14 350,000 0.67 $0.14 350,000 $0.14
F-24
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments: electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies. The Company evaluates performance of each segment based on earnings or
loss from operations. Selected segment information is as follows:
Electronics Ethernet
Assembly Technology Total
--------------------------------------------- ----------------- ---------------- -------------------
2003
Sales to external customers $ 1,050,090 $ 165,155 $ 1,215,245
Intersegment sales 75,814 - 75,814
Segment loss (2,762,592) (221,586) (2,984,178)
Segment assets 1,920,221 223,613 2,143,834
Depreciation and amortization 295,439 5,081 300,520
2002
Sales to external customers $ 1,838,781 $ 460,887 $ 2,299,668
Intersegment sales 179,451 - 179,451
Segment loss (1,890,097) (259,713) (2,149,810)
Segment assets 2,342,881 237,434 2,580,315
Depreciation and amortization 449,914 20,935 470,849
Sales 2003 2002
------------------------------------------------------------------ ---------------- -------------------
Total sales for reportable segments $ 1,291,059 $ 2,479,119
Elimination of intersegment sales (75,814) (179,451)
------------------------------------------------------------------ ---------------- -------------------
Consolidated net sales $ 1,215,245 $ 2,299,668
------------------------------------------------------------------ ---------------- -------------------
Total Assets 2003 2002
------------------------------------------------------------------ ---------------- -------------------
Total assets for reportable segments $ 2,143,834 $ 2,580,315
Adjustment for intersegment amounts - -
------------------------------------------------------------------ ---------------- -------------------
Consolidated total assets $ 2,143,834 $ 2,580,315
------------------------------------------------------------------ ---------------- -------------------
F-25
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - REVENUES
All revenue-producing assets are located in North America. Revenues are
attributed to the geographic areas based on the location of the customers
purchasing the products. The Company's net sales by geographic area are as
follows:
2003 2002
------------------------------------------------------------------ ---------------- -------------------
United States of America $ 1,206,510 $ 2,291,946
Europe/Africa/Middle East 8,735 7,722
------------------------------------------------------------------ ---------------- -------------------
$ 1,215,245 $ 2,299,668
------------------------------------------------------------------ ---------------- -------------------
NOTE 14 - SUBSEQUENT EVENTS
During January and February 2004, the Company granted options to purchase
10,750,000 shares of common stock to certain employees of the Company and to
members of the board of directors pursuant to the 2003 Plan. These options
vested on the date of grant. The related exercise price was from $0.01 to $0.015
per share, which was equal to the market value of the common stock on the dates
granted. The options are exercisable through 2009. All options granted were
exercised. The options were exercised for $55,000 of cash, $11,250 of accrued
interest to directors and $42,500 of accrued compensation. The Company estimated
the fair value of the options at the grant date using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used in
the Black-Scholes model to determine the fair value of the options to purchase a
share of common stock of $0.01: risk-free interest rate of 2.98 to 3.18 percent,
dividend yield of 0 percent, volatility of 314 to 317 percent, and expected
lives of 0.10 years.
During January and March of 2004, the Company issued $500,000 of additional
notes payable to the Equity Line Investor for $454,000 cash and $46,000 in fees
and offering costs. The notes are on the same terms as all other notes to the
Equity Line Investor as described in Note 10.
Subsequent to December 31, 2003, the Company issued an additional 40,000,000
shares to escrow for future funding of the equity line of credit agreement (see
Note 10).
Subsequent to December 31, 2003, the Company issued 30,075,515 shares of common
stock from the escrowed shares under the Equity Line Agreement in lieu of
payments of $650,000 on notes payable to the Equity Line Investor.
Subsequent to December 31, 2003, Abacas completed negotiations with several
vendors of the Company, whereby Abacas purchased various past due amounts for
goods and services provided by vendors, as well as certain notes payable. The
total of these obligations was $805,613. The Company has recorded this
transaction as a $805,613 non-cash increase to the bridge loan owed to Abacas,
pursuant to the terms of the Abacas agreement.
On April 14, 2004 an unrelated party filed a claim against the Company alleging
that the Company stopped paying amounts due under a note entered into in June
1998. The suit seeks $90,500 plus fees and costs. The Company denies all claims
and intends to vigorously defend itself in this matter. (Unaudited)
F-26