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 4 of this prospectus
before purchasing any of the Shares offered by this prospectus.
-------------------------
CirTran Corporation common stock is quoted on the OTC Bulletin Board and
trades under the symbol "CIRT". The last reported sale price of our common stock
on the OTC Bulletin Board on August 27, 2003, was approximately $0.01 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.
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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.
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September 4, 2003
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CirTran has not registered the Shares for sale by the Selling Shareholders
under the securities laws of any state. Brokers or dealers effecting
transactions in the Shares should confirm that the Shares have been registered
under the securities laws of the state or states in which sales of the Shares
occur as of the time of such sales, or that there is an available exemption from
the registration requirements of the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
Shares. This prospectus is not an offer to sell securities in any circumstances
in which such an offer is unlawful.
CirTran has not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, CirTran, or the Shares
that is different from the information included or incorporated by reference in
this prospectus. You should not assume that the information in this prospectus,
or any supplement to this prospectus, is accurate at any date other than the
date indicated on the cover page of this prospectus or any supplement to it. In
this prospectus, references to "CirTran," "the Company," "we," "us," and "our,"
refer to CirTran Corporation and its subsidiaries.
TABLE OF CONTENTS
Summary about CirTran Corporation and this offering.......................................2
Risk factors..............................................................................4
Use of proceeds..........................................................................10
Determination of offering price..........................................................10
Description of business..................................................................11
Management's discussion and analysis or plan of operation................................18
Forward-looking statements...............................................................22
Selling Shareholders.....................................................................23
Plan of distribution.....................................................................24
Regulation M.............................................................................26
Legal Proceedings........................................................................26
Directors, executive officers, promoters and control persons.............................30
Commission's position on indemnification for Securities Act liabilities..................31
Security ownership of certain beneficial owners and management...........................32
Description of common stock..............................................................33
Certain relationships and related transactions...........................................34
Market for common equity and related stockholder matters.................................35
Executive compensation...................................................................36
Changes in and disagreements with accountants on accounting and financial disclosure.....38
Index to financial statements ...........................................................38
Experts..................................................................................39
Legal matters............................................................................39
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 May 23, 2003, we had approximately
250,000,000 shares of our common stock outstanding. Nine and nine-tenths percent
of 250,000,000 shares is 24,750,000 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 24,750,000, 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
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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 August 27, 2003, we have drawn $184,000 on the Equity Line and have
issued 16,016,174 shares of our common stock in connection with draws on 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 $16,446,519 and $15,230,302 at June 30, 2003, and December 31, 2002,
respectively. Our net loss from operations for the six months ended June 30,
2003, and the year ending December 31, 2002, were $1,216,217 and $2,149,810,
respectively. Although our gross profit margin has improved over the last two
years, and our level of sales has increased 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: $3,323,654 as
of December 31, 1999; $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 $5,333,449 at June 30,
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, 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, 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 increased in year ending 2002 as compared to the year
ending 2001. Our sales volumes for the last three 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; and $2,299,668 for the year ended December 31, 2002. On an
annualized basis, this trend indicates a 64% decrease in sales from 2000 through
the year ended December 31, 2002. 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
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are unable to raise sufficient capital to finance our operations, we may not be
able to continue as a going concern.
As of June 30, 2003, our monthly operating costs and interest expenses
averaged approximately $230,000 per month. As income from operations is not
sufficient to meet these expenses, we must depend on other sources of capital to
fund our operations. We have operated without a line of credit since February
2000, and it is unlikely that we will be able, in our current financial
condition, to obtain additional debt financing; and if we did acquire more debt,
we would have to devote additional cash flow to pay the debt and secure the debt
with assets. Therefore, we likely will have to rely on equity financing to meet
our anticipated capital needs. We recently entered into a 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 June 30, 2003, we have significant short-term debt, including
approximately $1.50 million in accounts payable, $820,292 in demand notes due
certain of our shareholders, and $3.35 million 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 $2.07
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.
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We are dependent on the continued services of our President, and the untimely
death or disability of Iehab Hawatmeh could have a serious adverse effect upon
our company.
We view the continued services of our president, Iehab Hawatmeh, as
critical to the success of our company. Though we have an employment agreement
with Mr. Hawatmeh (see "Executive Compensation"), and a key-man life insurance
policy, the untimely death or disability of Mr. Hawatmeh could have a serious
adverse affect on our operations.
We have a limited product offering, and some of our key technologies are still
in the product development stage, which could have a material adverse impact on
our ability to generate revenues from operations.
We are a full-service contract electronics manufacturer servicing OEMs in
the following industries: communications, networking, peripherals, gaming, law
enforcement, consumer products, telecommunications, automotive, medical and
semi-conductor. We conduct our operations through two main divisions: circuit
board manufacturing and assembly, and Ethernet card design and manufacture.
Presently, there are a limited number of commercially available applications or
products incorporating our technologies. For us to be ultimately successful,
sales from these product offerings must be substantially greater. An additional
element of our business strategy is to achieve revenues through appropriate
strategic alliances, co-development arrangements, and license arrangements with
third parties. There can be no assurance that these collaboration and license
agreements will generate material revenues for our business in the future.
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly rapid
turnaround time for their OEM customers. We do not obtain firm, long-term
purchase commitments from our customers and have experienced a demand for
reduced lead-times in customer orders. Our customers may cancel their orders,
change production quantities or delay design and production for several factors.
Cancellations, reductions or delays by a customer or group of customers could
adversely affect our results of operations. Additional factors that affect the
electronics industry and that could have a material adverse effect on our
business include the inability of our customers to adapt to rapidly changing
technology and evolving industry standards and the inability of our customers to
develop and market their products. If our customers' products become obsolete or
fail to gain commercial acceptance, our results of operations may be materially
and adversely affected.
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
The majority of our revenue is generated from our contract manufacturing
services. Our customers include electronics, telecommunications, networking,
automotive, gaming and medical device OEMs that contract with us for the
manufacture of specified quantities of products at a particular price and during
a relatively short period of time. As a result, the mix and number of our
clients varies significantly from time to time. Responding to the fluctuations
and variations in the mix and number of our clients can cause significant time
delays in the operation of our business and the realization of revenues from our
clients. These delays could have a material adverse impact on our business.
Our industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able, especially given our lack of financial resources, to
effectively respond to the technological requirements of a changing market,
including the need for substantial additional capital expenditures 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
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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.
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
$4,816,000
$0.01 481,600,000
$0.02 240,800,000
$0.03 160,533,333
$0.04 120,400,000
$0.05 96,320,000
$0.10 48,160,000
$0.15 32,106,667
$0.25 19,264,000
$0.50 9,632,000
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
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the maximum 250,000,000 shares of common stock registered under this prospectus
and the registration statement of which it is a part:
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
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 $4,748,542 at June 30, 2003. Accordingly, the Equity
Line Investor will experience immediate and substantial dilution between
approximately $0.0099 to $0.2498 per share, or approximately 99.32% to 99.93% 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) $0.0099 99.32%
$0.02 $0.0199 99.50%
$0.03 $0.0299 99.60%
$0.04 $0.0399 99.67%
$0.05 $0.0499 99.72%
$0.10 $0.0998 99.84%
$0.15 $0.1498 99.88%
$0.25 $0.2498 99.93%
(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
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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 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 August 27, 2003, we had approximately 274,000,000 shares
of our common stock outstanding. Nine and nine-tenths percent of 274,000,000
shares is 27,126,000 shares. As of August 27, 2003, our average daily trading
volume was approximately 608,465 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 August 27, 2003, would result in the issuance of approximately
8,500,000 shares of our common stock. It likely would take the Equity Line
Investor longer than the 7 trading days we are required to wait between puts to
sell 8,500,000 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;
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o the issuer of the equity security has been in continuous operation for
less than three years, and either has (a) net tangible assets of at
least $5,000,000, or (b) average annual revenue of at least
$6,000,000; or
o the issuer of the equity security has been in continuous operation for
more than three years, and has net tangible assets of at least
$2,000,000.
If you buy or sell a penny stock, these regulations require that you
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock would be
subject to Rule 15g-9 of the Exchange Act, which relates to non-Nasdaq and
non-exchange listed securities. Under this rule, broker-dealers who recommend
our securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if their market price is at least
$5.00 per share.
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
The price of our common stock is volatile, and an investor may not be able to
resell our shares at or above the purchase price.
In recent years, the stock market in general, and the OTC Bulletin Board
and the securities of technology companies in particular, has experienced
extreme price and trading volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
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
12
years, the price of our common stock is not based on past earnings, nor is the
price of the shares of our common stock indicative of current market value for
the assets we own. No valuation or appraisal has been prepared for our business
or possible business expansion.
DESCRIPTION OF BUSINESS
We are a full-service contract electronics manufacturer servicing OEMs in
the following industries: communications, networking, peripherals, gaming, law
enforcement, consumer products, telecommunications, automotive, medical and
semi-conductor. We conduct our operations through two main divisions: circuit
board manufacturing and assembly and Ethernet card design and manufacture.
Industry Background
The contract electronics manufacturing industry specializes in providing
the program management, technical and administrative support and manufacturing
expertise required to take an electronic product from the early design and
prototype stages through volume production and distribution. The goal is to
provide a quality product, delivered on time and at the lowest cost, to the OEM.
This full range of services gives the OEM an opportunity to avoid large capital
investments in plant, inventory, equipment and staffing and to concentrate
instead on innovation, design and marketing. By using our contract electronics
manufacturing services, our customers have the ability to improve the return on
their investment with greater flexibility in responding to market demands and
exploiting new market opportunities.
We believe two important trends have developed in the contract electronics
manufacturing industry. First, we believe OEMs increasingly require contract
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis where the OEM supplies all
materials and the contract manufacturer supplies only labor. Turnkey contracts
involve design, manufacturing and engineering support, the procurement of all
materials, and sophisticated in-circuit and functional testing and distribution.
The manufacturing partnership between OEMs and contract manufacturers involves
an increased use of "just-in-time" inventory management techniques that minimize
the OEM's investment in component inventories, personnel and related facilities,
thereby reducing costs.
We believe a second trend in the industry has been the increasing shift
from pin-through-hole, or PTH, to surface mount technology, or SMT,
interconnection technologies. Surface mount and pin-through-hole printed circuit
board assemblies are printed circuit boards on which various electronic
components, such as integrated circuits, capacitors, microprocessors and
resistors are mounted. These assemblies are key functional elements of many
types of electronic products. PTH technology involves the attachment of
electronic components to printed circuit boards with leads or pins that are
inserted into pre-drilled holes in the boards. The pins are then soldered to the
electronic circuits. The drive for increasingly greater functional density has
resulted in the emergence of SMT, which eliminates the need for holes and allows
components to be placed on both sides of a printed circuit. SMT requires
expensive, highly automated assembly equipment and significantly more
operational expertise than PTH technology. We believe the shift to SMT from PTH
technology has increased the use of contract manufacturers by OEMs seeking to
avoid the significant capital investment required for development and
maintenance of SMT expertise.
Electronics Assembly and Manufacture
Approximately 80% of our revenues are generated by our electronics assembly
activities, which consist primarily of the placement and attachment of
electronic and mechanical components on printed circuit boards and flexible
(i.e., bendable) cables. We also assemble higher-level sub-systems and systems
incorporating printed circuit boards and complex electromechanical components
that convert electrical energy to mechanical energy, in some cases manufacturing
and packaging products for shipment directly to our customers' distributors. In
addition, we provide other manufacturing services, including refurbishment and
remanufacturing. We manufacture on a turnkey basis, directly procuring any of
the components necessary for production where the OEM customer does not supply
all of the components that are required for assembly. We also provide design and
new product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more
13
value-added services, and price-sensitive, high-volume production. Our goal is
to offer customers significant competitive advantages that can be obtained from
manufacturing outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management and increased
purchasing power.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation ("Racore"), we
design, manufacture, and distribute Ethernet cards. These components are used to
connect computers through fiber optic networks. In addition, we produce private
label, custom designed networking products and technologies on an OEM basis. Our
products serve major industrial, financial, and telecommunications companies
worldwide. We market our products through an international network of
distributors, value added resellers, and systems integrators who sell, install,
and support our entire product catalogue.
Additionally, we have established, and continue to seek to establish, key
business alliances with major multinational companies in the computing and data
communications industries for which we produce private label, custom designed
networking products and technologies on an OEM basis. These alliances generally
require that Racore either develop custom products or adapt existing Racore
products to become part of the OEM customer's product line. Under a typical
contract, Racore provides a product with the customer's logo, packaging,
documentation, and custom software and drivers to allow the product to appear
unique and proprietary to the OEM customer. Contract terms generally provide for
a non-recurring engineering charge for the development and customization
charges, together with a contractual commitment for a specific quantity of
product over a given term.
In June 2001, Racore received a $225,000 order for specially-designed
Ethernet cards for a federal law enforcement agency. In September 2001, Racore
submitted a bid for business with the same agency that, if accepted, would have
resulted in a contract valued at over $2.0 million over three years. This bid
was ultimately not accepted, but Racore remains committed to actively pursuing
government contracts for its Ethernet card technology. These contracts are
generally awarded in September of each year, the last month of the government's
fiscal year. In February of 2003, Racore received additional orders from GTSI
for another government agency in the amount of $40,000. Racore is continually
pursuing 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.
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.
14
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 2002 and 2001, CirTran Corporation spent approximately $43,272 and
$159,271, respectively, on research and development of new products and
services. The costs of that research and development were paid for by our
customers. In addition, during the same periods, our subsidiary, Racore, spent
approximately $45,000 and $148,287, 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, though we continue to seek out new customers to generate increased
sales. We treat sales and marketing as an integrated process involving
15
direct salespersons and project managers, as well as senior executives. We also
use independent sales representatives in certain geographic areas.
During the sale process, a customer provides us with specifications for the
product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
In 2002, 94% of our net sales were derived from pre-existing customers,
whereas during the year ended December 31, 2001, over 97% of our net sales were
derived from customers that were also customers during 2000. Historically, a
small number of customers accounted for a significant portion of our net sales.
In 2002 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 the year ended December 31, 2000, our largest customer,
Osicom Technology and its successor, Entrada Networks, Inc., accounted for 30%
of consolidated net sales. We no longer do business with Entrada Networks, Inc.
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.
Backlog consists of contracts or purchase orders with delivery dates
scheduled within the next twelve months. At December 31, 2002, our backlog was
approximately $450,000. As of June 30, 2003, our backlog has increased to
$750,000.
In September and October 2001, we issued several press releases relating
to:
- Our "partnership with an offshore Malaysian entity . . . expects to
commence bidding for multi- million dollar contracts through this
entity in the very near future" in our September 19, 2001 press
release;
- InterMotive Products and the "two contracts for new products and the
vehicle orders that are "projected to blossom into a million dollar
contract manufacturing opportunity" for CirTran in our October 10,
2001 press release; and
- The "implementation of . . . [new] software . . . bring CirTran the
potential for multi- million dollar revenue relationships" in our
October 16, 2001 press release.
We entered into the partnership with the Malaysian entity outlined in the
September 19, 2001, press release, to enable us to submit more competitive bids
for larger production contracts. The Company also implemented the software
referenced in the October 16, 2001, press release to enable us to bid more
competitively for larger contracts. Through December 31, 2002, in connection
with the relationship with the Malaysian entity, we bid on large-scale contracts
ranging from approximately $2 million to $4 million. Although we feel that our
relationship with the Malaysian entity will enable us to continue to bid
competitively for the larger contracts, to date we have been unsuccessful at
being selected as a supplier on any of the larger bids we submitted.
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
16
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. Department of
Defense and the Canadian Department of National Defense will allow us to support
the commercial activities of the broad range of manufacturers working with 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
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
17
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 51 persons, 4 in administrative positions, 3 in engineering and
design, 42 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, and $2,149,810 in 2002.
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until July 1, 2000, when we issued a total of 10,000,000 shares
of our common stock (150,000,000 of our shares as presently constituted) to
acquire, through our wholly-owned subsidiary, CirTran Corporation (Utah),
substantially all of the assets and certain liabilities of Circuit.
In 1987, Vermillion Ventures, Inc. filed an S-18 registration statement
with the United States Securities and Exchange Commission ("SEC") but did not at
that time become a registrant under the Securities Exchange Act of 1934 ("1934
Act"). From 1989 until 2000, Vermillion did not make any filings with the SEC
under the 1934 Act. In July 2000, we commenced filing regular annual, quarterly,
and current reports with the SEC on Forms 10-KSB, 10-QSB, and 8-K, respectively,
and have made all filings required of a public company since that time. In
February 2001, we filed a Form 8-A with the SEC and became a registrant under
the 1934 Act. We may be subject to certain liabilities arising from the failure
of Vermillion to file reports with the SEC from 1989 to 1990, but we believe
these liabilities are minimal because there was no public market for the common
shares of Vermillion from 1989 until the third quarter of 1990 (when our shares
began to be traded on the Pink Sheets) and it is likely that the statute of
limitations has run on whatever public trades in the shares of our common stock
may have taken place during the period during which Vermillion failed to file
reports.
On August 6, 2001, we effected a 1:15 forward split and stock distribution
which increased the number of 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.
18
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 purchase inventory items related to their contracts in the event that the
contracts are cancelled. The market value of related inventory is based upon
those agreements
The Company typically orders inventory on a customer-by-customer basis. In
doing so the Company enters into binding agreements that the customer will
purchase any excess inventory after all orders are complete. Almost 80% of the
total inventory is secured by these agreements.
Checks Written in Excess of Cash in Bank
19
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 purchase 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.
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
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Certain Relationships and Related Transactions."
We lease approximately 40,000 square feet of office and manufacturing space
in West Valley City, Utah, at a monthly lease rate of approximately $16,000. The
lease is renewable in November of 2006 for two additional ten- year periods.
This facility serves as our principal offices and manufacturing facility and is
leased from I&R Properties, LLC, a company owned and controlled by individuals
who are officers, directors and principal stockholders. We believe our lease for
the facility is on commercially reasonable terms.
Management believes that each of the related party transactions were as
fair to the Company as could have been made with unaffiliated third parties.
Results of Operations - Comparison of Years Ended December 31, 2002 and 2001
Sales and Cost of Sales
Net sales increased 22.9 % to $2,299,668 for the year ended December 31,
2002 as compared to $1,870,848 for the year ended December 31, 2001. The
increase is partially due to the increased orders from pre-existing customers.
For CirTran Corporation, we had two pre-existing customers that have generated
approximately 40% of the sales for 2002. These customers are Tempo at 25% and
General Cable at 15% of sales. For Racore, pre-existing customer SGI accounted
for 65% of sales.
Cost of sales for the year ended December 31, 2002 was $1,966,851, as
compared to $2,340,273 during the prior year. Those costs as a percentage of net
sales were 85.5% during 2002 as compared to 125% during 2001. The improvement in
the Cost of sales was due to the higher margin contracts the company completed.
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 2002 was $540,207, as compared to $506,381 in 2001. 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 lead 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 2001 and 2002; 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 2002 1,838,781 1,673,739 165,042
Assembly
------------------- ------------------ ----------------------- ------------------------ --------------------------
2001 1,352,085 1,718,687 (366,602)
------------------ ----------------------- ------------------------ --------------------------
Ethernet 2002 460,887 293,112 167,775
Technology
------------------- ------------------ ----------------------- ------------------------ --------------------------
2001 518,763 621,586 (102,823)
------------------ ----------------------- ------------------------ --------------------------
Year Total Pre-existing New
Sales Customers Customers
------------------- ------------------ ----------------------- ------------------------ --------------------------
Electronics 2002 1,838,781 1,817,312 21,469
Assembly
------------------- ------------------ ----------------------- ------------------------ --------------------------
2001 1,352,085 1,311,522 40,563
------------------ ----------------------- ------------------------ --------------------------
Ethernet 2002 460,887 338,927 121,960
Technology
------------------- ------------------ ----------------------- ------------------------ --------------------------
2001 518,763 462,844 55,919
------------------ ----------------------- ------------------------ --------------------------
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, 2002 was $1,550,553, as
compared to $1,773,888 at December 31, 2001. The decrease in inventory was
primarily the result of the settlement with Entrada, repeated customer orders,
and the implementation of our inventory control system.
Selling, General and Administrative Expenses
During the year ended December 31, 2002, selling, general and
administrative expenses were $2,180,226 versus $1,690,837 for 2001, a 28.2%
increase. The increase is a result of our increase in the size of our sales
staff, an increase in the commission structure for the sales staff, and our
effort to aggressively market our products during a period of economic downturn.
Interest Expense
Interest expense for 2002 was $437,074 as compared to $773,034 for 2001, a
decrease of 43.4%. This decrease is primarily attributable to a decrease in debt
which was attributed to the conversions of notes payable to shares of common
stock in January and December 2002 and in delinquent payroll tax liabilities,
the penalties on which were previously recorded as part of interest expense. As
of December 31, 2002 and 2001, the amount of our liability for delinquent state
and federal payroll taxes and estimated penalties and interest thereon was
$2,029,626 and $1,982,445, respectively.
Other income increased from $212 in 2001 to $7,173 in 2002.
As of December 31, 2002 there was a gain on the settlement of the sub-lease
in Colorado Springs of $152,500.
As a result of the above factors, our overall net loss decreased 26.7% to
$2,149,810 for the year ended December 31, 2002, as compared to $2,933,084 for
the year ended December 31, 2001.
Results of Operations - Comparison of Periods Ended June 30, 2003 and 2002
Sales and Cost of Sales
21 Net sales decreased significantly to $416,762 for the three-month period
ended June 30, 2003, as compared to $972,018 during the same period in 2002.
Cost of sales decreased by 71.7%, from $957,395 during the three- month period
ended June 30, 2003, to $271,211 during the same period in 2003. Our gross
profit margin for the three-month period ended June 30, 2003, was 34.9%, up from
1.5% for the same period in 2002. The large increase in the gross profit margin
is attributed to our selling more consigned products than turkey products, and
doing more higher margin lower quantity products. Though we sustained decreased
sales for the three-month period ended June 30, 2003, compared to the same
period in 2002, we were able to increase our gross profit margin.
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
us to deliver products to customers in the quantities and time frame required.
This manufacturing technique requires us to maintain an inventory of component
parts to meet customer orders. Inventory at June 30, 2003, was $1,538,406, as
compared to $1,550,553 at December 31, 2002. The decrease in inventory is
negligible.
Selling, General and Administrative Expenses
During the quarter ended June 30, 2003, selling, general and administrative
expenses were $584,045 versus $362,982 for 2002, a 60.9% increase. The increase
is substantially the result of our increase in legal fees for the equity line
and also the result of additional travel expenses for the sales staff in our
effort to aggressively market our products during a period of economic downturn.
Interest Expense
Interest expense for quarter ended June 30, 2003, was $122,984 as compared
to $103,864 for 2002, an increase of 18.4%. This increase is primarily
attributable to an increase in debt which was attributed to the increase in
notes payable and an increase in interest rates. As of June 30, 2003, and
December 31, 2002, the amount of our liability for delinquent state and federal
payroll taxes and estimated penalties and interest thereon was $2,074,134 and
$2,029,626, respectively.
As a result of the above factors, our overall net loss increased 87.4% to
$561,478 for the quarter ended June 30, 2003, as compared to $299,548 for the
quarter ended June 30, 2002 and 67.7% to $1,216,217 for the six months ended
June 30, 2003, as compared to $725,305 for the same period in 2002.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history
of losses and our accumulated deficit was $16,446,519 at June 30, 2003, and
$15,230,302 at December 31, 2002. Our net operating loss for the quarter ending
June 30, 2003, was $561,478, compared to $299,548 for the quarter ended June 30,
2002. Our current liabilities exceeded our current assets by $5,333,449 as of
June 30, 2003, and $4,490,623 as of December 31, 2002. The increase in the
difference is mostly attributed to increasing account payables, notes payable,
and accrued liabilities. For the six months ended June 30, 2003 and 2002, we had
negative cash flows from operations of $379,788 and $918,652, respectively.
Cash
We had cash on hand of $45,526 at June 30, 2003, and $500 at December 31,
2002.
Net cash used in operating activities was $379,788 for the six months ended
June 30, 2003. During 2003, net cash used in operations was primarily
attributable to $1,216,217 in net losses from operations, partially offset by
non-cash charges, increases in accrued liabilities of $455,767 and in increases
to trades accounts payable of $187,312, and in a decrease to inventories of
$12,147. The non-cash charges were for depreciation and amortization of $157,154
and non-cash compensation expense of $72,500.
22
Net cash used in investing activities during the six months ended June 30,
2003, consisted of equipment purchases of $4,495.
Net cash provided by financing activities was $429,309 during the six
months ended June 30, 2003. Principal sources of cash were proceeds of $100,000
from notes payable to related parties, proceeds from notes payable of $240,000
and proceeds from the exercise of options to purchase common stock of $187,500.
Accounts Receivable
At June 30, 2003, we had receivables of $89,628, net of a reserve for
doubtful accounts of $37,037, as compared to $37,464 at December 31, 2002, net
of a reserve of $37,037. This increase is primarily attributed to sales having
increased compared to the last two months of last year.
Accounts Payable
Accounts payable were $1,499,474 at June 30, 2003, as compared to
$1,359,723 at December 31, 2002. This increase is primarily attributed to
additional accounting and legal fees.
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather
than providing cash in operations. We had an accumulated deficit of $16,446,519
and a total stockholders' deficit of $4,748,542 at June 30, 2003. As of June 30,
2003, our monthly operating costs and interest expenses averaged approximately
$230,000 per month.
Significant amounts of additional cash will be needed to reduce our debt
and fund our losses until such time as we are able to become profitable. At June
30, 2003, we were in default of notes payable whose principal amount, not
including the amount owing to Abacas Ventures, Inc., was approximately $685,000.
In addition, the principal amount of notes that either mature in 2003 or are
payable on demand was approximately $630,000.
In conjunction with our efforts to improve our results of operations,
discussed above, we are also actively seeking infusions of capital from
investors and are seeking to replace our 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 on the Over the Counter Electronic Bulletin Board was
obtained in July 2002. There can be no assurance that we will be successful in
obtaining more debt and/or equity financing in the future or that our results of
operations will materially improve in either the short- or the long-term. If we
fail to obtain such financing and improve our results of operations, we will be
unable to meet our obligations as they become due. That would raise substantial
doubt about our ability to continue as a going concern.
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.
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 shareholdersSelling shareholders
Three of the Company's 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 August 27, 2003, 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 August 27, 2003, of the full
remaining amount of $4,816,000 under the Equity Line at a per share price of
approximately $0.01. 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
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.
24
Shares of Percentage of Number of
Shares of Common Stock Common Stock Shares of
Common Issuable to Issuable to Common Percentage
Stock Selling Selling Stock Number of Common
Owned by Shareholder In Shareholder In Registered of Shares Stock
Selling Connection with Connection with Hereunder of Beneficially
Share- Equity Line Equity Line (2) Common Owned
Name of Selling holder Prior Transaction Transaction(1) Stock After the
Shareholder to Offering Owned Offering
After
Offering
---------------------- ---------------- -------------------- ------------------- --------------- ------------- ---------------
Cornell Capital 2,375,0000 499,991,174 (3) 64.70% 252,375,000 0 (4) 0% (4)
Partners, LP
Butler Gonzalez 62,500 (5) 0 0.02% 62,500 0 (6) 0% (6)
LLP
Westrock Advisors, 125,000 (7) 0 0.05% 125,000 0 (6) 0% (6)
Inc.
_____________________
(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 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 Equity Line. Because
the specific circumstances of the issuances under the 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 amount under the Equity Line as of August 27, 2003. 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:
16,016,174 shares of common stock issued to the Equity Line Investor in
connection with draws on the Second Equity Line through August 27, 2003.
481,600,000 shares of common stock issuable upon a hypothetical put of the
full remaining $4,816,000 available under the Equity Line as of August 27, 2003.
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 $4,816,000 available
under the Equity Line as of August 27, 2003, and the issuance of 481,600,000
shares of our common stock, together with the sale by the Equity Line Investor
of the 497,616,174 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.
25
(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 DistributionPlan 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: " a block trade in
which a broker-dealer engaged by a Selling Shareholder will attempt to sell the
Shares as agent, but may position and resell a portion of the block as principal
to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus;
o an over-the-counter distribution in accordance with the rules of the
OTC Bulletin Board;
o ordinary brokerage transactions in which the broker solicits
purchasers; and
o privately negotiated transactions.
In effecting sales, broker-dealers engaged by the Selling Shareholders may
arrange for other broker-dealers to participate in the resales.
In connection with distributions of the Shares or otherwise, a Selling
Shareholder may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares covered by this prospectus in the course of hedging the positions
they assume with the Selling Shareholder. A Selling Shareholder may also sell
the Shares short and redeliver the Shares to close out such short positions. A
Selling Shareholder may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares,
which the broker-dealer may resell or otherwise transfer under this prospectus.
A Selling Shareholder may also loan or pledge the Shares registered hereunder to
a broker-dealer and the broker-dealer may sell the shares so loaned or upon a
default the broker-dealer may effect sales of the pledged
26
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.
None of these persons may effect any stabilizing transaction to facilitate any
offering at the market. As the Selling Shareholders will be offering and selling
our common stock at the market, Regulation M will prohibit them from effecting
any stabilizing transaction in contravention of Regulation M with respect to the
Shares.
Legal Proceedings
As of June 30, 2003, the Company had accrued liabilities in the amount of
$2,074,134 for delinquent payroll taxes, including interest estimated at
$349,298 and penalties estimated at $230,927. Of this amount, approximately
$321,828 was due the State of Utah. During the first quarter of 2003, no
payments were made to the State of Utah. During the second quarter of 2003,
partial payments were made to the State of Utah. Approximately $1,741,367 was
owed to the Internal Revenue Service as of June 30, 2003. The required monthly
payments were
27
made during each of the three months during the first quarter of 2003. The
Company is currently renegotiating the terms of the payment schedule with the
Internal Revenue Service, discussed more fully below under the heading "Internal
Revenue Service." Approximately $10,939 was owed to the State of Colorado as of
June 30, 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 has
filed the Confession of Judgment and proceeded with execution thereon. The
Company is currently negotiating with Sunborne in an attempt to settle the
remaining obligation under the settlement agreement.
We also assumed certain liabilities of Circuit Technology, Inc. in
connection with our transactions with that entity in the year 2000, and as a
result we are defendant in a number of legal actions involving nonpayment of
vendors for goods and services rendered. We have accrued these payables and have
negotiated settlements with respect to some of the liabilities, including those
detailed below, and are currently negotiating settlements with other vendors.
Advanced Component Labs adv. Circuit Technology Corporation Civil No.
990912318, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against the Company on or about December
8, 1999, under allegations that the Company owed $44,269.43 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Claims are asserted for breach of implied contract and unjust enrichment. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Initial discovery is beginning. No
trial date has been set.
Advanced Electronics has notified the Company that it believes it has a
claim against the Company in the amount of $67,691.56 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 make a cash payment to this creditor and issue a promissory
note and shares of its restricted common stock in satisfaction of the creditor's
claims. 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.
Arrow Electronics adv. Circuit Technology Corporation, Civil No. 990409504,
Third Judicial District Court Sandy Department, Salt Lake County, State of Utah.
Suit was brought against the Company on or about October 19,
28
1999, under allegations that the Company owes $199,647.92 for materials and
services and terms of a promissory note. The Company has answered, admitting
that it owed certain sums and denying all other claims. The Company and Arrow
have entered a settlement agreement under which the Company will pay $6,256.24
each month until the obligation and interest thereon are paid. Judgment was
entered April 24, 2001, against the Company for $218,435.46 accruing at 16% per
annum. The Company is currently attempting to negotiate a settlement of these
claims.
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. The Company is currently attempting to negotiate a
settlement of these claims.
Avnet Electronics has notified the Company that it believes it has a claim
against the Company in the amount of $180,331.02 for the cost of goods or
services provided to the Company for the Company's use and benefit. No lawsuit
has been filed. Negotiations for settlement of this claim have resulted in an
agreement in principal whereby the Company will make a cash payment to this
creditor and issue a promissory note and its restricted common stock in
satisfaction of the creditor's claims. 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.
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. During 2000, the Company settled the
lawsuit 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, Future filed a confession of judgment claiming that the
Company defaulted on its agreement and claimed the 2000 lawsuit was not properly
satisfied. At December 31, 2002, the Company owed $60,133 of principal under
terms of the remaining note payable. The Company denies the vendor's claim and
intends to vigorously defend itself against the confession of judgment.
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 Company and Racore are defending these claims. The parties are
also conducting settlement negotiations.
Infineon Technologies North America Corp. adv. Circuit Technology, Inc. et
al., Case No. CV 792634, Superior Court of the State of California, County of
Santa Clara. Judgment was entered against Circuit Technology, Inc., on March 12,
2002, in the amount of $181,342.15. As of March 25, 2003, we are not aware of
any collection efforts made by Infineon.
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
29
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 and Racore are defending these claims and are also negotiating
settlement.
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.
Orbit Systems, Inc. adv. Circuit Technology, Inc. et al, Case No.
010100050DC, Third Judicial District Court, West Valley City Department, Salt
Lake County, State of Utah. Orbit filed suit on January 4, 2001, seeking to
recovery $173,310 for the costs of goods that Orbit claims the Company was under
contract to purchase. The Company entered into a settlement agreement with Orbit
and has performed all its obligations under the agreement. Orbit has made demand
for an additional payment of approximately $600. The Company believes it has no
obligation to pay this amount. The Company will seek to enforce the parties'
settlement agreement if Orbit continues to demand this additional payment.
Sager Electronics adv. Circuit Technology Corporation, Civil No. 000403535,
Third Judicial District Court, Sandy Department, Salt Lake County, State of
Utah. Suit was brought against the Company on or about March 23, 2000, under
allegations that the Company owed $97,259.23 for the cost of goods or services
provided to the Company for the Company's use and benefit. Claims are asserted
for nonpayment of amount owing. The Company has answered, admitting that it owed
certain sums for conforming goods and services and denying all other claims.
Negotiations for settlement have resulted in an agreement for settlement of all
claims of Sager against the Company. The Company has arranged certain payments
and is required to pay Sager $1,972.07 each month until paid. The Company
defaulted on its obligations in December 2002. The Company is negotiating a new
settlement with Sager.
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 is making payments pursuant to a
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
30
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 have reached a settlement agreement under which the
Company will pay approximately $12,000 per month beginning in January 2003 to
resolve this claim.
Zion's First National Bank has notified the Company that it believes it has
a claim against the Company in the amount of $240,000.00 for loans made to the
Company for the Company's use and benefit. The Company has entered into a Fifth
Forbearance and Loan Modification Agreement, requiring monthly payments of
$20,000.00. The Company subsequently renegotiated a settlement with Zions Bank
under which the Company will pay approximately $12,000 per month beginning in
January 2003.
George M. Madanat, Civil No. KC 035616, Superior Court of the State of
California for the County of Los Angeles, East District. Suit was brought
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
under the settlement agreement, and judgment was entered against the Company. As
of April 4, 2003, 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 $2.0 million in employee payroll
taxes. The Company is reviewing its records in an effort to confirm the validity
of the claims and has been involved in settlement negotiations. The Company
recently made an offer to enter into an installment agreement, whereby the
Company would pay $30,000 per month. The Service rejected the Company's offer.
On August 6, 2003, the Company appealed the rejection to the Internal Revenue
Service Office of Appeals, and has requested a due process hearing on the
matter. No hearing date has been set.
Dickson Circuits USA, Third District Court, Sandy Department, Civil No.
030401796. Dickson Circuits filed suit against the Company in the amount of
$31,744.64 for the cost of goods and services provided to the Company for the
Company's use and benefit. The Company has entered into a settlement agreement
with Dickson Circuits, whereby the Company will make monthly payments of
approximately $1,500 over the course of three years.
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.
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.
31
Name Age Positions
Iehab J. Hawatmeh 36 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 28 Director since June 2001. Senior Vice-President,
Sales and Marketing since January 2002.
Shaher Hawatmeh 37 Vice-President of CirTran Corporation (Utah).
Served since July 2000.
Iehab J. Hawatmeh. Mr. Hawatmeh is our President and Secretary and a member of
our Board of Directors. Mr. Hawatmeh served as the President and Chief Executive
Officer of Circuit Technology, Inc. from 1993 until we acquired it in July 2000.
In this position, he was responsible for all operational, financial, marketing
and sales activities of Circuit Technology. He now performs similar functions
for us and our operating subsidiary, CirTran Corporation (Utah). Mr. Hawatmeh
received a bachelor's degree in electrical and computer engineering from Brigham
Young University in 1989, and an MBA with an emphasis in statistical process
controls from the University of Phoenix in 1993. Mr. Hawatmeh is the brother of
Shaher Hawatmeh.
Shaher Hawatmeh. Shaher Hawatmeh served as the Vice-President and Treasurer of
Circuit Technology, Inc. from 1993 until July 2000 and now serves as
Vice-President of our operating subsidiary, CirTran Corporation (Utah). In such
capacities, he is responsible for budget development, strategic planning, asset
management and marketing. Mr. Hawatmeh is the brother of Iehab Hawatmeh.
Raed Hawatmeh. Raed Hawatmeh, who is not related to Iehab and Shaher Hawatmeh,
has served as a director since June 2001. Mr. Hawatmeh has been a self-employed
investor and venture capitalist for the past five years, specializing in
financing start-up companies in the electronics industry.
Trevor Saliba. Mr. Saliba has served as a director since June 2001 and was
appointed Senior Vice-President, Sales and Marketing in January 2002. In 1997,
Mr. Saliba founded Saliba Corporation, a San Francisco construction company, and
has served as its president since that time. Prior to 1997, Mr. Saliba was
employed as a project engineer for Tutor-Saliba Corporation.
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
32
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 275,200,865
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of August 27, 2003, 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 (2) 5% 52,173,990 18.96%
115 S. Valley Street Shareholder
Burbank, CA 91505
Roger Kokozyon 5% 27,715,620 10.07%
4539 Haskell Avenue Shareholder
Encino, CA 91436
Iehab J. Hawatmeh Director, 46,754,188 16.99%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5% Shareholder
Raed Hawatmeh Director 29,598,530 10.76%
10989 Bluffside Drive & 5%
Studio City, CA 91604 Shareholder
Shaher Hawatmeh Officer 3,775,365 1.37%
4125 South 6000 West
West Valley City, Utah 84128
Trevor Saliba (1)
5 Thomas Mellon Circle, Suite 108 Director 500,000 *
All Officers and Directors as a Group 80,628,083 29.30%
(4 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.
Description of Common Stock
Effective August 6, 2001, our authorized capital was increased from
500,000,000 to 750,000,000 shares of common stock, $0.001 par value, and we also
effected, effective the same date, a 1:15 forward split of our issued and
outstanding shares of common stock through a forward split and share
distribution. As of August 27, 2003, 275,200,865 (post forward-split) shares of
our common stock were issued and outstanding. We are not authorized to issue
preferred stock.
Each holder of our common stock is entitled to a pro rata share of cash
distributions made to shareholders, including dividend payments, and are
entitled to one vote for each share of record on all matters to be voted on by
shareholders. There is no cumulative voting with respect to the election of our
directors or any other matter. Therefore, the holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of our common stock are entitled to receive dividends when, as and if
declared by our board of directors, in its sole discretion, from funds legally
available for such use. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities
and after provision has been made for each class of stock, if any, having any
preference in relation to our common stock. Holders of our common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to our common stock.
We have never declared or paid a cash dividend on our capital stock, nor do
we expect to pay cash dividends on our common stock in the foreseeable future.
We currently intend to retain our earnings, if any, for use in our business. Any
dividends declared in the future will be at the discretion of our board of
directors and subject to any restrictions that may be imposed by our lenders.
We have elected not to be governed by the terms and provisions of the
Nevada Private Corporations Law that are designed to delay, defer or prevent a
change in control of the Company.
Registration Rights and Related Matters
Pursuant to an agreement dated November 3, 2000, and as part of our debt
settlement with Future Electronics Corporation ("Future"), we granted certain
registration rights to Future with respect to 5,281,050 (352,070 pre-forward
split) shares of our common stock. These rights provide Future with the
opportunity, subject to certain terms and conditions, to include up to 50% of
our common stock that it holds in any registration statement filed by us. Among
other things, we have agreed to pay any costs incurred with the registration of
such stock and to keep any registration statement we file active for a period of
180 days or until the distribution contemplated in the registration statement
has been completed. Future's registration rights are assignable and transferable
to any individual or entity that does not directly compete with us. These
registration rights are not exercisable, however, with respect to registration
statements relating solely to the sale of securities to participants in a
company stock plan or relating solely to corporate reorganizations. In addition,
the rights would not be fully exercisable if an underwriter managing a public
offering determined in good faith that market factors required a limitation on
the
34
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
We lease our principal offices and manufacturing facility from I&R
Properties LLC, a Utah limited liability company, at a monthly lease rate of
approximately $16,000 under a lease that has a current term expiring in November
2006. We have the option of renewing the lease for two additional 10-year terms.
I & R Properties, LLC is owned and controlled by Iehab J. Hawatmeh, an officer,
director and principal stockholder, Raed Hawatmeh, a principal stockholder and
director, and Shaher Hawatmeh, a Vice president in CirTran Corporation (Utah),
our operating subsidiary.
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.
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 "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.
35
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.
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.
Calendar Quarter Ended High Bid Low Bid
June 30, 2003 $0.05 $0.01
March 31, 2003 $0.05 $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
December 31, 2001 $0.10 $0.04
September 30, 2001 (1) $0.36 $0.06
June 30, 2001 $3.500 $1.500
March 31, 2001 $5.500 $3.000
December 31, 2000 $4.000 $4.000
1. Our 15 for 1 forward stock split was made effective August 6, 2001 and
our stock price decreased accordingly.
As of August 27, 2003, we had approximately 542 shareholders of record
holding 275,200,865 shares of common stock.
We have not paid, nor declared, any dividends on our common stock since our
inception and do not intend to declare any such dividends in the foreseeable
future. Our ability to pay dividends is subject to limitations imposed by Nevada
law. Under Nevada law, dividends may be paid to the extent the corporation's
assets exceed its liabilities and it is able to pay its debts as they become due
in the usual course of business.
Recent Sales of Unregistered Securities
In 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.
36
In January, 2002, the Company entered into an agreement with Abacas under
which the Company issued an aggregate of 19,987,853 shares of common stock in
exchange for cancellation of an aggregate amount of $1,499,090 in senior debt
owed to the creditors by the Company. The shares were issued with an exchange
price of $0.075 per share, for the aggregate amount of $1,500,000. The Company
did not grant registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
Pursuant to the Second Equity Line of Credit Agreement, we will put to the
Equity Line Investor, in lieu of repayment of amounts drawn on the Equity Line,
shares of our common stock. Although we have filed this registration statement
to register the resale by the Equity Line Investor of the shares put to it by
us, the issuances of shares to the Equity Line Investor and the other Selling
Shareholders were 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 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 August 27, 2003, the company has issued
16,016,174 shares of common stock to the Equity Line Investor in connection with
draws on the Equity Line.
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 $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Executive Compensation
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2001, 2000,
and 1999, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
37
Long-Term Compensation
Annual Compensation Awards
----------------------- ------------------------------------------
Restricted
Stock Stock
Name and Salary Bonus Awards Options All Other
Principal Position Year ($) ($) ($) (#) Compensation
------------------ ---- ------- ------ ------------ ------------ ------------
Iehab J. Hawatmeh 2002 175,000 - - 1,850,000 -
President, Secretary, Treasurer, 2001 175,000 - - - -
and Director 2000 175,000 - - - -
Shaher Hawatmeh 2002 130,000 - - 2,500,000 -
Executive Vice President of CirTran 2001 130,000 - - 500,000 -
Corporation (Utah) 2000 109,000 - - - -
Trevor M. Saliba 2002 118,000 - - 500,000 -
Sr. Vice President and Director of 2001 - - - - -
CirTran Corporation 2000 - - - - -
Raed S. Hawatmeh 2002 - - - 500,000 -
Director of CirTran Corporation 2001 - - - - -
2000 - - - - -
Employment Agreements
Iehab Hawatmeh entered into an employment agreement with Circuit in 1993
that was assigned to us as part of the reverse acquisition of Circuit in July
2000. This agreement, which is of indefinite term, provides for a base salary
for Mr. Hawatmeh, plus a bonus of 2% of our net profits before taxes, payable
quarterly, and any other bonus our board of directors may approve. The agreement
also provides that, if Mr. Hawatmeh is terminated without cause, we are
obligated to pay him, as a severance payment, an amount equal to five times his
then-current annual base compensation, in one lump-sum payment or otherwise, as
Mr. Hawatmeh may direct.
Trevor Saliba entered into an agreement with us in January 2002 pursuant to
which we retained Mr. Saliba as Senior Vice-President, Sales and Marketing. The
agreement provides for remuneration to Mr. Saliba of $6,000 per month, plus
reimbursement for all pre-approved business expenses. In addition, we agreed to
pay Mr. Saliba an amount equal to 5.0% of all gross investments made into our
company that are generated and arranged by Mr. Saliba. The agreement has an
initial term of one year, renewable upon agreement of the parties, but is
terminable by either party for any reason upon 90 days written notice to the
other party. In addition, we may terminate the agreement upon 30 days written
notice if Mr. Saliba fails to comply with the terms of the agreement.
2001 Stock Plan
The 2001 Stock Plan has been fully distributed.
2002 Stock Plan
In December 2002, our board approved and adopted our 2002 Stock Plan, or
the 2002 Plan, subject to shareholder approval. An aggregate of 25,000,000 (post
forward-split) shares of our common stock are subject to the 2002 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 2002 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 2002 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 2002 Plan is administered by our board of directors, which designates
from time to time the individuals to whom awards are made under the 2002 Plan,
the amount of any such award and the price and other terms and conditions of any
such award. The 2002 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 2002
Plan at any time.
38
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 2002 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 2002 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. No stock purchase rights have been
granted under the 2002 Plan.
As of June 30, 2003, options to purchase 14,500,000 shares of our common
stock have been granted under the 2002 Plan.
Changes in and disagreements with accountants
on accounting and financial disclosure
On March 12, 2002, we engaged Hansen, Barnett & Maxwell as our independent
auditor following our dismissal, effective March 12, 2002, of Grant Thornton,
LLP ("Grant Thornton"). Our Board of Directors approved the engagement of
Hansen, Barnett & Maxwell and the dismissal of Grant Thornton.
Grant Thornton had served as our independent accountants since February
1999. Grant Thornton's auditors report on the restated consolidated financial
statements of the registrant and subsidiaries as of and for the year ended
December 31, 2000, not included herein, contained a separate paragraph stating
that "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 regard to
these matters are also described in Note B. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty." Except as noted above, Grant Thornton's report on our
restated financial statements for the fiscal year ended December 31, 2000, not
included herein, contained no adverse opinions or disclaimer of opinions, and
was not qualified as to audit scope, accounting principles, or uncertainties.
As required by applicable rules of the Securities and Exchange Commission
(the "Commission"), we notified Grant Thornton that during our two most recent
fiscal years and the interim period from January 1, 2002, through March 12,
2002, we were unaware of any disputes between us and Grant Thornton as to
matters of accounting principles or practices, financial statement disclosure,
or audit scope or procedure, which disagreements, if not resolved to the
satisfaction of Grant Thornton, would have caused it to make a reference to the
subject matter of the disagreements in connection with its reports.
We requested that Grant Thornton furnish us with a letter addressed to the
Commission stating whether or not it agrees with the above statements. A copy of
the letter received from Grant Thornton with respect to our request, addressed
to the Commission, was filed with the Commission.
Effective March 12, 2002, we engaged Hansen, Barnett & Maxwell as our
independent auditors with respect to the fiscal year ended December 31, 2001.
Hansen, Barnett & Maxwell was subsequently retained to also audit and provide a
report on our financial statements for the fiscal year ended December 31, 2000,
not included herein, and has provided a report on our financial statements for
the year ended December 31, 2002. Prior to March 12, 2002, we had not consulted
with Hansen, Barnett & Maxwell regarding either: (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
and neither a written report was provided to us nor was oral advice provided
that Hansen, Barnett & Maxwell concluded was an important factor considered by
us in reaching a decision as to the accounting, auditing or reporting issue; or
(ii) any matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to
Item 304 of Regulation S-K, or a reportable event, as that term is defined in
Item 304 (a)(1)(v) of Regulation S-K.
39
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002 and 2001 F-4
Consolidated Statement of Stockholders' Deficit for the Years Ended December 31, 2001 and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three and Six Months
ended June 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 30, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Experts
Our consolidated balance sheets as of December 31, 2002 and 2001, and the
consolidated statements of operations, stockholders' deficit, and cash flows,
for the years then ended, have been included in the registration statement on
Form SB-2 of which this prospectus forms a part, in reliance on the report of
Hansen, Barnett & Maxwell, independent certified public accountants, given on
the authority of that firm as experts in auditing and accounting.
Legal matters
The validity of the Shares offered hereby will be passed upon for us by
Durham Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City, Utah
84111.
40
Table of Contents
Summary about CirTran Corporation
and this offering 2
Risk factors 4
Use of proceeds 10
Determination of offering price 10
Description of business 11
Management's discussion and analysis
or plan of operation 18
Forward-looking statements 22
Selling Shareholders 23
Plan of distribution 24
Regulation M 26
Legal Proceedings 26
Directors, executive officers, promoters and
control persons 30
Commission's position on indemnification
for Securities Act liabilities 31
Security ownership of certain beneficial owners
and management 32
Description of common stock 33
Certain relationships and related transactions 34
Market for common equity and related
stockholder matters 35
Executive compensation 36
Changes in and disagreements with accountants
on accounting and financial disclosure 38
Index to financial statements 38
Experts 39
Legal matters 39
____________________
Dealer Prospectus Delivery Obligation. Until December 3, 2002,
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
___________________
September 4, 2003
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, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002 and 2001 F-4
Consolidated Statement of Stockholders' Deficit for the Years Ended December 31, 2001 and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
HANSEN, BARNETT & MAXWELL (801) 532-22
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the of Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiary as of December 31, 2002 and 2001, 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, 2002 and 2001, 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.
HANSEN, BARNETT & MAXWELL
/s/ Hansen, Barnett & Maxwell
Salt Lake City, Utah
March 13, 2003
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BANANCE SHEETS
DECEMBER 31, 2001 AND 2000
December 31,
----------------------------------
2002 2001
---------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 500 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $37,037 and $66,316 in 2002 and 2001, respectively 37,464 369,250
Inventory 1,550,553 1,773,888
Other 100,189 97,036
---------------- ---------------
Total Current Assets 1,688,706 2,240,674
Property and Equipment, Net 865,898 1,333,925
Other Assets, Net 12,236 10,887
Deferred Offering Costs 13,475 -
---------------- ---------------
Total Assets $ 2,580,315 $ 3,585,486
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 19,531 $ 159,964
Accounts payable 1,359,723 2,141,290
Accrued liabilities 3,030,970 3,071,191
Current maturities of long-term notes payable 1,059,987 863,650
Notes payable to stockholders 20,376 1,390,125
Notes payable to related parties 688,742 2,405,507
Current maturities of capital lease obligations - 41,206
---------------- ---------------
Total Current Liabilities 6,179,329 10,072,933
---------------- ---------------
Long-Term Liabilities
Long-term notes payable, less current maturities 295,083 447,155
Capital lease obligations, less current maturities - 7,775
---------------- ---------------
Total Long-Term Liabilities 295,083 454,930
---------------- ---------------
Commitments
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 247,184,691 at December 31,
2002 net of 3,000,000 shares held in treasury at no cost and 247,185 160,951
160,951,005 at December 31, 2001
Additional paid-in capital 11,089,020 5,977,164
Accumulated deficit (15,230,302) (13,080,492)
---------------- ---------------
Total Stockholders' Deficit (3,894,097) (6,942,377)
---------------- ---------------
Total Liabilities and Stockholders' Deficit $ 2,580,315 $ 3,585,486
================ ===============
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,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Net Sales $ 2,299,668 $ 1,870,848
Cost of Sales 1,966,851 2,340,273
----------------------- -----------------------
Gross Profit (Loss) 332,817 (469,425)
----------------------- -----------------------
Operating Expenses
Selling, general and administrative expenses 2,180,226 1,690,837
Non-cash compensation expense 25,000 -
----------------------- -----------------------
Total Operating Expenses 2,205,226 1,690,837
----------------------- -----------------------
Loss From Operations (1,872,409) (2,160,262)
----------------------- -----------------------
Other Income (Expense)
Interest (437,074) (773,034)
Gain on settlement of sublease 152,500 -
Other, net 7,173 212
----------------------- -----------------------
Total Other Expense, Net (277,401) (772,822)
----------------------- -----------------------
Net Loss $ (2,149,810) $ (2,933,084)
======================= =======================
Basic and diluted loss per common share $ (0.01) $ (0.02)
======================= =======================
Basic and diluted weighted-average
common shares outstanding 208,236,039 157,556,073
======================= =======================
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, 2001 AND 2002
Common Stock
------------------------------ Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
---------------- ------------- --------------- --------------- ---------------
Balance - December 31, 2000 156,301,005 $ 156,301 $ 5,664,154 $ (10,147,408) $ (4,326,953)
Warrants issued as a
sales commission - - 200,000 - 200,000
Exercise of warrants 3,000,000 3,000 (990) - 2,010
Exercise of employee stock
options 1,650,000 1,650 114,000 - 115,650
Net loss - - - (2,933,084) (2,933,084)
---------------- ------------- --------------- --------------- ---------------
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 employee stock
options 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)
================ ============= =============== =============== ===============
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,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Cash flows from operating activities
Net loss $ (2,149,810) $ (2,933,084)
----------------------- -----------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 470,849 540,090
Provision for doubtful trade accounts receivables - (16,186)
Cash paid for settlement of litigation (25,000) -
Non-cash compensation expense 25,000 -
Payments of notes payable and legal fess made on behalf
of Company from proceeds of settlement of sublease (152,500) -
Legal fees paid on behalf of lender (120,000) -
Warrants issued as a sales commission - 200,000
Changes in assets and liabilities:
Trade accounts receivable 361,065 521,033
Inventories 194,056 (18,102)
Prepaid expenses and other assets 2,498 (3,160)
Accounts payable (513,786) 612,038
Accrued liabilities 765,480 808,648
----------------------- -----------------------
Total adjustments 1,007,662 2,644,361
----------------------- -----------------------
Net cash used in operating activities (1,142,148) (288,723)
----------------------- -----------------------
Cash flows from investing activities
Purchase of property and equipment (2,822) (2,939)
----------------------- -----------------------
Net cash used in investing activities (2,822) (2,939)
----------------------- -----------------------
Cash flows from financing activities
Increase (decrease) in checks written in excess of cash in bank (140,433) 154,473
Proceeds from notes payable to stockholders 618,305 301,159
Payments on notes payable to stockholders (738,054) -
Principal payments on notes payable (363,848) (445,903)
Proceeds from notes payable 845,000 158,255
Payments on capital lease obligations - (4,550)
Proceeds from exercise of options and warrants to purchase
common stock 424,000 117,660
Proceeds from issuance of common stock 500,000 -
----------------------- -----------------------
Net cash provided by financing activities 1,144,970 281,094
----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents - (10,568)
Cash and cash equivalents at beginning of year 500 11,068
----------------------- -----------------------
Cash and cash equivalents at end of year $ 500 $ 500
======================= =======================
The accompanying notes are an integral
part of these financial statements.
F-6
For the Years Ended,
December 31,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 152,093 $ 622,266
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 316,762 $ 32,500
Accrued interest converted to note payable $ 52,955 $ 77,406
Common stock issued for deferred offering costs $ 205,000 $ -
Common stock issued for notes payable to stockholders $ 1,250,000 $ -
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 $ -
The accompanying notes are an integral
part of these financial statements.
F-7
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Nature of Operations - CirTran Corporation (the "Company") provides turnkey
manufacturing services using surface mount technology, ball-grid array assembly,
pin-through-hole, and custom injection molded cabling for leading electronics
original equipment manufacturers ("OEMs") in the communications, networking,
peripherals, gaming, consumer products, telecommunications, automotive, medical,
and semiconductor industries. The Company also designs, develops, manufactures,
and markets a full line of local area network products, with emphasis on token
ring and Ethernet connectivity.
Principles of Consolidation--The consolidated financial statements include the
accounts of CirTran Corporation and its wholly owned subsidiary, Racore
Technology Corporation. All significant intercompany transactions have been
eliminated in consolidation.
Revenue Recognition--Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses experienced with such returns have not been
significant and have been recognized as incurred.
Cash and Cash Equivalents--The Company considers all highly-liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.
Inventories -- Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead costs. Overhead costs are
based on indirect costs allocated among cost of sales, work-in-process inventory
and finished goods inventory. Indirect overhead costs have been charged to cost
of sales or capitalized as inventory based on management's estimate of the
benefit of indirect manufacturing costs to the manufacturing process. When there
is evidence that the inventory's value is less than original cost, the inventory
is reduced to market value. The Company determines market value on current
resale amounts and whether technological obsolescence exists. The Company has
agreements with most of its customers that require the customer to purchase
inventory items related to their contracts in the event that the contracts are
cancelled. The market value of related inventory is based upon those agreements.
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.
Impairment of Long-Lived Assets --The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
occurred that indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
F-8
over their remaining life in measuring whether the assets are recoverable. As of
December 31, 2002, 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, 2002, 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, 2002 and 2001, the Company recognized compensation expense relating
to stock options and warrants of $25,000 and $0, 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,
2002 2001
----------------- ----------------
Net loss, as reported $ (2,149,810) $ (2,933,084)
Add: Stock-based employee compensation expense
included in net loss 25,000 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (193,387) (56,095)
----------------- ----------------
Pro forma net loss $ (2,318,197) $ (2,989,179)
================= ================
Basic and diluted loss per common share as reported $ (0.01) $ (0.02)
================= ================
Basic and diluted loss per common share pro forma (0.01) $ (0.02)
================= ================
Income Taxes --The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and the carryforward of operating losses and tax credits
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. An allowance against deferred tax
assets is recorded when it is more likely than not that such tax benefits will
not be realized. Research tax credits are recognized as utilized.
Use of Estimates --In preparing the Company's financial statements in accordance
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
F-9
Concentrations of Risk --Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of trade accounts
receivable. The Company sells substantially to recurring customers, wherein the
customer's ability to pay has previously been evaluated. The Company generally
does not require collateral. Allowances are maintained for potential credit
losses, and such losses have been within management's expectations. At December
31, 2002 and 2001, this allowance was $37,037 and $66,316, respectively.
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.
At December 31, 2001, accounts receivable from a former customer and a current
customer represented approximately 63 percent and 12 percent, respectively, of
total trade accounts receivable. Sales to these same customers accounted for 0
percent and 3 percent of 2001 net sales, respectively. During 2002, the former
customer and the Company agreed to a settlement which provided for the payment
of all amounts owed to the Company by the former customer.
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 no potentially issuable
common shares at December 31, 2002 and 2001; therefore, basic and diluted loss
per share are the same.
Reclassifications --Certain previously reported 2001 amounts have been
reclassified to conform with the 2002 presentation. These reclassifications had
no effect on previously reported net loss.
New Accounting Standards - Statement of Financial Accounting Standard ("SFAS")
No. 141, "Business Combinations," requires usage of the purchase method for all
business combinations initiated after June 30, 2001, and prohibits the usage of
the pooling-of-interests method of accounting for business combinations. The
provisions of SFAS No. 141 relating to the application of the purchase method
are generally effective for business combinations completed after July 1, 2001.
Such provisions include guidance on the identification of the acquiring entity,
the recognition of intangible assets other than goodwill acquired in a business
combination and the accounting for negative goodwill. The application of this
standard did not have an impact on the Company's financial position and results
of operations.
SFAS No. 142, "Goodwill and Other Intangible Assets," changes the current
accounting model that requires amortization of goodwill, supplemented by
impairment tests, to an accounting model that is based solely upon impairment
tests. SFAS No. 142 also provides guidance on accounting for identifiable
intangible assets that may or may not require amortization. The provisions of
SFAS No. 142 related to accounting for goodwill and intangible assets are
generally effective for the Company at the beginning of 2002, except that
certain provisions related to goodwill and other intangible assets are effective
for business combinations completed after July 1, 2001. The application of this
standard did not have an impact on the Company's financial position and results
of operations.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No.143 addresses financial accounting and reporting for
obligations associated with the retirement of intangible long-lived assets and
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it has occured. The asset retirement obligations will be capitalized as a
part of the carrying amount of the long-lived asset. SFAS No. 143 applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and normal operation of
long- lived assets. SFAS No. 143 is effective for years beginning after June 15,
F-10
2002, with earlier adoption permitted. The adoption of this standard is not
expected to have a material effect on the Company's financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale and the recognition of
impairment of long-lived assets to be held and used. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001, with an earlier adoption
encouraged. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, the statement modifies the criteria classification of
gains and losses on debt extinguishments such that they are not required to be
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30. The Company elected
to adopt this standard during the year ended December 31, 2002. The adoption of
this standard did not have a material effect on the Company's financial position
or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal activities." The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
plan severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company will
be required to apply this statement prospectively for any exit or disposal
activities initiated after December 31, 2002. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based employee compensation. It also amends the disclosure
provisions of Statement No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Statement No. 148 also requires
disclosure about those effects in interim financial information. The adoption of
this standard has had no material effect on the Company's financial position or
results of operations.
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 $2,149,810 and $2,933,084 for the years
ended December 31, 2002 and 2001, respectively. As of December 31, 2002 and
2001, the Company had an accumulated deficit of $15,230,302 and $13,080,492,
respectively, and a total stockholders' deficit of $3,894,097 and $6,942,377,
respectively. In addition, the Company used, rather than provided, cash in its
operations in the amounts of $1,142,148 and $288,723 for the years ended
December 31, 2002 and 2001, respectively.
F-11
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 2002 and 2001, the Company successfully converted trade payables
of approximately $316,762 and $32,500, 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.
The Company is currently renegotiating certain terms of the line of credit
agreement that are not deemed to have a material impact on the line of credit
agreement.
NOTE 3 - INVENTORIES
Inventories consist of the following:
2002 2001
--------------- ---------------
Raw materials $ 1,363,276 $ 1,223,160
Work-in process 170,724 142,048
Finished goods 16,553 408,680
--------------- ---------------
$ 1,550,553 $ 1,773,888
=============== ===============
F-12
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2002 2001 in Years
---------------- --------------- ------------
Production equipment $ 3,141,993 $ 3,141,992 5-10
Leasehold improvements 958,940 958,940 7-10
Office equipment 631,645 628,824 5-10
Other 118,029 118,029 3-7
---------------- ---------------
4,850,607 4,847,785
Less accumulated depreciation
and amortization 3,984,709 3,513,860
---------------- ---------------
$ 865,898 $ 1,333,925
================ ===============
NOTE 5 - NOTES PAYABLE
Notes Payable consist of the following:
2002 2001
--------------- ---------------
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 $ --
Note payable to a financial institution, due in monthly
installments of $9,462, interest at 8.61%, matures
April 2004, collateralized by equipment. 258,644 305,090
Note payable to a company, due in monthly installments
of $6,256, interest at 8.00%, matures 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. 199,023 179,951
Note payable to an individual, due in monthly installments
of $12,748, matures February 2006, interest at 10.00%
unsecured, in default. 107,919 130,000
Note payable to a company, due in monthly installments
of $1,972, matures November 2005, interest at 8.00%,
unsecured, in default. 87,632 87,632
F-13
Note payable to an individual, due in monthly installments of
$5,000, interest at a rate of 9.50%, 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. 92,097 86,522
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%, matures April 2003,
unsecured. 60,133 65,973
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. 60,005 55,499
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 18,883
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 12,866
Note payable to a company, due in monthly installments
of $2,827, interest at 8.00%, unsecured, paid in
full during 2002. -- 21,732
Note payable to a bank, payable on demand, interest at
10.00%, unsecured 36,901 39,367
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 41,834 38,484
--------------- ---------------
Total Notes Payable 1,355,070 1,310,805
Less current maturities 1,059,987 863,650
--------------- ---------------
Long-Term Notes Payable $ 295,083 $ 447,155
=============== ===============
F-14
The Company's notes payable at December 31, 2002, mature as follows:
Year Ending December 31,
2003 $ 1,059,987
2004 295,083
---------------
Total $ 1,355,070
===============
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 from a related
party. The Company has an option to renew the lease for two additional ten-year
periods upon expiration of the term in 2006.
The following is a schedule of future minimum lease payments under the operating
lease:
Year Ending December 31,
2003 $ 191,688
2004 191,688
2005 191,688
2006 175,714
---------------
Total $ 750,778
===============
The building lease provides for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
$200,992 and $189,157 for 2002 and 2001, 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, 2002 and 2001,
was $20,376 and $1,390,125, respectively. Interest associated with amounts due
to stockholders is accrued at 10 percent. Unpaid accrued interest was $2,378 and
$205,402 at December 31, 2002 and 2001, 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. The
balance due to Abacas related to the note payable at December 31, 2002 and 2001,
was $0 and $2,405,507, respectively. 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.
F-15
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.
Also 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
year ended December 31, 2002, the Company was advanced $845,000 and made cash
payments of $156,258 for an outstanding balance on the bridge loan of $688,742.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $688,742 and $2,405,507 as of December 31, 2002 and 2001,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $71,686 and $380,927 as of December 31, 2002 and 2001,
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.
F-16
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, 2002, 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.
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, 2002, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. The Company is currently negotiating a new settlement
agreement.
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, 2002, 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. 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
not yet determined the validity of the claim, but has accrued the entire amount
claimed. No trial date has been set and the Company is currently negotiating a
settlement of these claims.
F-17
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, 2002, the Company
owed $87,632 on this settlement agreement. The Company is currently in default
on this obligation and is currently negotiating a new settlement agreement.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has subsequently made
payments to the financial institution, reducing the obligation to $258,644 at
December 31, 2002, 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 $370,152. 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 $179,757. 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
F-18
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, 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. During the first
quarter of 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. These monthly payments were not made during the third
quarter. Approximately $1,716,946 was owed to the Internal Revenue Service as of
December 31, 2002. During the first quarter of 2002, the Company negotiated a
payment schedule with respect to this amount, pursuant to which monthly payments
of $25,000 were required. In addition, the Company committed to keeping current
on deposits of federal withholding amounts. The required monthly payments were
made during each of the three months during the second quarter. None of the
monthly payments were made during the third quarter. The Company is currently
renegotiating the terms of the payment schedule with the Internal Revenue
Service. In addition, the Company failed to pay several of its current
withholding obligations. Approximately $10,939 was owed to the State of Colorado
as of December 31, 2002.
As of December 31, 2001, the Company had accrued liabilities in the amount of
$1,982,445 for delinquent payroll taxes, including interest estimated at
$215,268 and penalties estimated at $242,989. Of this amount, approximately
$257,510 was due the State of Utah. Approximately $1,713,996 was owed to the
Internal Revenue Service as of December 31, 2001. Approximately $10,939 was owed
to the State of Colorado as of December 31, 2001.
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,
2002 and 2001, are as follows:
2002 2001
--------------- ---------------
Deferred Income Tax Assets:
Inventory reserve $ 216,305 $ 188,880
Bad debt reserve 13,815 24,736
Vacation reserve 17,356 12,569
Research and development credits 17,979 12,718
Net operating loss carryforward 3,443,676 2,698,615
Intellectual property 144,553 159,039
--------------- ---------------
Total Deferred Income Tax Assets 3,853,684 3,096,557
Valuation allowance (3,795,179) (3,033,050)
Deferred Income Tax Liability - depreciation (58,505) (63,507)
---------------- ---------------
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.
F-19
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, 2002 and
2001.
As of December 31, 2002, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $9,232,376. These net operating loss
carryforwards, if unused, begin to expire in 2019. Utilization of approximately
$1,193,685 of the total net operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate return limitation
rules and limitations on the carryforward of net operating losses after a change
in ownership.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2002 and 2001:
2002 2001
--------------- ---------------
Benefit at statutory rate (34%) $ (730,935) $ (997,249)
Non-deductible expenses 39,752 56,876
Change in valuation allowance 762,129 1,037,165
State tax benefit, net of federal tax benefit (70,946) (96,792)
---------------- ---------------
Net Benefit from Income Taxes $ -- $ --
=============== ===============
NOTE 10 - STOCKHOLDER'S EQUITY
Forward Stock Split - On August 6, 2001, the Company effected a 15-for-1 forward
stock split of its outstanding shares of common stock. The Company also
increased authorized common shares from 500,000,000 to 750,000,000 shares. The
stock split has been retroactively reflected in the accompanying consolidated
financial statements for all periods presented.
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.
Equity Line of Credit -- On November 5, 2002, the Company entered into an 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,
F-20
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 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 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. The Company
also granted registration rights to the Equity Line Investor, in connection with
which the Company is required to use its best efforts to file a registration
statement and have it declared effective by the Securities and Exchange
Commission. The Company is unable to draw on the Equity Line until the
registration statement has been declared effective.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Non-Employee Grant - During 2001, the Company granted options to purchase
3,000,000 shares of common stock to a non-employee sales consultant as the
settlement of a $200,000 prepaid sales commission agreement. The options vested
on the date granted and expire in September 2006. The exercise price of these
options was $.00067 per share. Because there is not an active market for the
Company's common stock in this case, the fair value of the sales commission
agreement is more reliably measurable, and the value of the options was
determined to be $200,000 in accordance with the provisions of SFAS No. 123. By
December 31, 2001, the sales consultant had not generated any sales and
management felt the probability that the sales consultant would generate any
future sales was remote. Accordingly, the $200,000 was expensed December 31,
2001. All 3,000,000 options were exercised during 2001 for cash proceeds of
$2,010. There were no non-employee options outstanding at December 31, 2001. No
options were granted to non-employees during 2002.
Employee Grants - On July 26, 2001 the Company adopted the 2001 Stock Option
Plan (the "2001 Plan") with 15,000,000 shares of common stock reserved for
issuance there under. The Company's Board of Directors administers the plan 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.
During the years ended December 31, 2002 and 2001, the Company granted options
to purchase 10,350,000 and 1,650,000 shares of common stock, respectively, to
certain employees of the Company pursuant to the 2001 Plan. These options vested
on the date of grant. The related exercise price for all options was $0.03 to
$0.05 per share for 2002 grants and $0.07 per share for 2001 grants. The
exercise price for 2,500,000 options granted during 2002 was less than the fair
market value of the Company's common stock on the date granted, resulting in
F-21
$25,000 non-cash compensation expense. All other grants during 2002 and 2001 had
exercise prices equal to the fair value of the Company's common stock on the
date of grant. The options were exercisable through December 2007. During 2002
and 2001, all employee options granted were exercised for $424,000 and $115,650,
respectively. There were no employee options outstanding at December 31, 2002
and 2001.
Compensation Expense - During the year ended December 31, 2002 and 2001, the
Company recognized $25,000 and $0, respectively, as non-cash compensation
expense relating to stock options. SFAS 123 requires the presentation of pro
forma operating results as if the Company had accounted for stock options
granted to employees under the fair value method prescribed by SFAS 123. The
Company estimated the fair value of the employee stock options at the grant date
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used in the Black-Scholes model for options issued during the
years ended December 31, 2002 and 2001 to determine the fair value of the
employee options of $0.01 to $0.02 for 2002 options and $0.03 for 2001 options
to purchase a share of common stock: risk-free interest rate of 3.78 and 3.94
percent, dividend yield of 0 percent, volatility of 399 and 411 percent, and
expected lives of 0.10 and 0.01 years, respectively.
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
2002 Assembly Technology Total
---- ---------------- ------------- -------------
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
2001
Sales to external customers $ 1,352,085 $ 518,763 $ 1,870,848
Intersegment sales 309,374 -- 309,374
Segment loss (2,336,084) (597,000) (2,933,084)
Segment assets 3,152,815 434,471 3,587,286
Depreciation and amortization 519,217 20,873 540,090
F-22
Sales 2002 2001
----- --------------- ---------------
Total sales for reportable segments $ 2,479,119 $ 2,180,222
Elimination of intersegment sales (179,451) (309,374)
---------------- ---------------
Consolidated net sales $ 2,299,668 $ 1,870,848
=============== ===============
Total Assets
Total assets for reportable segments $ 2,580,315 $ 3,587,286
Adjustment for intersegment amounts -- (1,800)
--------------- ----------------
Consolidated total assets $ 2,580,315 $ 3,585,486
=============== ===============
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:
2002 2001
--------------- ---------------
United States of America $ 2,291,946 $ 1,820,700
Canada -- 338
Europe/Africa/Middle East 7,722 49,810
--------------- ---------------
$ 2,299,668 $ 1,870,848
=============== ===============
NOTE 14 - SUBSEQUENT EVENTS
On February 11, 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.
The Company's Board of Directors administers the plan 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.
During February 2003, the Company granted options to purchase 5,500,000 shares
of common stock to certain employees of the Company and options to purchase
2,000,000 shares of common stock to members of the board of directors pursuant
to the 2002 Plan. These options vested on the date of grant. The related
exercise price was $0.025 per share for employee options and $0.03 per share for
members of the board of directors. The market value of the common stock on the
grant date was $0.036, which resulted in non-cash compensation of $72,500. The
options are exercisable through February 2008. All options granted were
exercised. The options were exercised for $137,500 of cash, $45,000 of accrued
interest to directors and $15,000 of accrued compensation. The Company estimated
the fair value of the employee and director stock 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 employee and director options to purchase a share of common stock of $0.019
and $0.018, respectively: risk-free interest rate of 2.92 percent, dividend
yield of 0 percent, volatility of 364 percent, and expected lives of 0.10 years.
F-23
Quarterly Financial Information
Page
Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002 3
Statements of Operations for the Three and Six Months ended
June 30, 2003 (unaudited) and 2002 (unaudited) 4
Statements of Cash Flows for the Six Months ended
June 30, 2003 (unaudited) and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
2
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
2003 2002
--------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 45,526 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $37,037 89,628 37,464
Inventory 1,538,406 1,550,553
Other 102,322 100,189
--------------- -------------
Total Current Assets 1,775,882 1,688,706
--------------- -------------
Property and Equipment, Net 713,239 865,898
Other Assets, Net 6,390 12,236
Deferred Offering Costs - 13,475
--------------- -------------
Total Assets $ 2,495,511 $ 2,580,315
--------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 19,531
Accounts payable 1,499,474 1,359,723
Accrued liabilities 3,354,683 3,030,970
Current maturities of long-term notes payable 1,434,882 1,059,987
Notes payable to stockholders 31,550 20,376
Notes payable to related parties 788,742 688,742
--------------- -------------
Total Current Liabilities 7,109,331 6,179,329
--------------- -------------
Long-term notes payable, less current maturities 134,722 295,083
--------------- -------------
Commitments
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 262,021,502 and 247,184,691
net of 3,000,000 shares held in treasury at no cost at 262,022 247,185
June 30, 2003 and December 31, 2002, respectively
Additional paid-in capital 11,435,955 11,089,020
Accumulated deficit (16,446,519) (15,230,302)
--------------- -------------
Total Stockholders' Deficit (4,748,542) (3,894,097)
--------------- -------------
Total Liabilities and Stockholders' Deficit $ 2,495,511 $ 2,580,315
--------------- -------------
See accompanying notes to condensed consolidated
financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------------- ---------------------------------------
2003 2002 2003 2002
----------------------- -------------- -------------------- -----------------
Net Sales $ 416,762 $ 972,018 $ 686,536 $ 1,613,348
Cost of Sales 271,211 957,395 456,927 1,376,511
----------------------- -------------- -------------------- -----------------
Gross Profit 145,551 14,623 229,609 236,837
----------------------- -------------- -------------------- -----------------
Operating Expenses
Selling, general and administrative expenses 584,045 362,982 1,139,599 883,590
Non-cash compensation expense - - 72,500 -
----------------------- -------------- -------------------- -----------------
Total Operating Expenses 584,045 362,982 1,212,099 883,590
----------------------- -------------- -------------------- -----------------
Loss From Operations (438,494) (348,359) (982,490) (646,753)
----------------------- -------------- -------------------- -----------------
Other Income (Expense)
Interest (122,984) (103,864) (233,727) (240,744)
Other, net - 152,675 - 162,192
----------------------- -------------- -------------------- -----------------
Total Other Expense, Net (122,984) 48,811 (233,727) (78,552)
----------------------- -------------- -------------------- -----------------
Net Loss $ (561,478) $ (299,548) $ (1,216,217) $ (725,305)
----------------------- -------------- -------------------- -----------------
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00)
----------------------- -------------- -------------------- -----------------
Basic and diluted weighted-average
common shares outstanding 256,305,246 209,272,191 253,676,241 205,948,269
----------------------- -------------- -------------------- -----------------
See accompanying notes to condensed consolidated
financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2003 2002
-------------------- -------------------
Cash flows from operating activities
Net loss $ (1,216,217) $ (725,305)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 157,154 256,133
Provision for loss on trade receivables - (138)
Cash paid for settlement of litigation - (25,000)
Non-cash compensation expense 72,500 -
Payments made on behalf of the Company
as settlement of a sublease agreement - (152,500)
Changes in assets and liabilities:
Trade accounts receivable (52,164) (474,345)
Inventories 12,147 24,065
Prepaid expenses and other assets 3,713 (21,001)
Accounts payable 187,312 (45,501)
Accrued liabilities 455,767 244,940
-------------------- -------------------
Total adjustments 836,429 (193,347)
-------------------- -------------------
Net cash used in operating activities (379,788) (918,652)
-------------------- -------------------
Cash flows from investing activities
Purchase of property and equipment (4,495) (1,652)
-------------------- -------------------
Net cash used in investing activities (4,495) (1,652)
-------------------- -------------------
Cash flows from financing activities
Decrease in checks written in excess of cash in bank (19,531) (31,624)
Payments for deferred offering costs (30,753) -
Proceeds from notes payable to stockholders 107,725
Payments on notes payable to stockholders (96,551) (140,125)
Proceeds from notes payable 240,000 655,000
Principal payments on notes payable (59,081) (297,946)
Proceeds from notes payable to related parties 100,000 -
Proceeds from exercise of options and warrants to purchase
common stock 187,500 235,000
Proceeds from issuance of common stock - 500,000
-------------------- -------------------
Net cash provided by financing activities 429,309 920,305
-------------------- -------------------
Net increase in cash and cash equivalents 45,026 1
Cash and cash equivalents at beginning of year 500 499
-------------------- -------------------
Cash and cash equivalents at end of year $ 45,526 $ 500
-------------------- -------------------
See accompanying notes to condensed consolidated
financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
--------------------- --------------
2003 2002
--------------------- --------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 85,804 $ 112,905
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 47,561 $ 345,263
Common stock issued for notes payable to stockholders $ - $ 1,250,000
Common stock issued for notes payable $ - $ 1,499,090
Legal fees to be paid on behalf of lender $ - $ 120,000
Accrued interest converted to notes payable $ 32,054 $ -
Stock options exercised for settlement of accrued interest
and accrued compensation $ 90,000 $ -
Common stock issued for accrued compensation $ 10,000 $ -
See accompanying notes to condensed consolidated
financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiary (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
included in the Company's December 31, 2002 Annual Report on Form 10-KSB. In
particular, the Company's significant accounting principles were presented as
Note 1 to the consolidated financial statements in that report. In the opinion
of management, all adjustments necessary for a fair presentation have been
included in the accompanying condensed consolidated financial statements and
consist of only normal recurring adjustments. The results of operations
presented in the accompanying condensed consolidated financial statements for
the three months ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2003.
Stock-Based Compensation -- At June 30, 2003, the Company had one stock-based
employee compensation plan, which is described more fully in Note 7. The Company
accounts for the plan under APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. During the six months ended June 30,
2003 and 2002, the Company recognized compensation expense relating to stock
options and warrants of $72,500 and $0, 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:
Six Months Ended June 30, 2003 2002
----------------- --------------
Net loss, as reported $ (1,216,217) $ (725,305)
Add: Stock-based employee compensation
expense included in net loss 72,500 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (199,528) (88,009)
----------------- --------------
Pro forma net loss $ (1,343,245) $ (813,314)
----------------- --------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.00)
----------------- --------------
Basic and diluted loss per common share pro forma $ (0.01) $ (0.00)
----------------- --------------
Three Months Ended June 30, 2003 2002
----------------- --------------
Net loss, as reported $ (561,478) $ (299,548)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (57,863) -
----------------- --------------
Pro forma net loss $ (619,341) $ (299,548)
----------------- --------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.00)
----------------- --------------
Basic and diluted loss per common share pro forma $ (0.00) $ (0.00)
----------------- --------------
7
NOTE 2 - REALIZATION OF ASSETS
The accompanying condensed 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 $1,216,217 and $2,149,810 for the six
months ended June 30, 2003 and the year ended December 31, 2002, respectively.
As of June 30, 2003 and December 31, 2002, the Company had an accumulated
deficit of $16,446,519 and $15,230,302, respectively, and a total stockholders'
deficit of $4,748,542 and $3,894,097, respectively. In addition, the Company
used, rather than provided, cash in its operations in the amounts of $378,788
and $1,142,148 for the six months ended June 30, 2003 and the year ended
December 31, 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 4).
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.
During 2002, the Company entered into agreements whereby the Company has issued
common stock to certain principals of Abacas Ventures, Inc. ("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. The Company intends to continue to pursue this type of
debt conversion going forward with other creditors. As discussed in Note 5, the
Company has entered into an equity line of credit agreement with a private
investor. Realization of any additional proceeds under the equity line of credit
is not assured.
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable --The Company had amounts due to stockholders from two
separate notes. The balance due to stockholders at June 30, 2003 and December
31, 2002, was $31,500 and $20,376, respectively. Interest associated with
amounts due to stockholders is accrued at 10 percent. Unpaid accrued interest
was $5,247and $2,378 at June 30, 2003 and December 31, 2002, respectively, and
is included in accrued liabilities. These notes are due on demand.
8
Related Party Notes Payable --During 2002, the Company entered into a bridge
loan agreement with Abacas. This agreement allows the Company to request funds
from Abacas to finance the build-up of inventory relating to specific sales. The
loan bears interest at 24% and is payable on demand. There are no required
monthly payments. During the six ended June 30, 2003, the Company was advanced
$100,000. The outstanding balance on the bridge loan was $788,742 as of June 30,
2003. The total accrued interest owed to Abacas on the bridge loan was $160,335
as of June 30, 2003 and is included in accrued liabilities.
NOTE 4 - 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, 2002, the Company owed $60,133 of principal under the
9
terms of the remaining note payable. The Company denies the vendor's claims and
intends to vigorously defend itself against the confession of judgment.
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, 2002, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. The Company is currently negotiating a new settlement
agreement.
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, 2002, 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. 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
entered into a settlement with the vendor that will allow the Company to pay the
entire balance over three years. This amount has been reclassified as a note
payable.
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
10
pay the vendor $1,972 each month until paid. At December 31, 2002, the Company
owed $87,632 on this settlement agreement. The Company is currently in default
on this obligation and is currently negotiating a new settlement agreement.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has subsequently made
payments to the financial institution, reducing the obligation to $258,644 at
December 31, 2002, 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 $370,152. 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 $179,757. 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 5), 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 June 30, 2003, the Company had accrued
liabilities in the amount of $2,074,134 for delinquent payroll taxes, including
11
interest estimated at $349,298 and penalties estimated at $230,927. Of this
amount, approximately $321,828 was due the State of Utah. During the first
quarter of 2003, no payments were made to the State of Utah. During the second
quarter of 2003, partial payments were made to the State of Utah. Approximately
$1,741,367 was owed to the Internal Revenue Service as of June 30, 2003. The
required monthly payments were made during the six months ended June 30, 2003.
The Company is currently renegotiating the terms of the payment schedule with
the Internal Revenue Service. Approximately $10,939 was owed to the State of
Colorado as of June 30, 2003.
Deferred Compensation to Officers -- Certain officers of the Company have
deferred $152,500 of salary during the six months ended June 30, 2003. The total
amount of salary deferred by these officers as of June 30, 2003 is $310,240 and
is included in accrued liabilities.
NOTE 5 - STOCKHOLDER'S EQUITY
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
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 10,000,000 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. During the six
months ended June 30, 2003, the Company issued 2,836,811 shares of common stock
from the escrowed shares under the Equity Line Agreement for proceeds of
$46,000, which was offset by prior offering costs of $44,228.
During July and August 2003, the Company placed an additional 10,000,000 common
shares in escrow to fund conversions related to the Equity Line Agreement and
issued 13,179,363 shares of common stock from the escrowed shares under the
Equity Line Agreement for proceeds of $138,000.
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NOTE 6 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan - On February 11, 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. The Company's Board of Directors administers the plan
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.
During February 2003, the Company granted options to purchase 5,500,000 shares
of common stock to certain employees of the Company and options to purchase
2,000,000 shares of common stock to members of the board of directors pursuant
to the 2002 Plan. These options vested on the date of grant. The related
exercise price was $0.025 per share for employee options and $0.03 per share for
members of the board of directors. The market value of the common stock on the
grant date was $0.036, which resulted in non-cash compensation of $72,500. The
options are exercisable through February 2008. All options granted were
exercised. The options were exercised for $137,500 of cash, $45,000 of accrued
interest to directors and $15,000 of accrued compensation. The Company estimated
the fair value of the employee and director stock 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 employee and director options to purchase a share of common stock of $0.019
and $0.018, respectively: risk-free interest rate of 2.92 percent, dividend
yield of 0 percent, volatility of 364 percent, and expected lives of 0.10 years.
During May 2003, the Company granted options to purchase 2,500,000 shares of
common stock to certain employees of the Company and options to purchase
4,500,000 shares of common stock to members of the board of directors pursuant
to the 2002 Plan. These options vested on the date of grant. The related
exercise price was $0.02 per share for employee options and for options to
members of the board of directors. The market value of the common stock on the
grant date was $0.02, which resulted in no non-cash compensation. The options
are exercisable through May 2008. All employee options granted were exercised
for cash of $50,000. 1,500,000 of the options issued to directors were exercised
for $20,000 of accrued interest to directors and $10,000 of accrued
compensation. There were 3,000,000 options outstanding to members of the board
of directors at June 30, 2003. The Company estimated the fair value of the
employee and director stock options at the grant date using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used in
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the Black-Scholes model to determine the fair value of the employee and director
options to purchase a share of common stock of $0.02: risk-free interest rate of
2.35 percent, dividend yield of 0 percent, volatility of 343 percent, and
expected lives of 0.10 years.
NOTE 7 - NOTES PAYABLE
During June 2003, the Company issued a $230,000 note payable to the Equity Line
Investor for $200,000 cash and $30,000 in fees and offering costs. The note is
due seventy days after issuance and bears no interest. Because of the short term
of the note, no interest rate has been imputed. Should the Company fail to pay
the note in full, within seventy days; the note will accrue interest at 24% per
annum. The Company will use proceeds from the Equity Line Agreement to pay the
balance due. As of June 30, 2003, the Company made principal payments of
$46,000, leaving an unpaid balance of $184,000.
NOTE 8 -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:
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June 30, 2003 Electronics Assembly Ethernet Technology Total
----------------------- -------------------- ----------------
Sales to external customers $ 552,442 $ 134,094 $ 686,536
Intersegment sales 52,242 - 52,242
Segment loss (1,137,551) (78,666) (1,216,217)
Segment assets 2,252,257 243,254 2,495,511
Depreciation and amortization 154,354 2,800 157,154
June 30, 2002
----------------------- -------------------- ----------------
Sales to external customers $ 1,225,225 $ 388,123 $ 1,613,348
Intersegment sales 161,553 - 161,553
Segment loss (647,307) (77,998) (725,305)
Segment assets 3,169,357 330,993 3,500,350
Depreciation and amortization 245,663 10,470 256,133
June 30,
-------------------------------------
Sales 2003 2002
------------------ -----------------
Total sales for reportable segments $ 738,778 $ 1,774,901
Elimination of intersegment sales (52,242) (161,553)
------------------ -----------------
Consolidated net sales $ 686,536 $ 1,613,348
------------------ -----------------
Net Loss
------------------ -----------------
Net loss for reportable segments $(1,216,217) $ (725,305)
Elimination of intersegment losses - -
------------------ -----------------
Consolidated net loss $(1,216,217) $ (725,305)
------------------ -----------------
June 30, December 31,
Total Assets 2003 2002
------------------ -----------------
Total Assets for reportable segments $ 2,495,511 $ 2,580,315
Elimination of intersegment amounts - -
------------------ -----------------
Consolidated total assets $ 2,495,511 $ 2,580,315
------------------ -----------------
NOTE 9 -SUBSEQUENT EVENTS
During July 2003, the Company granted options to purchase 6,000,000 shares of
common stock to certain employees of the Company pursuant to the 2002 Plan.
These options vested on the date of grant. The related exercise price was $0.005
and $0.01 per share. The market value of the common stock on the grant date was
$0.01, which resulted in non-cash compensation of $25,000. The options are
exercisable through July 2008. The Company estimated the fair value of the stock
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
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$0.004 and $0.006: risk-free interest rate of 2.65 percent, dividend yield of 0
percent, volatility of 338 percent, and expected lives of 0.10 years. Employees
exercised 6,000,000 of these options for $35,000 of cash.
Also in July 2003, the Company issued an additional 10,000,000 shares to escrow
for future funding of the equity line of credit agreement (see Note 5).
16