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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2005, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange act of 1934 for the transition period from __________ to
______________.
Commission File No. 33-13674-LA
CIRTRAN CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 68-0121636
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4125 South 6000 West, West Valley City, Utah 84128
(Address of principal executive offices)
(801) 963-5112
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, Par Value
$0.001
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $12,992,512
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of April 14, 2006, was $16,137,771.
As of April 14, 2006, the Registrant had outstanding 616,586,117 shares of
Common Stock, par value $0.001.
Documents incorporated by reference: None
-3-
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Description of Properties 30
3. Legal Proceedings 31
4. Submission of Matters to a Vote of Security Holders 33
Part II
5. Market for Common Equity and Related Stockholder Matters 33
6. Management's Discussion and Analysis or Plan of Operation 37
7. Financial Statements 51
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 51
8A. Controls and Procedures 51
Part III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 53
10. Executive Compensation 55
11. Security Ownership of Certain Beneficial Owners and Management 62
12. Certain Relationships and Related Transactions 63
13. Exhibits 65
14. Principal Accountant Fees and Services 69
Signatures 71
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
ANTICIPATED BY CIRTRAN AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE
SECTION ENTITLED "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL
REPORT. WE DISCLAIM ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE. THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
DOCUMENT.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the increase in revenue for the year ended
December 31, 2004 and the year ended December 31, 2005. This division is an
Asian-based, wholly owned subsidiary of CirTran Corporation and provides a
myriad of manufacturing services to the direct response and retail consumer
markets. Our experience and expertise in manufacturing enables CirTran-Asia to
enter a project at any phase: engineering and design, product development and
prototyping, tooling, and high-volume manufacturing. We anticipate that
CirTran-Asia will pursue manufacturing relationships beyond printed circuit
board assemblies, cables, harnesses and injection molding systems by
establishing complete "box-build" or "turn-key" relationships in the
electronics, retail, and direct consumer markets. This strategic move into the
Asian market has helped to elevate CirTran to an international contract
manufacturer status for multiple products in a wide variety of industries, and
has, in short order, allow us to target large-scale contracts.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines.
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006.
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On March 21, 2006, we announced that we had formed a new subsidiary to provide
end-to-end services to the direct response and entertainment industries. The new
division will provide product marketing, production, media funding and
merchandise manufacturing services. Forming this new division was a necessary
step to maximize product manufacturing opportunities for CirTran's proprietary
products and to provide marketing services for individual entrepreneurs and
inventors. The new division will be headquartered in CirTran's Los Angeles
(Century City) offices and be headed by Mr. Saliba. We are presently in
development of proprietary programs to be launched in the product marketing
division, production services and media funding divisions. We are also in final
discussions on two projects for our merchandising division. We continue to
pursue opportunities in the direct response and entertainment division to
maximize manufacturing and business opportunities
Information relating to developments in our increasing line of fitness
products is as follows:
In early June 2004, the Company entered into an exclusive manufacturing
agreement with certain Developers, including Charles Ho, the President of
CirTran-Asia. Under the terms of the agreement, CirTran, through its
wholly-owned subsidiary CirTran-Asia, has the exclusive right to manufacture
certain products developed by the Developers or any of their affiliates.
Pursuant to the agreement, we could enter into addendum agreements with the
developers with respect to particular products to be produced and manufactured.
The agreement was to be for an initial term of 36 months, and may be continued
after that on a month-to-month basis unless terminated by either party by
providing written notice.
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, from International Edge relating to the manufacture of
80,000 abdominal fitness machines. This order was the first order placed with
CirTran-Asia under the exclusive manufacturing agreement. Subsequently, on June
14, 2004, we received another order for 80,000 units of the abdominal fitness
machines, which was announced on June 16, 2004, through a separate press
release. The Company received many orders subsequent to these first orders.
Since these announcements, CirTran-Asia has manufactured, shipped, and received
payments of approximately $5,546,000. On August 13, 2004, we also announced that
on August 11, 2004 we had received new orders for Wal-Mart. The Company shipped
to Wal-Mart the complete order of abdominal fitness machines and received
payments of approximately $400,000 through the date of this Report. The units
were distributed to Wal-Mart stores throughout Canada.
On September 9, 2004, we announced that on September 6, 2004,
CirTran-Asia had been awarded the rights to manufacture the Ab Trainer Club Pro,
a new abdominal fitness machine, for Tristar Products, under an exclusive
manufacturing agreement. This new product is another type of abdominal fitness
machine. Since this announcement, and through the date of this Report,
CirTran-Asia had manufactured and shipped units, and received payments of
approximately $42,000.
On September 10, 2004, we announced that on September 7, 2004,
CirTran-Asia had been awarded the rights to manufacture the AbRoller, another
type of an abdominal fitness machine, for Tristar Products, under an exclusive
manufacturing agreement. Since this announcement, and through the date of this
Report, CirTran-Asia had manufactured and shipped units, and received payments
of approximately $1,600,000.
On September 14, 2004, we announced that on September 7, 2004, we had
begun manufacturing the Instant Abs product, another type of abdominal fitness
machine, for Tristar Products, under an exclusive manufacturing agreement. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured, and shipped units, and received payments of approximately
$640,000.
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On September 30, 2004, we announced that on September 23, 2004,
CirTran-Asia had been awarded the rights to manufacture the Denise Austin
Pilates product, a pilates fitness machine, for Tristar Products, under an
exclusive manufacturing agreement. Since this announcement, and through the date
of this Report, CirTran-Asia had manufactured and shipped units, and received
payments of approximately $85,000.
On April 28, 2005, CirTran-Asia announced that it has been awarded a
contract (the "April 2005 Agreement") from Guthy - Renker Corporation ("GRC") to
be the exclusive manufacturer of a new fitness machine (the "Fitness Product")
for the sold-on-TV direct response industry. Pursuant to the April 2005
Agreement, GRC agreed to purchase all of its requirements of the Fitness Product
during the term of the April 2005 Agreement, which is defined as running from
the signing of the agreement through the time when the Fitness Product is not
being sold in quantity. Since signing the April 2005 Agreement, we have received
orders totaling approximately $1,370,000. Since these announcements,
CirTran-Asia has manufactured and shipped orders and has received $968,000 as
payment for such shipments.
Information relating to recent developments in new products under
development along with procuring new products for development is as follows:
On August 11, 2004, we announced that CirTran-Asia received a purchase
order from Emson in New York, on August 10, 2004 relating to the manufacture of
a household cooking appliance for hot dogs and sausages. Since these
announcements, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately
$1,320,000.
On October 1, 2004, we entered into an agreement with Transactional
Marketing Partners, Inc. ("TMP"), for consulting services. Pursuant to the
agreement, we engaged TMP to provide strategic planning and for introduction of
new business to us. Under the agreement, we agreed to pay to TMP a fee of ten
percent of the net proceeds received by us from business brought to us by TMP.
The fee is to be paid within 15 calendar days following the end of the month in
which we receive the net proceeds. Additionally, we agreed to pay $7,500 during
each of the first six months of the term of the agreement, with such payments
being viewed as an advance against the fee to be earned. The advance payments
are not refundable, but will be deducted from fees earned by TMP. The agreement
had an initial term of six months, beginning October 1, 2004, and could
automatically extended for successive six-month periods unless either party
gives written notice at least 30 days prior to the expiration of the term of the
agreement of its intent not to renew. Additionally, we may terminate the
agreement at any time by giving 30 days' written notice. In March 2006, the
parties have agreed to six-month extensions through September 2006. The parties
will evaluate the relationship at that time and decide if there needs to be
another extension. To date the relationship has proven successful, resulting in
multiple new manufacturing relationships.
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with Advanced Beauty Solutions L.L.C. ("ABS"), a company relating to
the manufacture of a hair product in California. Since these announcements,
CirTran-Asia has manufactured and shipped approximately $4,550,000 worth of
units of the hair care products. Early October, CirTran Corporation was notified
that ABS had defaulted on its obligation to its financing company. CirTran
Corporation has stopped shipping under credit and is in the process of
exercising its rights permitted by the agreements.
On July 7, 2005, CirTran Corporation signed another Exclusive
Manufacturing Agreement with ABS, relating to the manufacture of a hair dryer
product in California. We had already begun shipment on previous contracts and
were projecting to begin early in 2006.
In early October 2005, CirTran Corporation was notified that ABS had
defaulted on its obligation to its financing company. In October 2005, we
terminated the agreement for both products based on the
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default. In January 2006, following efforts to resolve the disputes with ABS,
the Company filed a lawsuit against ABS, claiming breach of contract,
interference with contractual relationships, unjust enrichment, and fraud, and
seeking damages from ABS.
With respect to the flat iron products, through October 2005, CirTran
had shipped to ABS directly approximately $4,746,000 worth of the product, and
CirTran had received from ABS or its finance company a total amount of
approximately $788,000. In November 2005, CirTran repossessed from ABS
approximately $2,341,000 worth of the products in the United States, as we were
permitted to do pursuant to the agreement. As of April 14, 2006, CirTran has a
balance remaining unpaid from ABS of approximately $1,600,000 for the flat iron
product.
Since November 2005, CirTran has been pursuing its rights under the
agreement and has been offering the flat iron product for sale directly to ABS's
customers. In doing so, CirTran sold to ABS's international customers directly
approximately $411,000 worth of the flat iron product. The shipments have all
been paid in full. These products shipped were not part of the repossessed
inventory.
On January 24, 2006, ABS filed a voluntary petition for relief under
chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District of California, San Fernando Valley Division (the
"Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
settlement were read into the Bankruptcy Court's record at the Hearing on the
Settlement Motion and the March 24, 2006 hearing on the Sale Motion ("Proposed
Modifications"). Written notice of the Proposed Modifications was provided to
creditors and parties in interests on March 27, 2006, and the Declaration of
James C. Bastian, Jr., attesting that no objections to the Proposed
Modifications have been received by ABS, was filed with the Bankruptcy Court. As
of April 14,2006, an order approving the settlement had been entered by the
Bankruptcy Court.
Subject to and conditioned upon the approval of the settlement by the
Bankruptcy Court and Bankruptcy Court approval of and consummation of the sale
of substantially all of ABS's assets to the Company pursuant to the Sale Motion,
the Company shall have an allowed claim against the ABS's estate in the amount
of $2,350,000, of which $750,000 shall be credited to the purchase of
substantially all of ABS's assets. Under the settlement, the Company shall be
allowed to participate as a general unsecured creditor of ABS's estate in the
amount of $1,600,000 on a pari passu basis with the $2,100,000 general unsecured
claim of certain insiders of ABS and subject to the prior payment of certain
secured, priority, and non-insider claims in the amount of approximately
$1,507,011. Subject to final negotiation and execution of a definitive purchase
agreement and Bankruptcy Court Approval of the sale, CirTran Corporation shall
purchase substantially all of ABS's assets in exchange for (i) a cash payment in
the amount of $1,125,000, (ii) a reduction of CirTran's allowed claim in the
Bankruptcy Case by $750,000, (iii) the assumption of any assumed liabilities,
and (iv) the obligation to pay ABS a royalty equal to $3.00 per True Ceramic Pro
flat iron unit sold by ABS (the "Royalty Obligation"). The Royalty Obligation
shall be capped at $4,135,000. To the extent the amounts paid to ABS on account
of the Royalty Obligation equal less than $435,000 on the 2 year anniversary of
the Closing, then, within 30 days of such anniversary, the Company shall pay ABS
an amount equal to $435,000 less the royalty payments made to date. As part of
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the settlement, the Company shall exchange general releases with, among others,
ABS, Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolves a related dispute with
ICG in which ICG will assign $65,000 of its secured claim against ABS to the
Company.
With respect to the hair dryers, as of April 14, 2006, we had not
received any orders or shipped any products, either to ABS or its customers.
On January 9, 2006, we announced the first contract of the new year
that could amount to $22 million in sales over the life of the contract.
Arrowhead Industries, Inc., of Windermere, Florida, has awarded an exclusive
contract to CirTran to manufacture its patented Hinge Helper (TM) do-it-yourself
utility tool. The Hinge Helper will be manufactured by CirTran-Asia, the
Company's China-based subsidiary. The exclusive manufacturing contract is for
three years. Arrowhead has completed the infomercial and will begin media
testing within 60 days from January 9, 2006. CirTran-Asia has provided Arrowhead
multiple generation versions of the product for the Direct Response and Retail
distribution. It is anticipated that the program will launch towards the end of
the second quarter 2006.
Information relating to other recent developments in our on-going
electronics business and lines of products are as follows:
On June 10, 2005, we announced that Racore Technology Inc., ("Racore"),
a subsidiary of CirTran Corporation, received a purchase order from the New York
Fire Department, an established city public department on the east coast for
fiber optic Ethernet network adapters. Since this announcement, the product has
been manufactured and shipped, and a payment of $9,000 has been received. We
continue to market and solicit orders on the Racore product line from various
commercial and public agency clients.
On June 23, 2005, we announced that CirTran Corporation entered the
"sold-on-TV" market by having its CirTran-Asia subsidiary build consumers'
electronics products in China, and is now bringing business to the United
States, refurbishing popular skill-stop slot machines from Japan for home
amusement use in the United States. We continue to receive the imported machines
from Rock Bottom Slots, perform the conversion and refurbishment services and
ship directly to the customer.
On June 24, 2005, we announced that Racore received a purchase order
from Lockheed-Martin, a well-known aerospace manufacturing company for fiber
optic token-ring network adapters. Direct sales of new and repeat business from
this company have totaled more than $30,000. Since this announcement the product
has been manufactured and shipped, and payment has been received. As of the date
of this Report, we have shipped an additional $40,000 worth of product to this
company.
On July 22, 2005, we announced that Racore received a purchase order
from the United States Air Force for OptiCORE network interface cards. Since
this announcement, the product has been manufactured and shipped, and payments
of $15,000 have been received.
On August 1, 2005, we announced that Racore received a purchase order
for fiber optics products from Cherokee City Appraisal District, another city
public department located in the southern United States for fiber optic PCI
Ethernet network interface cards with VF-45 connectors. Since this announcement,
the product has been manufactured and shipped, and a payment of $1,030 has been
received.
On August 4, 2005, we announced that Racore received a purchase order
from Walt Disney World, a well-known amusement park in the southeastern United
States, for more than $21,000 worth of network interface cards. Since this
7
announcement, the product has been manufactured and shipped, and payment has
been received.
On August 9, 2005, we announced that CirTran Corporation completed the
first phase of the redevelopment of the next-generation SafetyNet(TM)
RadioBridge(TM). Since this announcement, the Company has completed working on
the second phase of the contract. On March 14, 2006, Aegis Assessments, Inc., a
wireless technology company, announced that it has ordered a $250,000 initial
production run of the next generation SafetyNet(TM) RadioBridge(TM)from the
Company.
On September 13, 2005, we announced that Racore had been named an
"approved vendor" by the City of New York. Racore began its current business
relationship with the City of New York in April when it received a request for
an evaluation unit of the Racore M8190A Fiber Optic Fast Ethernet Network
Adapters with Volition Patch Cords. Racore subsequently received an order placed
through one of its value-added resellers. Since this announcement, the product
has been manufactured and shipped, and a payment of $4,500 has been received.
On October 11, 2005, we announced that CirTran Corporation was opening
a satellite office in Los Angeles in accordance with the Company's internal
expansion program. The new 2,500-square foot office will be located on the 17th
floor at 1875 Century Park East in the Century City Entertainment and Business
District of Los Angeles. Scheduled to open in late November, the office will
serve as headquarters for CirTran's business development and strategic planning
activities for the Company's multiple business divisions including electronics,
consumer products, direct response/retail and "as sold-on-TV" products. Current
plans call for CirTran to open additional satellite offices in New York and
London in 2006. Since this announcement, we have signed a lease for the office
space in Los Angeles, California.
On December 2, 2005, we announced that we had formed a new division,
CirTran Products, which will offer products for sale at retail. The new division
will be run from our new Los Angeles office, with Trevor Saliba, our executive
vice president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006.
.
Industry Background
The contract manufacturing industry specializes in providing the program
management, technical and administrative support and manufacturing expertise
required to take products from the early design and prototype stages through
volume production and distribution. The goal is to provide a quality product,
delivered on time and at the lowest cost, to the client. This full range of
services gives the client an opportunity to avoid large capital investments in
plant, inventory, equipment and staffing and to concentrate instead on
innovation, design and marketing. By using our contract manufacturing services,
our customers have the ability to improve the return on their investment with
greater flexibility in responding to market demands and exploiting new market
opportunities.
We believe two important trends have developed in the contract manufacturing
industry. First, we believe customers increasingly require contract
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis where the customer supplies
all materials and the contract manufacturer supplies only labor. Turnkey
contracts involve design, manufacturing and engineering support, the procurement
of all materials, and sophisticated in-circuit and functional testing and
distribution. The manufacturing partnership between customers and contract
manufacturers involves an increased use of "just-in-time" inventory management
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techniques that minimize the customer's investment in component inventories,
personnel and related facilities, thereby reducing costs.
We believe a second trend in the industry, that relates to our electronics
division, has been the increasing shift from pin-through-hole, or PTH, to
surface mount technology, or SMT, interconnection technologies. Surface mount
and pin-through-hole printed circuit board assemblies are printed circuit boards
on which various electronic components, such as integrated circuits, capacitors,
microprocessors and resistors are mounted. These assemblies are key functional
elements of many types of electronic products. PTH technology involves the
attachment of electronic components to printed circuit boards with leads or pins
that are inserted into pre-drilled holes in the boards. The pins are then
soldered to the electronic circuits. The drive for increasingly greater
functional density has resulted in the emergence of SMT, which eliminates the
need for holes and allows components to be placed on both sides of a printed
circuit. SMT requires expensive, highly automated assembly equipment and
significantly more operational expertise than PTH technology. We believe the
shift to SMT from PTH technology has increased the use of contract manufacturers
by OEMs seeking to avoid the significant capital investment required for
development and maintenance of SMT expertise.
Electronics Assembly and Manufacture
As of December 31, 2005, approximately 23% of our revenues were generated by our
low-volume electronics assembly activities, which consist primarily of the
placement and attachment of electronic and mechanical components on printed
circuit boards and flexible (i.e., bendable) cables. We also assemble
higher-level sub-systems and systems incorporating printed circuit boards and
complex electromechanical components that convert electrical energy to
mechanical energy, in some cases manufacturing and packaging products for
shipment directly to our customers' distributors. In addition, we provide other
manufacturing services, including refurbishment and remanufacturing. We
manufacture on a turnkey basis, directly procuring any of the components
necessary for production where the OEM customer does not supply all of the
components that are required for assembly. We also provide design and new
product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more value-added
services, and price-sensitive, high-volume production. Our goal is to offer
customers significant competitive advantages that can be obtained from
manufacturing outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management and increased
purchasing power.
As part of our electronics assembly and manufacture focus, in April 2004, we
entered into a Preferred Manufacturing Agreement (the "Broadata Agreement") with
Broadata Communications, Inc. ("Broadata"). Under this agreement, we will
perform exclusive "turn-key" manufacturing services handling most of Broadata's
manufacturing operations from material procurement to complete finished
box-build. Specifically, Broadata agreed that during the three-year term of the
Broadata Agreement, we would be the exclusive manufacturer of the Broadata
products covered by the Broadata Agreement. Under the Broadata Agreement,
Broadata issues us purchase orders specifying the work to be completed and the
delivery time. The price paid for work performed under the Broadata Agreement is
our costs plus 10%, plus an assembly fee of $0.07 per component and an hourly
charge of $18 per hour for manual assembly, mechanical assembly, and testing,
subject to periodic review and adjustment. We agreed to ship the products
manufactured FOB West Valley City, Utah. Beginning in May 2005, we began
handling a portion of Broadata's manufacturing operations from material
procurement to complete finished box-build. The initial term of the agreement is
three years, continuing month to month thereafter unless terminated by either
party.
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Ethernet Technology
Through our subsidiary, Racore Technology Corporation ("Racore"), we design,
manufacture, and distribute Ethernet cards. These components are used to connect
computers through fiber optic networks. In addition, we produce private label,
custom designed networking products and technologies on an OEM basis. Our
products serve major industrial, financial, and telecommunications companies
worldwide. We market our products through an international network of
distributors, value added resellers, and systems integrators who sell, install,
and support our entire product catalogue.
Additionally, we have established, and continue to seek to establish, key
business alliances with major multinational companies in the computing and data
communications industries for which we produce private label, custom designed
networking products and technologies on an OEM basis. These alliances generally
require that Racore either develop custom products or adapt existing Racore
products to become part of the OEM customer's product line. Under a typical
contract, Racore provides a product with the customer's logo, packaging,
documentation, and custom software and drivers to allow the product to appear
unique and proprietary to the OEM customer. Contract terms generally provide for
a non-recurring engineering charge for the development and customization
charges, together with a contractual commitment for a specific quantity of
product over a given term.
Contract Manufacturing
Through our subsidiary, CirTran-Asia, we design, engineer, manufacture and
supply products in the electronics, consumer products and general merchandise
industries for various marketers, distributors and national retailers. This new
division is our Asian-based, wholly owned subsidiary, and provides manufacturing
services to the direct response and retail consumer markets. Our experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase:
engineering and design; product development and prototyping; tooling; and
high-volume manufacturing. This strategic move into the Asian market has helped
to elevate CirTran to an international contract manufacturer status for multiple
products in a wide variety of industries, and has, in short order, allowed us to
target large-scale contracts.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. CirTran-Asia intends to pursue manufacturing
relationships beyond printed circuit board assemblies, cables, harnesses and
injection molding systems by establishing complete "box-build" or "turn-key"
relationships in the electronics, retail, and direct consumer markets.
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and reliance
upon, the use of manufacturing specialists by many OEMs, marketing firms,
distributors and national retailers. We believe the trend towards outsourcing
manufacturing will continue. OEMs utilize manufacturing specialists for many
reasons, including the following:
* To Reduce Time to Market. Due to intense competitive pressures
in the electronics and general manufacturing industry, OEMs are faced with
increasingly shorter product life-cycles and, therefore, have a growing need to
reduce the time required to bring a product to market. We believe OEMs can
reduce their time to market by using a manufacturing specialist's manufacturing
expertise and infrastructure.
* To Reduce Investment. The investment required for internal
manufacturing has increased significantly as products have become more
technologically advanced and are shipped in greater unit volumes. We believe use
10
of manufacturing specialists allows OEMs to gain access to advanced
manufacturing capabilities while substantially reducing their overall resource
requirements.
* To Focus Resources. Because the electronics industry is
experiencing greater levels of competition and more rapid technological change,
many OEMs are focusing their resources on activities and technologies which add
the greatest value to their operations. By offering comprehensive electronics
assembly and related manufacturing services, we believe manufacturing
specialists allow OEMs to focus on their own core competencies such as product
development and marketing.
* To Access Leading Manufacturing Technology. Electronic
products and electronics manufacturing technology have become increasingly
sophisticated and complex, making it difficult for OEMs to maintain the
necessary technological expertise to manufacture products internally. We believe
OEMs are motivated to work with a manufacturing specialist to gain access to the
specialist's expertise in interconnect, test and process technologies.
* To Improve Inventory Management and Purchasing Power.
Electronics industry OEMs are faced with increasing difficulties in planning,
procuring and managing their inventories efficiently due to frequent design
changes, short product life-cycles, large required investments in electronic
components, component price fluctuations and the need to achieve economies of
scale in materials procurement. OEMs can reduce production costs by using a
manufacturing specialist's volume procurement capabilities. In addition, a
manufacturing specialist's expertise in inventory management can provide better
control over inventory levels and increase the OEM's return on assets.
An important element of our strategy is to establish partnerships with major and
emerging OEM leaders in diverse segments across the electronics industry. Due to
the costs inherent in supporting customer relationships, we focus our efforts on
customers with which the opportunity exists to develop long-term business
partnerships. Our goal is to provide our customers with total manufacturing
solutions for both new and more mature products, as well as across product
generations.
Another element of our strategy is to provide a complete range of manufacturing
management and value-added services, including materials management, board
design, concurrent engineering, assembly of complex printed circuit boards and
other electronic assemblies, test engineering, software manufacturing, accessory
packaging and post-manufacturing services. We believe that as manufacturing
technologies become more complex and as product life cycles shorten, OEMs will
increasingly contract for manufacturing on a turnkey basis as they seek to
reduce their time to market and capital asset and inventory costs. We believe
that the ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it serves. In
addition, we believe that due to the difficulty and long lead-time required to
change manufacturers, turnkey projects generally increase an OEM's dependence on
its manufacturing specialist, which can result in a more stable customer base.
In our high volume electronics, consumer products, and general merchandise
manufacturing divisions, we believe we add value by providing turn-key solutions
in design, engineering, manufacturing and supply of products to our clients.
Suppliers; Raw Materials
Our sources of components for our electronics assembly business are either
manufacturers or distributors of electronic components. These components include
passive components, such as resisters, capacitors and diodes, and active
components, such as integrated circuits and semi-conductors. Our suppliers
include Siemens, Muriata-Erie, Texas Instruments, Fairchild, Harris and
Motorola. Distributors from whom we obtain materials include Avnet, Future
Electronics, Digi-key and Force Electronics. Although we have experienced
11
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 2005 and 2004, CirTran Corporation spent approximately $200,000 and
$75,000, 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 $42,536, respectively. None of Racore's expenses were paid for by
its customers. We remain committed, particularly in the case of Racore, to
continuing to develop and enhance our product line as part of our overall
business strategy.
Beginning in 2004, Racore started working more aggressively on marketing
existing products by simplifying ordering and sales processing to existing
customers. We are also working towards some cost reduced versions of existing
product line and adding new sales channels. We are also in the process of
expanding the current product line, adding new product categories to existing
sales channels, along with products with reduced development costs, quicker time
to market, higher profit margins, greatly reduced support costs, less pressure
from competitors and shorter sales cycles.
In the coming months, we anticipate that Racore will redesign some of its
products to reduced versions of existing products, but also similar yet unique
products that will satisfy market needs which currently have no deliverable or
affordable solutions. These products will realize reduced development costs,
quicker time to market, higher profit margins, greatly reduced support costs,
less pressure from competitors, and shorter sales and delivery cycles. These
products will leverage our expertise in the areas of fiber optics, security, and
portability.
We possess advanced design and engineering capabilities with experienced
professional staffs at both our Salt Lake City and ShenZhen offices for
electrical, software, mechanical and industrial design. This provides the end
client a total solution for original design, re-design and final design of
products.
Sales and Marketing
As of April 14, 2006, we had three individuals on our internal sales staff, and
we have continued to pursue sales representative relationships with firms that
work as independent contractors in generating new business. We signed an
agreement with TMP and have other outside independent contractors that we
continue to work with. This is advantageous to the Company, as it provides the
Company with a broad sales network with no direct cost. It is our intention to
continue pursuing sales representative relationships as well as internal
salaried sales executives. Early in 2006 the Company opened a dedicated
satellite sales/engineering office in Los Angeles to headquarter all business
development activities companywide. The Company has since begun staffing this
office with administrative and project management staff. The Company is still
pursuing product development and business development professionals with
concentrated efforts on the direct response, product and retail distribution
divisions as well as sales executives for the electronics manufacturing
division.
We are working aggressively to market existing products through current sales
channels. We will also add major new conduits to deliver products and services
directly to end users, as well as motivate our distributors, partners, and other
third party sales mechanisms. We continue to simplify and improve the sales,
order, and delivery process. We are also pursuing strategic relationships with
retail distribution firms to engage with us in a reciprocal relationship where
12
they would act as CirTran's retail distribution arm and we would act as their
manufacturing arm with both parties giving the other priority and first
opportunity to work on the other's products.
Historically, we have had substantial recurring sales from existing customers,
though we continue to seek out new customers to generate increased sales. We
treat sales and marketing as an integrated process involving direct salespersons
and project managers, as well as senior executives. We also use independent
sales representatives in certain geographic areas. We have also engaged
strategic consulting groups to make strategic introductions to generate new
business. This strategy has proven successful, and has already generated
multiple manufacturing contracts. These relationships were responsible for a
portion of sales generated in 2005 and we anticipate will be a major factor in
our sales growth for 2006 and 2007.
During the typical sales process, a customer provides us with specifications for
the product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
In 2005, 38% of our net sales were derived from pre-existing customers, whereas
during the year ended December 31, 2004, only 20% of our net sales were derived
from customers that were also customers during 2003. In 2005, 62% of our sales
were derived from new business, with the majority of those sales being secured
by exclusive manufacturing contracts. In 2005, our major new customer was
Advanced Beauty Solutions, LLC which accounted for about 35% of our net sales.
Our second and third largest customers for 2005 were also new customers, Tristar
Products with about 14%, and Emson with 9% of our net sales. Our largest
pre-existing customer was Dynojet Research Inc. with over 8% of our net sales.
We anticipate that our exclusive manufacturing contracts with Guthy-Renker,
Reliant and Arrowhead Industries will contribute significantly to our sales for
2006 and 2007 as those projects are scheduled to roll out in the second and
third quarter of 2006. Historically, a small number of customers accounted for a
significant portion of our electronics assembly and manufacture division net
sales.
Our expansion into China manufacturing has allowed us to increase our sales,
manufacturing capacity and output with minimal capital investment required. By
using various subcontractors among which are Zhejiang Hengtai Machinery
Manufacturing Co., Ltd., which manufactures the Supreme Pilates and Zhejiang
Cuiori Electrical Appliances Co., Ltd,, which manufactures the Perfect Grill, we
leverage our upfront payments for inventories and tooling to control costs and
receive benefits from economics of scale in Asian manufacturing facilities.
These expenses can be upwards of $100,000 per product. The Company will,
depending on the contract, prepay anywhere from 10% to 50% of the purchase
orders for materials to some of the factories we have contracts with. In
exchange for theses financial commitments, the Company receives dedicated
manufacturing responsiveness hence eliminating the costly expense associated
with capitalizing complete proprietary facilities.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. As of April 14, 2006, our backlog was
approximately $1,700,000 with confirmed deliveries dates. The Company also has a
total of approximately $90,000,000 of signed contracts for blanket quantities
(i.e. the full amount of the contract), in which the customer agrees to purchase
a set amount and will issue purchases against the contract when product is
needed. The majority of these blanket quantities orders are two contracts from
Arrowhead for $22,000,000 and Reliant for $30,000,000. We have a $30,000,000
contract from Guthy - Renker Corporation, a contract from Emson for about
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$7,000,000 along with a few other smaller contracts. Each contract contains a
buy out clause that varies, depending on the product and amounts of product
agreed upon.
In December of 2004, we issued a press release relating to our hiring of Mr.
Patrick L. Gerrard Sr. as a director of our corporate Quality Control Systems.
We also announced that we had received an order for the United States Air Force.
The products were built and shipped to them.
Management has continued its internal plan for increasing sales, reducing costs
and restructuring the overall financial condition. As part of this strategy,
sales for the Company in 2005 were greater than sales in 2004, and the Company
reached an offer in compromise with the Internal Revenue Service in 2004 and the
State of Utah in 2006 settling all outstanding tax liabilities.
The year 2004 was a critical year for CirTran Corporation. The most significant
event for CirTran in 2004 was the acceptance of the offer in compromise by the
Internal Revenue Service settlement of the Company's prior tax obligation. This
has been a top priority for management and the board of directors as the
Company's viability was in question. With this new milestone, management feels
the Company is financially stable and in position to continue its plan to grow.
In addition, our effort to enter high-volume manufacturing in the electronics,
consumer products and general merchandise industries has had a dramatic impact
to the Company's sales and backlog. Also, management's constant pursuit of
establishing the Company as a world-class manufacturer was recognized with the
Company receiving ISO9001:2000 certification on March 31, 2005. This is an
international monitoring agency that requires all companies who are certified to
comply with a set standard of policies on quality and manufacturing.
Material Contracts and Relationships
We generally use form agreements with standard industry terms as the basis for
our contracts with our customers. The form agreements typically specify the
general terms of our economic arrangement with the customer (number of units to
be manufactured, price per unit and delivery schedule) and contain additional
provisions that are generally accepted in the industry regarding payment terms,
risk of loss and other matters. We also use a form agreement with our
independent marketing representatives that features standard terms typically
found in such agreements.
Cogent Agreement
On September 14, 2003, we entered into an agreement with Cogent Capital Corp.
("Cogent"), under which we engaged Cogent to provide strategic planning and
advisory services relating to acquisitions and with a view to obtaining a
listing on either the American Stock Exchange or the NASDAQ. In a September 2003
press release, we mentioned that Cogent was assisting us in connection with a
proposed direct investment in CirTran, but that transaction was not closed. We
continue to work with Cogent, and they continue to provide strategic planning
and advice.
MET Advisors Agreement
In August 2003, we entered into an agreement with MET Advisors ("MET") under
which we retained MET to identify and provide detailed information on potential
acquisition targets. Pursuant to the MET agreement, we agreed to pay MET a
transaction fee equal to 5% of the total value of the transaction (but not less
than $100,000), together with expenses incurred by MET in connection with the
potential acquisition.
In January and March 2004, we issued press releases relating to a new agreement
with a contract electronics manufacturer. The January 21, 2004, press release
stated that we had entered into a Letter of Intent to purchase all the assets of
14
a leading contract electronics manufacturer of printed circuit board assemblies
based in Orange County, California. The March 2, 2004 press release was issued
to give an update on the due diligence process. However, the letter of intent
expired on March 5, 2004, and no agreement was reached regarding an extension.
We have decided not to pursue further negotiations relating to this matter.
In March 2004, we issued two additional press releases relating to our potential
acquisition of an interest in a manufacturer of digital fiber optic cable
equipment. On March 18, 2004, we announced that we had signed a letter of intent
to acquire a minority interest in a manufacturer based in southern California,
and that in connection with the acquisition, we anticipated that we would enter
into an exclusive manufacturing agreement. On March 26, 2004, we announced that
we anticipated that we expected to finalize the acquisition of the interest and
the exclusive agreement. On April 14, 2004, we entered into a stock purchase
agreement with Broadata Communications, Inc., a California corporation
("Broadata") under which we purchased 400,000 shares of Broadata Series B
Preferred Stock (the "Broadata Preferred Shares") for an aggregate purchase
price of $300,000. The Broadata Preferred Shares are convertible, at our option,
into an equivalent number of shares of Broadata common stock, subject to
adjustment. The Broadata Preferred Shares are not redeemable by Broadata. As a
holder of the Broadata Preferred Shares, we have the right to vote the number of
shares of Broadata common stock into which the Broadata Preferred Shares are
convertible at the time of the vote. Separate from the acquisition of the
Broadata Preferred Shares, we also entered into a Preferred Manufacturing
Agreement with Broadata. Under this agreement, we will perform exclusive
"turn-key" manufacturing services handling most of Broadata's manufacturing
operations from material procurement to complete finished box-build of all of
Broadata's products. The initial term of the agreement is three years,
continuing month to month thereafter unless terminated by either party.
As of April 14, 2006, we had no other acquisitions planned or anticipated. We
continue to work with MET and Cogent with respect to potential acquisitions.
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
Furthermore, the Asian manufacturing market is growing at a rapid pace.
Particularly in China, therefore, management feels that the Company is
strategically positioned to hedge against unforeseen obstacles and continues its
efforts to increase establishing additional relationships with manufacturing
partners, facilities and personnel.
15
Regulation
We are subject to typical federal, state and local regulations and laws
governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee safety laws and
regulations and labor practices laws and regulations. We are not required under
current laws and regulations to obtain or maintain any specialized or
agency-specific licenses, permits, or authorizations to conduct our
manufacturing services. Other than as discussed in "Item 3 - Legal Proceedings"
concerning delinquent payroll taxes, we believe we are in substantial compliance
with all relevant regulations applicable to our business and operations.
Employees
As of April 14, 2006, we employed a total staff of 103 persons in the United
States. In our Salt Lake headquarters, we employed 100 persons: 5 in
administrative positions, 5 in engineering and design, 88 in clerical and
manufacturing, and 2 in sales. In our sales office in Los Angeles, we employed 3
persons: 1 administrative and sales, 1 project manager, and 1 clerical
assistant. At this time we are actively searching for additional qualified sales
staff for our new office. In our CirTran-Asia division, we employed 7 people: 1
administrative, 2 accounting staff, 2 quality engineers, and 2 design engineers.
We believe that our relationship with our employees is good.
Corporate Background
Our core business was commenced by Circuit Technology, Inc. ("Circuit"), in 1993
by our president, Iehab Hawatmeh. Circuit enjoyed increasing sales and growth in
the subsequent five years, going from $2.0 million in sales in 1994 to $15.4
million in 1998, leading to the purchase of two additional SMT assembly lines in
1998 and the acquisition of Racore Computer Products, Inc., in 1997. During that
period, Circuit hired additional management personnel to assist in managing its
growth, and Circuit executed plans to expand its operations by acquiring a
second manufacturing facility in Colorado. Circuit subsequently determined in
early 1999, however, that certain large contracts that accounted for significant
portions of our total revenues provided insufficient profit margins to sustain
the growth and resulting increased overhead. Furthermore, internal accounting
controls then in place failed to apprise management on a timely basis of our
deteriorating financial position.
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until July 1, 2000, when we issued a total of 10,000,000 shares
of our common stock (150,000,000 of our shares as presently constituted) to
acquire, through our wholly-owned subsidiary, CirTran Corporation (Utah),
substantially all of the assets and certain liabilities of Circuit.
In 1987, Vermillion Ventures, Inc. filed an S-18 registration statement with the
United States Securities and Exchange Commission ("SEC") but did not at that
time become a registrant under the Securities Exchange Act of 1934 ("1934 Act").
From 1989 until 2000, Vermillion did not make any filings with the SEC under the
1934 Act. In July 2000, we commenced filing regular annual, quarterly, and
current reports with the SEC on Forms 10-KSB, 10-QSB, and 8-K, respectively, and
have made all filings required of a public company since that time. In February
2001, we filed a Form 8-A with the SEC and became a registrant under the 1934
Act. We may be subject to certain liabilities arising from the failure of
Vermillion to file reports with the SEC from 1989 to 1990, but we believe these
liabilities are minimal because there was no public market for the common shares
of Vermillion from 1989 until the third quarter of 1990 (when our shares began
to be traded on the Pink Sheets) and it is likely that the statute of
limitations has run on whatever public trades in the shares of our common stock
may have taken place during the period during which Vermillion failed to file
reports.
16
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.
Recent Developments
Diverse Media Group
On March 21, 2006, the Company issued a press release "CirTran Forms New
Division to Serve Direct Response and Entertainment Industries." The new
division will concentrate its efforts on product marketing, production, media
funding and merchandise manufacturing services working as a complete
vertically-integrated platform that can augment our manufacturing services in
the direct response industry. Our experience in this industry over the past two
years has taught us that there is a need for a single source solution. In
addition, we feel it will help us capture additional business that might
otherwise had been lost at the manufacturing level allowing us to participate in
all additional areas.
CirTran Products Division
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006
CirTran Products was established to pursue manufacturing relationships on both a
contracted and proprietary basis in the consumer products industry. Proprietary
products will be product lines where the intellectual property (logo, trade name
etc.) are owned by CirTran Products as well as exclusively manufactured by
CirTran Corporation. The marketing efforts may also be managed exclusively by
CirTran, or CirTran may choose to engage third party consultants or partner with
an independent marketing firm. CirTran Products also intends to pursue contract
manufacturing relationships in the consumer products industry which can include
product lines including: home/garden, kitchen, health/beauty, toys, licensed
merchandise and apparel for film, television, sports and other entertainment
properties. Licensed merchandise and apparel can be defined as any item that
bears the image of, likeness, or logo of a product sold or advertised to the
public. Licensed merchandise and apparel are sold and marketed in the
entertainment (film and television) and sports (sports franchises) industries.
As of April 14, 2006, we have concentrated our product development efforts into
three areas, home/kitchen appliances, beauty products and licensed merchandise.
We anticipate that these products will be introduced into the market under one
uniform brand name or under a separate trademarked names owned by CirTran
Products.
Convertible Debenture Transaction
On May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate" or the "Selling Shareholder"), relating to the issuance by us of a
5% Secured Convertible Debenture, due December 31, 2007, in the aggregate
principal amount of $3,750,000 (the "Convertible Debenture").
In connection with the issuance of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
17
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to
Highgate, and legal fees of $5,668. As such, of the total proceeds of
$3,750,000, the net proceeds to us were $1,228,567, which we received following
the closing of the issuance of the Convertible Debenture. We intend to use these
proceeds were used for general corporate and working capital purposes.
The Convertible Debenture bears interest at a rate of 5%. Highgate is entitled
to convert, at its option, all or part of the principal amount owing under the
Convertible Debenture into shares of our common stock at a conversion price
equal to the lesser of (a) $0.10 per share, or (b) an amount equal to the lowest
closing bid price of the Common Stock as listed on the OTC Bulletin Board, as
quoted by Bloomberg L.P. for the twenty (20) trading days immediately preceding
the conversion date. Except as otherwise set forth in the Convertible Debenture,
Highgate's right to convert principal amounts owing under the Convertible
Debenture into shares of our common stock is limited as follows:
1. Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the market price of our
stock is $0.10 per share or less at the time of conversion;
2. Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the price of our stock is
greater than $0.10 per share at the time of conversion,
provided, however, that Highgate may convert in excess of the
foregoing amounts if we and Highgate mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), Highgate may, in its sole discretion,
accelerate full repayment of all debentures outstanding and
accrued interest thereon or may, notwithstanding any
limitations contained in the Convertible Debenture and/or the
Purchase Agreement, convert the Convertible Debenture and
accrued interest thereon into shares of our common stock
pursuant to the Convertible Debenture.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
27.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Additional Convertible Debenture Transaction
On December 30, 2005, we entered into a securities purchase agreement
(the "Cornell Purchase Agreement") with Cornell Capital Partners, a Delaware
limited partnership ("Cornell Capital"), relating to the issuance of a 5%
Secured Convertible Debenture, due July 30, 2008, in the aggregate principal
amount of $1,500,000 (the "Cornell Debenture").
We also paid a commitment fee of $120,000 and a structuring fee of
$10,000 to Cornell Capital. As such, of the total amount of $1,500,000, the net
proceeds to us were $1,370,000. We will use these proceeds for general corporate
and working capital purposes, at our discretion.
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The Cornell Debenture bears interest at a rate of 5%. Cornell Capital
is entitled to convert, at its option, all or part of the principal amount owing
under the Debenture into shares of the Company's common stock at a conversion
price equal one hundred percent (100%) of the lowest closing bid price of the
Common Stock as listed on the OTC Bulletin Board, as quoted by Bloomberg L.P.
for the twenty (20) trading days immediately preceding the Conversion Date,
subject to certain restrictions and limitations set forth in the Cornell
Debenture.
Under the terms of the Cornell Debenture, except upon an event of
default as defined in the Cornell Debenture, Cornell Capital may not convert the
Cornell Debenture for a number of shares of common stock in excess of that
number of shares of common stock which, upon giving effect to such conversion,
would cause the aggregate number of shares of Common Stock beneficially owned by
Cornell Capital and its affiliates to exceed 4.99% of the outstanding shares of
the common stock following such conversion.
Pursuant to the Cornell Debenture, interest is to be paid at the time
of maturity or conversion. We may, at our option, pay accrued interest in cash
or in shares of our common stock. If paid in stock, the conversion price shall
be the closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Also pursuant to the Cornell Debenture, we have the right to redeem, by
giving 3 days' written notice to Cornell Capital, a portion or all of the
Cornell Debenture then outstanding by paying an amount equal to one hundred five
percent (105%) of the amount redeemed plus interest accrued thereon. In the
event that we redeem only a portion of the outstanding principal amount of the
Cornell Debenture, Cornell Capital may convert all or any portion of the unpaid
principal or interest of the Cornell Debenture not being redeemed by us.
Additionally, if after the earlier to occur of (x) fifteen (15) months following
the date of the purchase of the Cornell Debenture or (y) twelve (12) months
following the date on which the initial registration statement is declared
effective, all or any portion of the Cornell Debenture remains outstanding, then
we, at the request of Cornell Capital, are required to redeem such amount
outstanding at the rate of five hundred thousand dollars ($500,000) per each
30-day period. Finally, upon the occurrence of an event of default as defined in
the Cornell Debenture, Cornell Capital can convert all outstanding principal and
accrued interest under the Cornell Debenture irrespective of any of the
limitations set forth in the Cornell Debenture and/or the Purchase Agreement,
and in such event, all such principal and interest shall become immediately due
and payable.
In connection with the Purchase Agreement, we also agreed to grant to
Cornell Capital warrants (the "Warrants") to purchase up to an additional
10,000,000 shares of our common stock. The Warrants have an exercise price of
$0.09 per share, and expire three years from the date of issuance. The Warrants
also provide for cashless exercise if at the time of exercise there is not an
effective registration statement for the warrant or if an event of default has
occurred.
Additionally, we entered into an investor registration rights agreement
(the "Registration Rights Agreement") with Cornell Capital, pursuant to which we
agreed to file, within 120 days of the closing of the purchase of the Cornell
Debenture, a registration statement to register the resale of shares of our
common stock issuable to Cornell Capital upon conversion of the Cornell
Debenture. We agreed to register the resale of up to 42,608,696 shares,
consisting of 32,608,696 shares underlying the Cornell Debenture, and 10,000,000
shares underlying the Warrants. We agreed to keep such registration statement
effective until all of the shares issuable upon conversion of the Cornell
Debenture have been sold. In the event that we issue more than 32,608,696 shares
of its common stock upon conversion of the Cornell Debenture, we will file
additional registration statements as necessary.
19
We also entered into a security agreement (the "Security Agreement")
with Cornell Capital, pursuant to which we granted a second position security
interest in all of our property, including goods; inventory; contract rights and
general intangibles; documents, receipts, and chattel paper; accounts and other
receivables; products and proceeds; and any interest in any subsidiary, joint
venture, or other investment interest to secure our obligation under the Cornell
Debenture and the related agreements.
We also entered into an escrow agreement (the "Escrow Agreement") with
Cornell Capital relating to the holding and disbursement of payment of the
purchase price of the Cornell Debenture and cash payments made by us in payment
of the obligations owing under the Cornell Debenture. We agreed with Cornell
Capital to appoint David Gonzalez as the Escrow Agent under the Escrow
Agreement.
By way of background, we have previously entered into financing
transactions with Cornell Capital. In April 2003, we had entered into an equity
line of credit agreement with Cornell Capital. Between December 2003 and March
2004, we drew a total of $2,150,000 on the equity line, and issued a total of
57,464,386 shares of common stock to Cornell Capital. In May 2004, we entered
into a standby equity distribution agreement with Cornell Capital, but the
agreement was terminated before any funds were drawn or any shares were issued.
Between June 2003 and January 2005, Cornell Capital loaned to us an aggregate of
$5,595,000 pursuant to promissory notes issued to Cornell Capital. These notes
were paid in full by May 2005.
Highgate and Cornell have the same general partner, Yorkville Advisors,
but have different portfolio managers. Additionally, the escrow agent appointed
in connection with the purchase and sale of both the Cornell Capital debenture
transaction and the Highgate debenture transaction is David Gonzalez, who is an
officer of Cornell Capital.
The Company does not anticipate that it will use any of the proceeds of
the sale of the Cornell Debenture to Cornell Capital to repay the debenture sold
to Highgate.
Exclusive Manufacturing Agreement
On December 28, 2005, we signed an Exclusive Manufacturing Agreement
(the "Agreement") with Arrowhead Industries, Inc. ("Arrowhead"), pursuant to
which we will become the exclusive manufacturer of a tool for assisting with the
removal of door hinges called the "Hinge Helper" (the "Product"). Under the
Agreement, Arrowhead agreed to buy the Product exclusively from us for the
period of the Agreement, which is three years. The Product will be manufactured
by us or by sub-manufacturers selected by us.
The Agreement provides that Arrowhead will own all right, title, and
interest in the Product, and will sell and market the Product under its
trademarks, service marks, or trade names.
On January 9, 2006, we issued a press release which referred, in the
title, to the Agreement as a "$22 Million Exclusive Manufacturing Agreement."
The dollar amount referenced relates to the potential amount of income or
revenue which we may receive over the anticipated life of the Agreement.
CirTran announced on January 9, 2006, that Arrowhead Industries, Inc.,
of Windermere, Florida, had awarded us an exclusive contract to manufacture its
patented Hinge Helper (TM) do-it-yourself utility tool for the home. The Hinge
Helper will be manufactured by CirTran-Asia, the Company's China-based
subsidiary. The exclusive manufacturing contract for the product is for three
years. Arrowhead has filmed a Hinge Helper infomercial for TV with an airing
date scheduled for late April.
20
The Hinge Helper is a unique hand tool designed and developed for use
by household customers as well as tradesmen. Recognized by the U.S. Patent
Office (#6,308,390 B1), its trademark and patent are owned by and registered to
Arrowhead. The specific advantage of the Hinge Helper is its ease-of-use and
simplistic design. It can be applied to any residential hinge on wood, metal or
composite doors, and is being manufactured with highly-durable materials,
enabling it to carry a lifetime guarantee.
The contract is for 3 years, and Arrowhead agreed to purchase a minimum
of ten million (10,000,000) units of the Product (the "Minimum Quantity"),
subject to the terms and conditions of the Agreement. Arrowhead and CirTran have
agreed on the Minimum Quantity in good faith, although the parties acknowledged
that in certain circumstances described in the agreement, the agreement may be
terminated prior to the sale of the entire Minimum Quantity. Arrowhead agreed to
submit purchase orders for the Product from time to time in accordance with the
terms of the agreement. Arrowhead agreed to pay CirTran for the Product
purchased at the prices ranging from $2.95 to $1.90 per unit, depending on the
cumulative number of units of Product which have been purchased by Arrowhead.
Arrowhead will also be entitled to a rebate equal to 10% of the purchase Price
paid for Product in the previous Tier. Rebates will be payable only in the form
of a credit memo against future purchases. Rebate credit memos will not be paid
in cash and may not be applied against outstanding balances. We will calculate
eligibility for the Rebate as soon as practicable following the end of the month
in which a new Tier is entered.
We have produced hand made samples, which have been sent to Arrowhead.
These were approved and we are awaiting final approval for the production
samples that were supplied at the end of March 2006.. Once the production
samples are approved, we will start production according to the release schedule
that should be provided by Arrowhead shortly thereafter.
RISK FACTORS
The short- and long-term success of CirTran is subject to certain risks, many of
which are substantial in nature and outside the control of CirTran. You should
consider carefully the following risk factors, in addition to other information
contained herein. When used in this prospectus, words such as "believes,"
"expects," "intends," "plans," "anticipates," "estimates," and similar
expressions are intended to identify forward-looking statements, although there
may be certain forward-looking statements not accompanied by such expressions.
You should understand that several factors govern whether any forward-looking
statement contained herein will or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected herein.
These forward-looking statements include plans and objectives of management for
future operations, including the strategies, plans and objectives relating to
the products and the future economic performance of CirTran and its subsidiaries
discussed above. We disclaim any intention or obligation to update or revise and
forward-looking statement, whether as a result of new information, future
events, or otherwise. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by CirTran or any other person that
the objectives or plans of CirTran will be achieved.
In addition to the other information in this report, the following risk factors
should be considered carefully in evaluating our business before making any
investment decisions with respect to 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.
21
Risks Related to Our Operations
We have a history of operating losses which could have a material adverse impact
on our ability to continue operations.
Our current liabilities exceeded our current assets by $1,142,874 as of December
31, 2005, and by $3,558,826 as of December 31, 2004. Our net loss for the year
ending December 31, 2005, was $527,708, which included a gain on forgiveness of
debt of $337,761, compared to $658,322 for the year ended December 31, 2004,
which included a gain on forgiveness of debt of $1,713,648. Our ability to
operate profitably depends on our ability to increase our sales further and
achieve sufficient gross profit margins for sustained growth. We can give no
assurance that we will be able to increase our sales sufficiently to enable us
to operate profitably, which could have a material adverse impact on our
business. Our ability to obtain funding has had a material effect on our
operations. Additionally, there is no guarantee that the fluctuations in the
volume of our sales will stabilize or that we will be able to continue to
increase our revenues to exceed our expenses. There are doubts that we will be
able to continue as a going concern.
Our current liabilities exceeded our current assets, which raises doubts that we
may continue as a going concern.
As of December 31, 2005, our current liabilities exceeded our current assets by
$1,142,874, compared to $3,558,826 as of December 31, 2004. For the year ended
December 31, 2005 and 2004, we had negative cash flows from operations of
$1,751,744 and $1,680,054, respectively. There can be no guarantee that our
current assets will exceed our current liabilities. As such, and in light of our
recent history, there remains a doubt we will be able to meet our obligations as
they come due and will be able to execute our long-term business plans. If we
are unable to meet our obligations as they come due or are unable to execute our
long-term business plans, we may be forced to curtail our operations, sell part
or all of our assets, or seek protection under bankruptcy laws.
The "going concern" paragraph in the reports of our independent registered
public accounting firm for the years ended December 31, 2005 and 2004, raises
doubts about our ability to continue as a going concern.
The independent registered public accounting firm's reports for our financial
statements for the years ended December 31, 2005 and 2004, include an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. This may have an adverse effect on our ability to obtain
financing for our operations and to further develop and market our products.
Our volume of sales has fluctuated significantly over the last four years, and
there is no guarantee that we will be able to increase sales. These fluctuations
in sales volume could have a material adverse impact on our ability to operate
our business profitably.
Our sales volume increased in the year of 2005 as compared to 2004. Our sales
volumes for the previous four years have changed as indicated by the following
levels of net sales for the periods indicated: $2,299,668 for the year ended
December 31, 2002; $1,215,245 for the year ended December 31, 2003 and
$8,862,715 for the year ended December 31, 2004. For the year ended December 31,
2005 our sales increased to $12,992,512 which is a 46.6% increase from year
ended December 31, 2004. This increase indicates an increasing trend in sales
volume. There is no guarantee that the fluctuations in the volume of our sales
will stabilize or that we will be able to continue to increase our sales volume.
We are involved in numerous legal proceedings that may give rise to significant
liabilities, which could impair our ability to continue as a going concern.
22
We are involved in legal proceedings, several of which involve lawsuits filed
against us. As of April 14, 2006, one company had a judgment against us in the
amount of $37,966, and there were additional claims, in connection with pending
litigation, in the aggregate amount of approximately $10,000,000. This pending
litigation involves CirTran Asia and the other plaintiffs whom have filed their
reply to the counterclaim, disputing all of the allegations and claims.
International Edge filed a motion to dismiss for lack of jurisdiction, which was
pending as of the date of this report. This claim involves licensing issues
relating to a product which generated approximately $3,510,000 in revenue in
2004 and $960,000 in 2005. As discussed in the "Legal Proceedings" section, we
are currently attempting to negotiate with each of these claimants to settle the
claims against CirTran, although in many cases, we have not yet reached final
settlements. There can be no assurance that we will be successful in those
negotiations or that, if successful, we will be able to service any payment
obligations which may result from such settlements.
There is substantial risk, therefore, that the existence and extent of these
liabilities could adversely affect our business, operations and financial
condition. The liabilities and claims could also result in a reduction in our
revenues to the extent that claims relate to specific products or licenses., As
a result, we may be forced to curtail our operations, sell part or all of our
assets, or seek protection under bankruptcy laws. Additionally, there is
substantial risk that our vendors could expand their collection efforts to
collect the unpaid amounts. If they undertake significant collection efforts,
and if we are unable to negotiate settlements or satisfy our obligations, we
could be forced into bankruptcy.
In connection with the sale of the Convertible Debentures, we granted a security
interest in all of our assets to secure our payment obligations under the
Convertible Debentures. If we are unable to satisfy our payment obligations,
Highgate or Cornell Capital could execute on the security interest and take
control of our assets.
In connection with the sale of the Convertible Debenture to Highgate, we entered
into a security agreement with Highgate, pursuant to which we pledged all of our
property, including goods; inventory; contract rights and general intangibles;
documents, receipts, and chattel paper; accounts and other receivables; products
and proceeds; and any interest in any subsidiary, joint venture, or other
investment interest to secure our obligation under the Convertible Debenture and
the related agreements. Similarly, in connection with the sale of the
Convertible Debenture to Cornell Capital, we entered into a security agreement
with Cornell Capital, pursuant to which we gave a second position security
interest and pledged all of our property, including goods; inventory; contract
rights and general intangibles; documents, receipts, and chattel paper; accounts
and other receivables; products and proceeds; and any interest in any
subsidiary, joint venture, or other investment interest to secure our obligation
under the Cornell Capital Convertible Debenture and the related agreements. In
the event that we are unable to make our payment obligations under the
Convertible Debentures or to work out alternate arrangements with Highgate
and/or Cornell Capital, or to arrange for financing to enable us to make our
payment obligations to Highgate and/or Cornell Capital, Highgate and/or Cornell
Capital could execute on the security interest and take control of all of our
property and assets.
We are dependent on the continued services of our President and other officers,
and the untimely death or disability of Iehab Hawatmeh could have a serious
adverse effect upon our Company.
We view the continued services of our president, Iehab Hawatmeh, and our other
officers as critical to the success of our Company. Though we have employment
agreements with Mr. Iehab Hawatmeh, Mr. Trevor Saliba, and Mr. Shaher Hawatmeh
(see "Executive Compensation"), and a key-man life insurance policy for Mr.
Iehab Hawatmeh, the untimely death or disability of Mr. Hawatmeh could have a
serious adverse affect on our operations.
23
Our international business activities subject us to risks that could adversely
affect our business.
For the year ended December 31, 2005, sales of products manufactured in the
United States accounted for 24.1 percent of our total net revenues, and sales of
products manufactured in China accounted for 75.9 percent of our total net
revenues. Our sales of our products manufactured internationally have increased,
and now represents a larger percentage of our sales. Additionally, the portion
of our products that are produced at facilities in close proximity to our
CirTran-Asia production facilities in ShenZhen, China, has increased. As a
result, we are subject to the risks inherent in international operations. Our
international business activities could be affected, limited, or disrupted by a
variety of factors, including:
* the imposition of or changes in governmental controls, taxes,
tariffs, trade restrictions and regulatory requirements;
* the costs and risks of localizing products for foreign
countries;
* longer accounts receivable payment cycles;
* changes in the value of local currencies relative to our
functional currency;
* import and export restrictions;
* loss of tax benefits due to international production;
* general economic and social conditions within foreign
countries;
* taxation in multiple jurisdictions; and/or
* political instability, war or terrorism.
All of these factors could harm future sales of our products to international
customers or future production outside of the United States of our products, and
have a material adverse effect on our business, results of operations and
financial condition.
We may continue to expand our operations in international markets. Our failure
to effectively manage our international operations could harm our business.
Entering new international markets, including our entry into China with
CirTran-Asia, may require significant management attention and expenditures and
could adversely affect our operating margins and earnings. To date, we have only
recently begun to penetrate international markets. To the extent that we are
unable to do so, our growth in international markets would be limited, and our
business could be harmed.
We expect that our international business operations will be subject to a number
of material risks, including, but not limited to:
* difficulties in managing foreign sales channels;
* difficulties in enforcing agreements and collecting
receivables through foreign legal systems and addressing other
legal issues;
* longer payment cycles;
24
* taxation issues;
* differences in international telecommunications standards and
regulatory agencies;
* product requirements different from those of our current
customers;
* fluctuations in the value of foreign currencies; and
* unexpected domestic and international regulatory, economic or
political changes.
A combination of any or all of these risks could have a material adverse impact
both on our international business, and on our core business operations in the
United States.
We are dependent on the continued services of Charles Ho, the President of our
CirTran-Asia subsidiary, and the untimely death or disability of Mr. Ho could
have a serious adverse effect upon our subsidiary and Company.
We view the continued services of Charles Ho, the president of our CirTran-Asia
subsidiary, as critical to the success of that subsidiary. Though we have an
employment agreement with Mr. Ho (see "Executive Compensation"), we have no
key-man life insurance policy for Mr. Ho. The untimely death or disability of
Mr. Ho could have a serious adverse affect on our international operations and
our operations overall.
We have not held an annual meeting in several years, which could result in a
legal action being brought against the Company to compel an annual meeting.
We have not held an annual meeting of shareholders since 2001. Under Nevada law,
if a Nevada corporation does not hold a meeting to elect directors of the
corporation within eighteen months after the last election of directors, a
shareholder or shareholders owning at least fifteen percent of the Company's
outstanding voting stock can apply to a court for an order compelling the
Company to hold a shareholder meeting to elect directors. Because it has been
more than eighteen months since our last meeting where directors were elected,
an action could be brought, pursuant to Nevada law, against the Company to
compel us to hold an annual meeting and elect directors of the Company.
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly rapid
turnaround time for their OEM customers. We do not obtain firm, long-term
purchase commitments from our customers and have experienced a demand for
reduced lead-times in customer orders. Our customers may cancel their orders,
change production quantities or delay design and production for several factors.
Cancellations, reductions or delays by a customer or group of customers could
adversely affect our results of operations. Additional factors that affect the
electronics industry and that could have a material adverse effect on our
business include the inability of our customers to adapt to rapidly changing
technology and evolving industry standards and the inability of our customers to
develop and market their products. If our customers' products become obsolete or
fail to gain commercial acceptance, our results of operations may be materially
and adversely affected, which could make it difficult for us to continue as a
going concern.
25
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
A percentage of our revenue is generated from our electronics assembly and
manufacturing services. Of this amount our three largest customers generate
approximately 12% of the total revenue. Our customers include electronics,
telecommunications, networking, automotive, gaming, exercise equipment, and
medical device OEMs that contract with us for the manufacture of specified
quantities of products at a particular price and during a relatively short
period of time. As a result, the mix and number of our clients varies
significantly from time to time. Responding to the fluctuations and variations
in the mix and number of our clients can cause significant time delays in the
operation of our business and the realization of revenues from our clients.
These delays could have a material adverse impact on our business, resulting
from, among other things, the costs associated from shifting operations to
respond to different orders.
Our industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able to effectively respond to the technological requirements of a
changing market, including the need for substantial additional capital
expenditures that may be required as a result of these changes. The electronics
manufacturing services industry is characterized by rapidly changing technology
and continuing process development. The future success of our business will
depend in large part upon our ability to maintain and enhance our technological
capabilities and successfully anticipate or respond to technological changes on
a cost-effective and timely basis. In addition, our industry could in the future
encounter competition from new or revised technologies that render existing
technology less competitive or obsolete. If we are unable to respond adequately
to such changes, our business operations could be adversely impacted, which
could make it difficult for us to continue as a going concern.
There may be shortages of required components which could cause us to curtail
our manufacturing or incur higher than expected costs.
Component shortages or price fluctuations in such components could have an
adverse effect on our results of operations by delaying or making it more
difficult or expensive for us to fill customer orders. We purchase the
components we use in producing circuit board assemblies and other electronic
manufacturing services and we may be required to bear the risk of component
price fluctuations. In addition, shortages of electronic components have
occurred in the past and may occur in the future. These shortages and price
fluctuations could potentially have an adverse effect on our results of
operations, again by delaying or making it more difficult or expensive for us to
fill orders or to seek new orders.
Holders of CirTran common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of common
stock in connection with the Convertible Debentures.
The following table describes the number of shares of common stock that would be
issuable, assuming that the full principal amount of the Convertible Debentures
(excluding any interest accrued) was converted into shares of our common stock,
irrespective of the availability of registered shares and any conversion
limitations contained in the Convertible Debentures, and further assuming that
the applicable conversion or exercise prices at the time of such conversion or
exercise were the following amounts:
26
Total Shares
Shares Issuable Issuable in
Shares Issuable Upon Conversion Connection
Upon Conversion of $1,500,000 with
of $3,000,000 Principal Conversion of
Principal Amount Amount of Aggregate
of Convertible Convertible Principal
Hypothetical Debenture by Debenture by Amount of
Conversion Highgate House Cornell Capital Convertible
Price Funds, Ltd. Partners Debentures
--------------------------------------------------------------------------------
$0.01 300,000,000 150,000,000 450,000,000
$0.02 150,000,000 75,000,000 225,000,000
$0.03 100,000,000 50,000,000 150,000,000
$0.04 75,000,000 37,500,000 112,500,000
$0.05 60,000,000 30,000,000 90,000,000
$0.10 30,000,000 15,000,000 45,500,000
Given the formula for calculating the shares to be issued in connection with
conversions of the Convertible Debentures, there effectively is no limitation on
the number of shares of common stock which may be issued in connection with
conversions of the Convertible Debentures, except for the number of shares
registered under prospectuses and related registration statements. As such,
holders of our common stock may experience substantial dilution of their
interests to the extent that Highgate and/or Cornell Capital converts amounts
under the Convertible Debentures.
Our issuances of shares in connection with conversions of the Convertible
Debentures 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 conversions of the Convertible
Debenture by Highgate and Cornell Capital may result in substantial dilution to
the equity interests of holders of CirTran common stock other than Highgate and
Cornell Capital. Specifically, the issuance of a significant amount of
additional common stock will result in a decrease of the relative voting control
of our common stock issued and outstanding prior to the issuance of common stock
in connection with conversions of the Convertible Debentures. Furthermore,
public resales of our common stock by Highgate and/or Cornell Capital following
the issuance of common stock in connection with conversions of the Convertible
Debentures likely will depress the prevailing market price of our common stock.
Even prior to the time of actual conversions and public resales, the market
"overhang" resulting from the mere existence of our obligation to honor such
conversions or exercises could depress the market price of our common stock,
which could make it more difficult for existing investors to sell their shares
of our common stock, and could reduce the amount they would receive on such
sales.
Existing shareholders likely will experience increased dilution with decreases
in market value of common stock in relation to our issuances of shares in
connection with the Convertible Debentures, which could have a material adverse
impact on the value of their shares.
The formulas for determining the number of shares of common stock to be issued
in connection with conversions of the Convertible Debentures are based, in part,
on the market price of the common stock. With respect to the Highgate
Convertible Debenture, the conversion price is are equal to the lower of $0.10
per share or the lowest closing bid price of our common stock over the twenty
trading days after the conversion notice is tendered by us to Highgate. With
respect to the Cornell Capital Convertible Debenture, the conversion price is
are equal to the lowest closing bid price of our common stock over the twenty
trading days after the conversion notice is tendered by us to Cornell Capital.
As a result, the lower the market price of our common stock at and around the
time we issue shares to Highgate or Cornell Capital in connection with the
Convertible Debentures, the more shares of our common stock Highgate or Cornell
Capital, respectively, will receive. Any increase in the number of shares of our
common stock issued upon conversion of principal or interest on the Convertible
Debentures as a result of decreases in the prevailing market price would
compound the risks of dilution described in the preceding paragraphs.
27
Highgate and Cornell Capital will experience immediate and substantial dilution
to their holdings as a result of the issuances of common stock in connection
with the Convertible Debentures.
The potential increase in stockholders' equity if Highgate and Cornell converted
the entire Convertible Debenture could potentially exceed our net tangible book
value of $1,415,040 at December 31, 2005. Accordingly, Highgate will experience
immediate and substantial dilution between approximately $0.0034 to $0.4013 per
share, or approximately 34.09% to 97.86% of the estimated average conversion
price of $0.01 to $0.50. The dilution at various estimated average conversion
prices is as follows:
Average Conversion Price
Dilution Percent Dilution
Estimated Per Share Per Share
$0.01 (1) $0.0034 34.09%
$0.02 (1) $0.0118 59.03%
$0.03 (1) $0.0211 70.28%
$0.04 $0.0307 76.68%
$0.05 $0.0404 80.81%
$0.10 $0.0898 89.83%
$0.15 $0.1396 93.08%
$0.25 $0.2394 95.78%
$0.50 $0.4893 97.86%
(1) At this conversion price, the Company would be required to register
additional shares to convert the entire amount of the Convertible Debenture to
shares of common stock.
There is an increased potential for short sales of our common stock due to the
sales of shares issued to Highgate and Cornell Capital in connection with the
Convertible Debentures, which could materially effect the market price of our
stock.
Downward pressure on the market price of our common stock that likely will
result from sales of our common stock by Highgate and/or Cornell Capital issued
in connection with conversions of the Convertible Debentures, could encourage
short sales of common stock by Highgate or Cornell Capital. A "short sale" is
defined as the sale of stock by an investor that the investor does not own.
Typically, investors who sell short believe that the price of the stock will
fall, and anticipate selling at a price higher than the price at which they will
buy the stock. Significant amounts of such short selling could place further
downward pressure on the market price of our common stock, which could make it
more difficult for existing shareholders to sell their shares.
The restrictions on the number of shares issued upon conversion of the
Convertible Debentures may have little if any effect on the adverse impact of
our issuance of shares in connection with the Convertible Debentures, and as
such, Highgate and Cornell Capital may sell a large number of shares, resulting
in substantial dilution to the value of shares held by our existing
shareholders.
Both Highgate and Cornell Capital are prohibited, except in certain
circumstances, from converting amounts of the Convertible Debentures to the
extent that the issuance of shares would cause Highgate or Cornell Capital,
respectively, to beneficially own more than 4.99% of our then outstanding common
stock. These restrictions, however, do not prevent Highgate or Cornell Capital
from selling shares of common stock received in connection with a conversion,
and then receiving additional shares of common stock in connection with a
subsequent conversion. In this way, either Highgate or Cornell Capital could
sell more than 4.99% of the outstanding common stock in a relatively short time
28
frame while never holding more than 4.99% at one time. As a result, existing
shareholders and new investors could experience substantial dilution in the
value of their shares of our common stock.
The trading market for our common stock is limited, and investors who purchase
shares from Highgate or Cornell Capital may have difficulty selling their
shares.
The public trading market for our common stock is limited. On July 15, 2002, our
common stock was listed on the OTC Bulletin Board. Nevertheless, an established
public trading market for our common stock may never develop or, if developed,
it may not be able to be sustained. The OTCBB is an unorganized, inter-dealer,
over-the-counter market that provides significantly less liquidity than other
markets. Purchasers of our common stock therefore may have difficulty selling
their shares should they desire to do so.
It may be more difficult for us to raise funds in subsequent stock offerings as
a result of the sales of our common stock by Highgate and Cornell Capital in
connection with the Convertible Debentures.
As noted above, sales by Highgate and/or Cornell Capital likely will result in
substantial dilution to the holdings and interest of current and new
shareholders. Additionally, as noted above, the volume of shares sold by
Highgate and Cornell Capital could depress the market price of our stock. These
factors could make it more difficult for us to raise additional capital through
subsequent offerings of our common stock, which could have a material adverse
effect on our operations.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Securities in the OTC market are generally more difficult to trade than those on
the Nasdaq National Market, the Nasdaq SmallCap Market or the major stock
exchanges. In addition, accurate price quotations are also more difficult to
obtain. The trading market for our common stock is subject to special
regulations governing the sale of penny stock.
A "penny stock," is defined by regulations of the Securities and Exchange
Commission as an equity security with a market price of less than $5.00 per
share. However, an equity security with a market price under $5.00 will not be
considered a penny stock if it fits within any of the following exceptions:
* the equity security is listed on Nasdaq or a national
securities exchange;
* the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
* 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.
29
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
The price of our common stock is volatile, and an investor may not be able to
resell our shares at or above the purchase price.
In recent years, the stock market in general, and the OTC Bulletin Board and the
securities of technology companies in particular, has experienced extreme price
and trading volume fluctuations. These fluctuations have often been unrelated or
disproportionate to the operating performance of individual companies. These
broad market fluctuations may materially adversely affect our stock price,
regardless of operating results. Investors in our common stock should be aware
that they may not be able to resell our shares at or above the price paid for
them due to the fluctuations in the market.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the only ones
facing CirTran. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the foregoing risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline.
Where to get additional information
Federal securities laws require us to file information with the Commission
concerning our business and operations. Accordingly, we file annual, quarterly,
and special reports, and other information with the Commission. You can inspect
and copy this information at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549.
You can get additional information about the operation of the Commission's
public reference facilities by calling the Commission at 1-800-SEC-0330. The
Commission also maintains a web site (http://www.sec.gov) at which you can read
or download our reports and other information.
CirTran's internet addresses are www.cirtran.com., www.cirtran-asia.com,
www.racore.com.
ITEM 2. DESCRIPTION OF PROPERTIES
On December 17, 2003, we entered into a ten-year lease agreement (the "Lease")
with PFE Properties, LLC, a Utah limited liability company (the "Lessor"), for
our existing 40,000 square-foot headquarters and manufacturing facility, located
at 4125 South 6000 West in Salt Lake City, Utah. The workspace includes 10,000
square feet of office space to support the Registrant's Administration, Sales,
and Engineering Staff. The 30,000 square feet of manufacturing space includes a
30
highly secured inventory area, shipping and receiving areas, and manufacturing
and assembly space that support six full surface-mount lines with
state-of-the-art equipment capable of placing over 360 million components per
year.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with a fair value of $800,000 on the date of issuance.
No registration rights were granted. The shares were issued without registration
under the 1933 Act in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"), and the rules and regulations promulgated thereunder.
The primary asset of PFE is its rights, titles and interests in and to a parcel
of real property, together with any improvements, rents and profits thereon or
associated therewith, located at 4125 S. 6000 W., West Valley City, Utah, 84128,
where the Company presently has its headquarters and manufacturing facility.
Following the acquisition of the PFE interests, PFE will continue to own the
building. PFE will remain a separate LLC due to liability issues and the Company
will continue to make intercompany lease payments under the 2003 lease.
Our facilities in Shenzhen, China, constitute a sales and business office. We
have no manufacturing facilities in China. Our office in Shenzhen is
approximately 1,600 square feet. Under the terms of our lease on the space, the
monthly payment is 15,000 Renminbi, which in was approximately $1,900 on April
14, 2006. The term of the lease is for two years, running from July 18, 2004.
As of December, 2005, CirTran had begun occupying a commercial space in the
Century City district of Los Angeles located at 1875 Century Park East, Suite
1790. The space is approximately 2,500 square feet of office space. The office
will serve as the Business Development, Sales, Marketing and Strategic Planning
Headquarters company-wide and for all divisions and subsidiaries. The sublease,
which was signed in October of 2005 expires in October of 2007. The lease
payment is $4,500 per month, all inclusive.
We believe that the facilities and equipment described above are generally in
good condition, are well maintained, and are generally suitable and adequate for
our current and projected operating needs.
ITEM 3. LEGAL PROCEEDINGS
In November 2003, the Company entered into an agreement with the Utah State Tax
Commission to allow the Company to pay certain accrued tax liabilities for
delinquent payroll taxes, including interest and penalties, incurred by CirTran
Corporation owing to the State of Utah in equal monthly installments over a two
year period. Under the agreement, the Company would make monthly payments of
$4,000 per month through November 2005 to pay the tax liability only. We
completed the payment of the taxes owing in November 2005, and subsequently paid
off the agreed-upon interest and penalties in January 2006.
As of December 31, 2004, the Company had accrued liabilities in the amount of
$500,000 for delinquent payroll taxes, including interest and penalties, owed to
the Internal Revenue Service. The Company entered into an offer in compromise of
all federal tax liabilities owed by the Company based on its ability to pay.
Under the offer, the Company was required to pay an aggregate amount of $500,000
(representing payments of $350,000 by Circuit Technology, Inc., $100,000 by
CirTran Corporation, and $50,000 by Racore Technology, Inc.), not later than
31
February 3, 2005. These amounts were paid. Additionally, the Company must remain
current in its payment of taxes for 5 years, and may not claim any NOLs for the
years 2001 through 2015, or until the three companies pay taxes in an amount
equal to the taxes waived by the offer in compromise.
We also assumed certain liabilities of Circuit Technology, Inc., in connection
with our transactions with that entity in the year 2000, and as a result we are
defendant in a number of legal actions involving nonpayment of vendors for goods
and services rendered. We have accrued these payables and have negotiated
settlements with respect to some of the liabilities, including those detailed
below, and are currently negotiating settlements with other vendors. As of April
14, 2006, the only remaining liability of Circuit Technology is C/S Utilities,
discussed below.
We (as successor to Circuit Technology, Inc.) were a defendant in an action in
El Paso County, Colorado District Court, brought by Sunborne XII, LLC
("Sunborne"), 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. Following several attempts to
settle the claims, we entered into a settlement agreement with Sunborne,
pursuant to which we paid a total of $200,000 in settlement of all claims
subsequent to year end. The action has been dismissed with prejudice.
C/S Utilities notified the Company that (as successor to Circuit Technology,
Inc.) it believes it has a claim against the Company in the amount of $32,472
regarding utilities services. The claim was assigned to BC Services, Inc., which
obtained a judgment against Circuit Technology, Inc., for $37,966 in El Paso
County, Colorado, District Court on February 13, 2003. The Company is reviewing
its records in an effort to confirm the validity of the claims and is evaluating
its options.
CirTran Asia v. Mindstorm Civil No. 050902290, Third Judicial District Court,
Salt Lake County, State of Utah. In February, 2005, CirTran Asia brought suit
against Mindstorm Technologies, LLC, for nonpayment for goods provided. On April
22, 2005, the defendant filed its answer and counterclaim, following which
defendant's counsel withdrew from representation. CirTran Asia notified
defendant that under governing rules it was required to appoint successor
counsel. The defendant failed to do so, and failed to prosecute its claim.
CirTran Asia moved for default judgment, which was granted. CirTran Asia
submitted a proposed order of default judgment in the amount of $288,529 to the
court in September 2005, which has been signed.
CirTran Asia v. Robinson, Civil No. 050915272, Third Judicial District Court,
Salt Lake County, State of Utah. On August 30, 2005, CirTran Asia brought suit
against Glenn Robinson, one of the principals of Mindstorm Technologies, LLC,
for nonpayment for goods provided. Mr. Robinson filed an answer and subsequently
filed for personal bankruptcy. CirTran Asia is reviewing its options and intends
to vigorously pursue this action including filing a nondischargeability suit
against Mr. Robinson in his personal bankruptcy case filed in Florida.
CirTran Asia, et al. v. International Edge, et al., Civil No. 2:05 CV 413BSJ,
U.S. District Court, District of Utah. On May 11, 2005, CirTran Asia, UKING
System Industry Co., Ltd., and Charles Ho filed suit against International Edge,
Inc., Michael Casey Enterprises, Inc., Michael Casey, David Hayek, and HIPMG,
Inc., for breach of contract, breach of the implied covenant of good faith and
fair dealing, interference with economic relationships, and fraud in relation to
certain licensing issues relating to the Ab King Pro. The defendants
counterclaimed, alleging breach of contract, fraud, defamation and related
claims, all related to the Ab King Pro. CirTran Asia and the other plaintiffs
filed their reply to the counterclaim, disputing all of the allegations and
claims. International Edge filed a motion to dismiss for lack of jurisdiction,
which was pending as of the date of this report. Sales from this product in the
32
year ended December 31, 2004 were approximately $3,510,000, and in the year
ended December 31, 2005, were approximately $960,000. CirTran Asia intends to
vigorously pursue this action.
CirTran Corporation vs. Advanced Beauty Solutions, LLC, and Jason Dodo, Civil
No. 060900332, Third Judicial District Court, Salt Lake County, State of Utah.
On January 9, 2006, CirTran Corporation brought suit against Advanced Beauty
Solutions ("ABS") and Jason Dodo, asserting claims including breach of contract,
breach of the implied covenant of good faith and fair dealing, interference with
economic relations, fraud and unjust enrichment. After the complaint was filed,
ABS filed for bankruptcy protection. The Company has reached a tentative
settlement with ABS. However, because ABS has sought protection under the
bankruptcy laws, any settlement must be approved by the bankruptcy court. As of
March 28, 2006, Mr. Dodo has not answered the complaint and the Company intends
to pursue its claims against Mr. Dodo.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the year ended December 31, 2005.
PART II
ITEM 5. 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 calendar years ending
December 31, 2004, 2003, and 2002, the prices of our common stock as reported
and summarized on the Pink Sheets. These prices are based on inter-dealer bid
and asked prices, without markup, markdown, commissions, or adjustments and may
not represent actual transactions.
Calendar Quarter Ended High Bid Low Bid
---------------------- -------- -------
December 31, 2005 $0.03 $0.02
September 30, 2005 $0.04 $0.03
June 30, 2005 $0.05 $0.03
March 31, 2005 $0.05 $0.03
December 31, 2004 $0.04 $0.02
September 30, 2004 $0.06 $0.03
June 30, 2004 $0.09 $0.04
March 31, 2004 $0.08 $0.01
December 31, 2003 $0.03 $0.02
September 30, 2003 $0.03 $0.01
June 30, 2003 $0.04 $0.01
March 31, 2003 $0.04 $0.01
December 31, 2002 $0.12 $0.03
September 30, 2002 $0.16 $0.03
June 30, 2002 $0.07 $0.02
March 31, 2002 $0.08 $0.02
33
As of April 14, 2006, we had approximately 528 shareholders of record holding
617,586,117 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 February 2006, in connection with the settlement of a lawsuit, we issued to
Howard Salamon 4,000,000 shares of our common stock, and warrants to purchase an
additional 5,250,000 to Salamon and 1,750,000 to Melissa Cohen. The Warrants
have a term of five years and an exercise price of $0.05 per share. The issuance
of the shares and warrants to Salamon and Cohen were made in reliance on Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act") and rules and
regulations promulgated thereunder, as a transaction not involving any public
offering. No advertising or general solicitation was employed in offering the
securities.
In December 2005, we entered into a securities purchase agreement with Cornell
Capital Partners ("Cornell"), concerning the issuance of an aggregate principal
amount of $1,500,000 of Convertible Debentures. The issuance of the Convertible
Debentures to Cornell was made in reliance on Section 4(2) of the Securities Act
of 1933, as amended (the "1933 Act") and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in offering the securities, and the
Convertible Debenture was issued to only one investor which represented that it
is an "accredited investor" as that term is defined in Regulation D promulgated
pursuant to the Securities Act of 1933. Through April 14, 2006, we had issued no
shares of our common stock in connection with any conversions of the Convertible
Debentures, and we had received notice of no conversions from Cornell.
In May 2005, we entered into a securities purchase agreement with Highgate
concerning the purchase and issuance of the Convertible Debenture. The issuance
of the Convertible Debenture to Highgate was made in reliance on Section 4(2) of
the 1933 Act, and rules and regulations promulgated thereunder, as a transaction
not involving any public offering. No advertising or general solicitation was
employed in offering the securities, and the Convertible Debenture was issued to
only one investor which represented that it is an "accredited investor" as that
term is defined in Regulation D promulgated pursuant to the Securities Act of
1933. Through April 14, 2006, we have issued 24,193,548 shares of our common
stock in connection with conversions of $750,000 of the Convertible Debentures,
and we had received notice of the conversion from Highgate. This registration
statement is filed to register the resale of shares into the market that
Highgate will receive upon conversion of the Convertible Debenture, and our
issuances of shares to Highgate will be made without registration under the 1933
Act in reliance on Section 4(2) of the 1933 Act, and the rules and regulations
promulgated thereunder.
In March 2005, the Company entered into agreements with eight individuals or
entities (collectively, the "Lenders") to whom the Company was indebted, in an
aggregate amount of $2,450,000, pursuant to which, the Company agreed to issue
an aggregate of 61,250,000 shares of its restricted common stock in exchange for
the Lenders' agreeing to cancel the debt obligations owed by the Company. With
respect to $2,050,000 of the indebtedness, that amount was owed to Abacas
Ventures, Inc. ("Abacas"), a company that had purchased certain of the Company's
obligations. Abacas agreed to the cancellation of the Company's obligation to
Abacas in return for the Company's issuing shares to certain of Abacas's
shareholders and the other named individuals. Trevor Saliba, who is a
34
beneficiary of the Saliba Private Annuity Trust, has been a director of the
Company since June 2001. The remaining $400,000 was due to I&R Properties in
connection with past rent on the Company's headquarters building. I&R Properties
is a Company owned and controlled by individuals who are officers, directors and
principal stockholders. The issuances of shares to the Lenders were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in the issuance of the securities.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with an estimated value of Eight Hundred Thousand
Dollars ($800,000). No registration rights were granted. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder, as a transaction not involving any public
offering. No advertising or general solicitation was employed in the issuance of
the securities
Pursuant to the Equity Line of Credit Agreement, we were entitled to put to the
Equity Line Investor, in lieu of repayment of amounts drawn on the Equity Line,
shares of the Company's common stock. Although the Company filed a registration
statement to register the resale by the Equity Line Investor of the shares put
to it by the Company, the issuances of shares to the Company were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in offering the securities, and the shares
were issued to only one investor which represented that it is an "accredited
investor" as that term is defined in Regulation D promulgated pursuant to the
Securities Act of 1933. Through December 31, 2003, we issued 64,253,508 shares
of common stock to the Equity Line Investor in connection with draws on the
Equity Line. Subsequent to December 31, 2003, and through August 31, 2004, we
issued an aggregate of 57,464,386 shares of Common Stock to the Equity Line
Investor in connection with draws on the Equity Line. We used the proceeds of
the draws on the Equity Line to pay outstanding liabilities, including notes to
Cornell, the Equity Line Investor, discussed above. As noted above, the Company
has terminated the Equity Line of Credit Agreement.
In March 2004, the Company issued 542,495 shares of restricted common stock to a
financial institution in partial settlement of an obligation of the Company. The
shares were issued without registration under the Securities Act of 1933, as
amended (the "1933 Act") in reliance on Section 4(2) of the 1933 Act, and the
rules and regulations promulgated thereunder.
In May 2004, the Company issue 1,000,000 shares of restricted common stock to an
unrelated party in settlement of a claim that the Company owed an obligation
under a note. The shares were issued without registration under the 1933 Act in
reliance on Section 4(2) of the 1933 Act, and the rules and regulations
promulgated thereunder.
In November 2004, the Company issued 1,000,000 shares of restricted common stock
to a corporation in settlement of an obligation of the Company under a note
payable to the corporation. The shares were issued without registration under
the 1933 Act in reliance on Section 4(2) of the 1933 Act, and the rules and
regulations promulgated thereunder.
In 2004, the Company issued 45,273,989 shares of restricted common stock to
Iehab and Shaher Hawatmeh in settlement of an obligation of the Company related
to accrued compensation and accrued interest. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act, and
the rules and regulations promulgated thereunder.
35
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock in exchange
for cancellation of an aggregate amount of $1,500,000 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of $0.05
per share, for the aggregate amount of $1,500,000. The Company did not grant
registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act, as
amended (the "1933 Act"), and the rules and regulations promulgated thereunder.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock in exchange
for cancellation of an aggregate amount of $1,499,090 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of
$0.075 per share, for the aggregate amount of $1,500,000. The Company did not
grant registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment Company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
36
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the increase in revenue for the year ended
December 31, 2004 and for the year ended December 31, 2005. This new division,
is our Asian-based, wholly owned subsidiary of CirTran Corporation and provides
a myriad of manufacturing services to the direct response and retail consumer
markets. Our experience and expertise in manufacturing enables CirTran-Asia to
enter a project at any phase: engineering and design, product development and
prototyping, tooling, and high-volume manufacturing. This strategic move into
the Asian market has helped to elevate CirTran to an international contract
manufacturer status for multiple products in a wide variety of industries, and
has, in short order, allow us to target large-scale contracts.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. CirTran-Asia will pursue manufacturing
relationships beyond printed circuit board assemblies, cables, harnesses and
injection molding systems by establishing complete "box-build" or "turn-key"
relationships in the electronics, retail, and direct consumer markets.
In December 2005 we formed a new division, CirTran Products, which will offer
products for sale at retail. The new division will be run from our new Los
Angeles office, working to develop sales. We anticipate that consumer products
built by our CirTran Asia subsidiary, as well as other products which we plan to
acquire, will be available for retail sale in 2006.
Information relating to recent developments in our increasing line of
fitness products is as follows:
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, from International Edge relating to the manufacture of
80,000 abdominal fitness machines. This order was the first order placed with
CirTran-Asia under the exclusive manufacturing agreement. Subsequently, on June
14, 2004, we received another order for 80,000 units of the abdominal fitness
machines, which was announced on June 16, 2004, through a separate press
release. The Company received many orders subsequent to these first orders.
Since these announcements, CirTran-Asia has manufactured, shipped, and received
payments of approximately $5,546,000. On August 13, 2004, we also announced that
on August 11, 2004 we had received new orders for Wal-Mart. The Company shipped
37
to Wal-Mart the complete order of abdominal fitness machines and received
payments of approximately $400,000 through April 14, 2006. The units were
distributed to Wal-Mart stores throughout Canada.
On September 9, 2004, we announced that on September 6, 2004, CirTran-Asia had
been awarded the rights to manufacture the Ab Trainer Club Pro, a new abdominal
fitness machine, for Tristar Products, under an exclusive manufacturing
agreement. This new product is another type of abdominal fitness machine. Since
this announcement, and through April 14, 2006, CirTran-Asia had manufactured and
shipped units, and received payments of approximately $42,000.
On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had
been awarded the rights to manufacture the AbRoller, another type of an
abdominal fitness machine, for Tristar Products, under an exclusive
manufacturing agreement. Since this announcement, and through April 14, 2006,
CirTran-Asia had manufactured and shipped units, and received payments of
approximately $1,600,000.
On September 14, 2004, we announced that on September 7, 2004, we had begun
manufacturing the Instant Abs product, another type of abdominal fitness
machine, for Tristar Products, under an exclusive manufacturing agreement. Since
this announcement, and through April 14, 2006, CirTran-Asia had manufactured,
and shipped units, and received payments of approximately $640,000.
On September 30, 2004, we announced that on September 23, 2004, CirTran-Asia had
been awarded the rights to manufacture the Denise Austin Pilates product, a
pilates fitness machine, for Tristar Products, under an exclusive manufacturing
agreement. Since this announcement, and through the date of this Report,
CirTran-Asia had manufactured and shipped units, and received payments of
approximately $85,000.
On April 28, 2005, CirTran-Asia announced that it has been awarded a contract
(the "April 2005 Agreement") from Guthy - Renker Corporation ("GRC") to be the
exclusive manufacturer of a new fitness machine (the "Fitness Product") for the
sold-on-TV direct response industry. Pursuant to the April 2005 Agreement, GRC
agreed to purchase all of its requirements of the Fitness Product during the
term of the April 2005 Agreement, which is defined as running from the signing
of the agreement through the time when the Fitness Product is not being sold in
quantity. Since signing the April 2005 Agreement, we have received orders
totaling approximately $1,370,000. Since these announcements, CirTran-Asia has
manufactured and shipped orders and has received approximately $968,000 as
payment for such shipments.
Information relating to recent developments in new products under
development along with procuring new products for development is as follows:
On August 11, 2004, we announced that CirTran-Asia received a purchase order
from Emson in New York, on August 10, 2004 relating to the manufacture of a
household cooking appliance for hot dogs and sausages. Since these
announcements, and through April 14, 2006, CirTran-Asia had manufactured and
shipped units, and received payments of approximately $1,320,000.
On October 1, 2004, we entered into an agreement with Transactional Marketing
Partners, Inc. ("TMP"), for consulting services. Pursuant to the agreement, we
engaged TMP to provide strategic planning and for introduction of new business
to us. Under the agreement, we agreed to pay to TMP a fee of ten percent of the
net proceeds received by us from business brought to us by TMP. The fee is to be
paid within 15 calendar days following the end of the month in which we receive
the net proceeds. Additionally, we agreed to pay $7,500 during each of the first
six months of the term of the agreement, with such payments being viewed as an
advance against the fee to be earned. The advance payments are not refundable,
but will be deducted from fees earned by TMP. The agreement had an initial term
38
of six months, beginning October 1, 2004, and could be automatically extended
for successive six-month periods unless either party gives written notice at
least 30 days prior to the expiration of the term of the agreement of its intent
not to renew. Additionally, we may terminate the agreement at any time by giving
30 days' written notice. In March 2005, we extended our agreement an additional
6 months that would expire in early September 2005. In September 2005, the
parties agreed to another six-month extension through March 2006. The parties
will evaluate the relationship at that time and decide if there needs to be
another extension. To date the relationship has proven successful, resulting in
multiple new manufacturing relationships.
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with ABS, a company relating to the manufacture of a hair product in
California. Since these announcements, CirTran-Asia has manufactured and shipped
approximately $4,550,000 worth of units of the hair care products. Early
October, CirTran Corporation was notified that the company had defaulted on its
obligation to its financing company. CirTran Corporation has stopped shipping
under credit and is in the process of exercising its rights permitted by the
agreements.
On July 7, 2005, CirTran Corporation signed another Exclusive Manufacturing
Agreement with ABS, relating to the manufacture of a hair dryer product in
California. We had already begun shipment on previous contracts and were
projecting to begin early in 2006.
In early October 2005, CirTran Corporation was notified that Advanced Beauty
Solutions had defaulted on its obligation to its financing company. In October
2005, we terminated the agreement for both products based on the default. In
January 2006, following efforts to resolve the disputes with ABS, the Company
filed a lawsuit against ABS, claiming breach of contract, interference with
contractual relationships, unjust enrichment, and fraud, and seeking damages
from ABS.
With respect to the flat iron products, through October 2005, CirTran had
shipped to ABS directly approximately $4,746,000 worth of the product, and
CirTran had received from ABS or its finance company a total amount of
approximately $788,000. In November 2005, CirTran repossessed from ABS
approximately $2,341,000 worth of the products in the United States, as we were
permitted to do pursuant to the agreement. As of April 14, 2006, CirTran has a
balance remaining unpaid from ABS of approximately $1,600,000 for the flat iron
product.
Since November 2005, CirTran has been pursuing its rights under the agreement
and has been offering the flat iron product for sale directly to ABS's
customers. In doing so, CirTran sold to ABS's international customers directly
approximately $411,000 worth of the flat iron product. The shipments have all
been paid in full. These products shipped were not part of the repossessed
inventory.
On January 24, 2006, ABS filed a voluntary petition for relief under chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the
"Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
settlement were read into the Bankruptcy Court's record at the Hearing on the
Settlement Motion and the March 24, 2006 hearing on the Sale Motion ("Proposed
39
Modifications"). Written notice of the Proposed Modifications was provided to
creditors and parties in interests on March 27, 2006, and the Declaration of
James C. Bastian, Jr., attesting that no objections to the Proposed
Modifications have been received by ABS, was filed with the Bankruptcy Court. As
of April 14, 2006, an order approving the settlement had been entered by the
Bankruptcy Court.
Subject to and conditioned upon the approval of the settlement by the Bankruptcy
Court and Bankruptcy Court approval of and consummation of the sale of
substantially all of ABS's assets to the Company pursuant to the Sale Motion,
the Company shall have an allowed claim against the ABS's estate in the amount
of $2,350,000, of which $750,000 shall be credited to the purchase of
substantially all of ABS's assets. Under the settlement, the Company shall be
allowed to participate as a general unsecured creditor of ABS's estate in the
amount of $1,600,000 on a pari passu basis with the $2,100,000 general unsecured
claim of certain insiders of ABS and subject to the prior payment of certain
secured, priority, and non-insider claims in the amount of approximately
$1,507,011. Subject to final negotiation and execution of a definitive purchase
agreement and Bankruptcy Court Approval of the sale, CirTran Corporation shall
purchase substantially all of ABS's assets in exchange for (i) a cash payment in
the amount of $1,125,000, (ii) a reduction of CirTran's allowed claim in the
Bankruptcy Case by $750,000, (iii) the assumption of any assumed liabilities,
and (iv) the obligation to pay ABS a royalty equal to $3.00 per True Ceramic Pro
flat iron unit sold by ABS (the "Royalty Obligation"). The Royalty Obligation
shall be capped at $4,135,000. To the extent the amounts paid to ABS on account
of the Royalty Obligation equal less than $435,000 on the 2 year anniversary of
the Closing, then, within 30 days of such anniversary, the Company shall pay ABS
an amount equal to $435,000 less the royalty payments made to date. As part of
the settlement, the Company shall exchange general releases with, among others,
ABS, Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolves a related dispute with
ICG in which ICG will assign $65,000 of its secured claim against ABS to the
Company.
With respect to the hair dryers, as of April 14, 2006, we had not received any
orders or shipped any products, either to ABS or its customers.
On January 9, 2006, we announced the first contract of the new year that could
amount to $22 million in sales over the life of the contract. Arrowhead
Industries, Inc., of Windermere, Florida, has awarded an exclusive contract to
CirTran to manufacture its patented Hinge Helper (TM) do-it-yourself utility
tool. The Hinge Helper will be manufactured by CirTran-Asia, the Company's
China-based subsidiary. The exclusive manufacturing contract is for three years.
Arrowhead has completed the infomercial and will begin media testing within 60
days from January 9, 2006. CirTran-Asia has provided Arrowhead multiple
generation versions of the product for the Direct Response and Retail
distribution. It is anticipated that the program will launch towards the end of
the second quarter 2006.
Due to lack of performance, at management's suggestion, Mr. Michael Casey
submitted his written resignation from the board of directors of CirTran-Asia on
January 31, 2005. He was provided written acceptance by Mr. Hawatmeh, Chairman
of the parent Company, CirTran Corp, on February 1, 2005.
Significant Accounting Policies
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
40
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material and overhead costs. Overhead costs are based on indirect
costs allocated among cost of sales, work-in-process inventory and finished
goods inventory. Indirect overhead costs have been charged to cost of sales or
capitalized as inventory based on management's estimate of the benefit of
indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
The Company typically orders inventory on a customer-by-customer basis in the
electronics assembly and manufacture division. 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 electronics assembly and
manufacture inventory is secured by these agreements.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including intangibles, for impairment
when events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred that indicate possible
impairment. The Company uses an estimate of future undiscounted net cash flows
from the related asset or group of assets over their remaining life in measuring
whether the assets are recoverable. As of December 31, 2005, the Company does
not consider any of its long-lived assets to be impaired.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item 6
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Item 12 - Certain Relationships and Related Transactions."
Results of Operations - Comparison of Years Ended December 31, 2005 and 2004
Sales and Cost of Sales
Net sales increased 46.6% to $12,992,512 for the year ended December 31, 2005,
as compared to $8,862,715 for the year ended December 31, 2004. This sales
increase can be attributed to several factors. The biggest factor contributed to
the increase of net sales during the 2005 was the establishment of the new
division CirTran-Asia, which has contributed $4,569,221 of the increase in
revenue. Another factor was the strengthening of the overall marketing strategy
of the Company. We have added many new customers mostly in CirTran Asia which
contributed to the large increase. Also, industry-wide, we are seeing more OEMs
release larger order commitments with extended time tables. The second
significant factor directly related to CirTran is our marketing approach. Most
contract manufacturers approach customers on a job-by-job basis. CirTran
approaches customers on a partner basis. We have developed a program where we
41
can be more effective when we control the material procurement, purchasing, and
final assembly, providing the customer a final quality product delivered on time
and at a lower market cost. This approach for the electronics assembly and
manufacture division has resulted in sales to new customers of $170,504 during
the year ended December 31, 2005. The biggest factor contributing to the
increase of net sales during 2005 was our contract manufacturing division, which
has resulted in sales to new customers of $4,598,211.
Cost of sales decreased by 4.6%, from $7,030,934 during year ended December 31,
2004, to $6,706,135 during year ended December 31, 2005. The decrease in cost of
sales is due to an increase in revenue. Our gross profit margin for the year
ended December 31, 2005, was 48.1%, up from 20.5% from the year ended December
31, 2004. The increase in margins is attributable to the outsourcing strategy of
most of CirTran Asia's business to other subcontractors in China to better
control cost of materials, direct labor, and scrap.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our two main areas of operations, i.e., Asia Division,
electronics assembly and Ethernet technology, during 20043 and 2005; and (ii)
comparisons during these two years for each division between sales generated by
pre-existing customers and sales generated by new customers.
Year Sales Cost of Sales Gross Loss/Margin
---- ------------- ------------- -----------------
Contract 2005 $ 9,865,023 $ 5,739,436 $ 4,125,587
Manufacture 2004 5,458,944 4,736,479 722,465
Electronics 2005 3,002,038 973,953(2) 2,028,085
Assembly 2004 3,354,057 2,282,253(1) 1,071,804
Ethernet 2005 125,451 79,850(3) 45,601
Technology 2004 49,714 25,202 24,512
Total Pre-existing New
Year Sales Customers Customers
---- ------------- ------------- -----------------
Contract 2005 $ 9,865,023 $ 5,266,812 $ 4,598,211
Manufacture 2004 5,458,944 0 5,458,944
Electronics 2005 3,002,038 2,831,534 170,504
Assembly 2004 3,354,057 2,796,720 557,337
Ethernet 2005 125,451 101,004 24,447
Technology 2004 49,714 30,257 19,457
(1) Includes the write-down of carrying value of inventories of $13,000
(2) Includes the write-down of carrying value of inventories of $17,364
(3) Includes the write-down of carrying value of inventories of $20,725
42
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, 2005 was $2,271,604, as
compared to $1,453,754 at December 31, 2004. The increase in inventory is due to
the repossession of ABS finished goods inventory.
Selling, General and Administrative Expenses
During the year ended December 31, 2005, selling, general and administrative
expenses were $5,923,075 versus $3,362,933 for 2004, a 76.1% increase. The
increase was due to expenses related to the CirTran-Asia division, along with
our efforts to aggressively market our products. Selling, general and
administrative expenses as a percentage of sales as of December 30, 2005 were
45.6% as compared to 37.9% during 2004. This increase is due to expenses related
to the CirTran-Asia division, along with our efforts to aggressively market our
products
Other Income and Expense
Interest expense for 2005 was $1,225,252 as compared to $495,637 for 2004, a
increase of 147.2%. The increase is primarily due to the increase in interest
expense related the convertible debentures, accretion expense and interest
accrued. Also, included are the settlement of various notes payable and interest
income charged to delinquent accounts receivable accounts. As of December 31,
2005 and 2004, the amount of our liability for delinquent state and federal
payroll taxes and estimated penalties and interest thereon was $98,316 and
$723,660, respectively. We had a gain on forgiveness of debt related to
previously unpaid liabilities in the amount of $337,761 and a gain on derivative
valuation of $169,570.
As a result of the above factors, our overall net loss decreased 19.8% to
$527,708 for the year ended December 31, 2005, as compared to $658,322 for the
year ended December 31, 2004.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $19,327,310 at December 31, 2005, and
$18,799,602 at December 31, 2004. Our net loss for the year ending December 31,
2005 was $527,708, compared to $658,322 for the year ending December 31, 2004.
Our current liabilities exceeded our current assets by $1,142,874 as of December
31, 2005, and $3,558,826 as of December 31, 2004. The decrease in the difference
is due to the settlement of notes payable and the agreement with the Internal
Revenue Service. Also, in the difference is an increase in cash, net inventory
and trade accounts payable. For the years ended December 31, 2005 and 2004, we
recorded negative cash flows from operations of $1,751,744 and $1,680,054,
respectively.
Cash
We had cash on hand of $1,427,865 at December 31, 2005, compared to $81,101 at
December 31, 2004. The increase in cash on hand is due to a new cash management
system that was established during 2003, and cash proceeds from the Cornell
convertible debenture.
Net cash used in operating activities was $1,751,744 for the fiscal year ended
December 31, 2005. During 2005, net cash used in operations was primarily
43
attributable to $527,708 in net losses from operations, a gain on forgiveness of
debt of $337,761, an increase in accounts receivable of $2,126,097, and a
decrease in accrued liabilities of $446,452, partially offset by increases in
accounts payable of $291,143 and in accrued prepaid expenses of $277,987. The
non-cash charge was for depreciation and amortization of $324,955.
Net cash used in investing activities during the fiscal year ended December 31,
2005, consisted of the property and equipment purchases of $295,346.
Net cash provided by financing activities was $3,354,523 during the fiscal year
ended December 31, 2005. Principal sources of cash were proceeds from
stockholder notes payable of $123,220, proceeds of $3,102,067 from convertible
debentures, net of cash paid for offering costs; proceeds from the exercise of
options and warrants to purchase common stock of $33,000, and proceeds from
notes payable to related parties of $95,586.
Accounts Receivable
At December 31, 2005, we had receivables of $3,358,981, net of a reserve for
doubtful accounts of $158,374, as compared to $1,288,719 at December 31, 2004,
net of a reserve of $41,143.
This increase was primarily attributed to sales having substantially increased
in the last months of the year as compared to the last two months in 2005. Also
included is the unpaid balance of accounts receivable from ABS. (See ABS history
beginning on page 6). The Company has implemented an aggressive process to
collect past due accounts over the past two years. Individual accounts are
continually monitored for collectibilty. As part of monitoring individual
customer accounts, the Company evaluates the adequacy of its allowance for
doubtful accounts. Since the implementation of the new collection process, very
few accounts have been deemed uncollectible.
Accounts Payable
Accounts payable were $1,239,519 at December 31, 2005, as compared to $1,104,392
at December 31, 2004. This increase is due to an increase in sales.
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather than
providing cash in operations. We had an accumulated deficit of $19,327,310 and a
total stockholders' equity of $1,268,054 at December 31, 2005. In addition,
during 2005 and 2004, we have used, rather than provided, cash in our
operations. As of December 31, 2005, our monthly operating costs and interest
expenses averaged approximately $607,000 per month.
Since February 2000, we have operated without a line of credit. Abacas Ventures,
Inc., an entity whose shareholders include the Saliba Private Annuity Trust, one
of our major shareholders (see "Item 11 - Security Ownership of Certain
Beneficial Owners and Management") and a related entity, the Saliba Living
Trust, purchased our line of credit of $2,792,609, and this amount was converted
into a note payable to Abacas bearing an interest rate of 10%. As of December
31, 2001, a total of $2,405,507, plus $380,927 in accrued interest, was owed to
Abacas pursuant to this note payable. During 2002, we entered into agreements
with the Saliba Private Annuity Trust and the Saliba Living Trust to exchange
19,987,853 shares of our common stock for $1,499,090 in principal amount of this
debt and to issue an additional 6,666,667 shares to these trusts for $500,000
cash which was used for working capital for the Company. During December 2002,
an additional $1,020,154 of principal and $479,846 of accrued interest owed to
Abacas was converted to 30,000,000 shares of our common stock. We issued no
44
common stock to Abacas during 2003. During 2003 and 2002, the Company received
$350,000 and $845,000 of cash proceeds under the terms of a bridge loan from
Abacas. The Company made principal payments of $875,000 and 156,268 during 2003
and 2002, respectively, on the bridge loan. At December 31, 2003, the balance
owed on the bridge loan was $163,742. See "Item 12 - Certain Relationships and
Related Transactions."
During 2003 and 2002, we converted approximately $34,049 and $316,762,
respectively of trade payables into notes and stock. During January 2002, in
addition to the above-described transactions with the Saliba trusts, we issued
16,666,666 shares of restricted common stock at a price of $0.075 per share in
exchange for the cancellation of $1,250,000 of notes payable to various
stockholders. See "Item 12 - Certain Relationships and Related Transactions." We
continue to work with vendors in an effort to convert other trade payables into
long-term notes and common stock and to cure defaults with lenders with
forbearance agreements that we are able to service.
Despite our efforts to make our debt-load more serviceable, significant amounts
of additional cash will be needed to reduce our debt and fund our losses until
such time as we are able to become profitable.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable
(see Note 7). The total of these obligations was $1,263,713. The Company has
recorded this transaction as a $1,263,713 non-cash increase to the note payable
owed to Abacas, pursuant to the terms of the Abacas agreement.
The total principal amount owed to Abacas between the note payable and the
bridge loan was zero and $1,530,587 as of December 31, 2005 and 2004,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was zero and $430,828 as of December 31, 2005 and 2004,
respectively, and is included in accrued liabilities.
In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 to
principal and accrued interest in return for the Company's issuing 51,250,000
shares of our restricted common stock to the shareholders of Abacas. No
registration rights were granted.
As of December 31, 2004, the Company had accrued liabilities in the amount of
$500,000 for delinquent payroll taxes, including interest and penalties, owed to
the Internal Revenue Service. The Company, in response to collection notices,
filed a due process appeal with the Internal Revenue Service's Appeals Office.
The appeal was resolved by an agreement with the Appeals Office that allowed the
Company to file an offer in compromise of all federal tax liabilities owed by
the Company based on its ability to pay. The Company filed its offer in
compromise with the IRS in November 2003, and after meeting with IRS personnel,
filed a revised offer in compromise on August 31, 2004. The Company was notified
in November 2004 that the IRS had accepted the offer in compromise. Under the
offer, the Company was required to pay an aggregate amount of $500,000
(representing payments of $350,000 by Circuit Technology, Inc., $100,000 by
CirTran Corporation, and $50,000 by Racore Technology, Inc.), not later than
February 3, 2005. These amounts were paid. Additionally, the Company must remain
current in its payment of taxes for 5 years, and may not claim any NOLs for the
years 2001 through 2015, or until the three companies pay taxes in an amount
equal to the taxes waived by the offer in compromise.
Management believes that each of the related party transactions were as fair to
the Company as could have been made with unaffiliated third parties.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors and are
seeking to replace our operating line of credit. It is unlikely that we will be
45
able, in our current financial condition, to obtain additional debt financing;
and if we did acquire more debt, we would have to devote additional cash flow to
paying the debt and securing the debt with assets. We may therefore have to rely
on equity financing to meet our anticipated capital needs. There can be no
assurances that we will be successful in obtaining such capital. If we issue
additional shares for debt and/or equity, this will dilute the value of our
common stock and existing shareholders' positions.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
Company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock on the Over the Counter Electronic Bulletin Board was obtained in July
2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short or the long term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
Notes Payable to Equity Line Investor
During 2003, we borrowed a total of $1,830,000 from Cornell Capital Partners,
LP, pursuant to nine unsecured promissory notes. The loans were made and the
notes were issued from June 2003 through December 2003. In lieu of interest, we
paid fees to the lender, ranging from 5% to 10%, of the amount of the loan.
These fees have been recorded as interest expense. The fees were negotiated in
each instance and agreed upon by us and by the lender and its affiliate. The
notes were repayable over periods ranging from 70 days to 131 days. Each of the
notes stated that if we did not repay the notes when due, a default interest
rate of 24% would apply to the unpaid balance. Through December 31, 2003, we
directed the repayment of $1,180,000 of these notes from proceeds generated
under the Equity Line Agreement, as discussed below. At December 31, 2003, the
balance owing on these notes was $650,000. All notes were paid when due or
before, and at no time did we incur the 24% penalty interest rate.
During the year ended December 31, 2004, Cornell loaned us an additional
$3,200,000 pursuant to four additional unsecured promissory notes, $1,700,000 of
which remained outstanding at December 31, 2004. The loans were made and the
notes were issued in January through June 2004, bringing the total aggregate
loans from Cornell to $5,030,000. As before, in lieu of interest, we paid fees
to the lender, ranging from 4% to 5%, of the amount of the loan. The fees were
negotiated in each instance and agreed upon by us and by the lender and its
affiliate. The notes were repayable over periods of 88 days and 193 days. Each
of the notes stated that if we did not repay the notes when due, a default
interest rate of 24% would apply to the unpaid balance.
As noted above, we received proceeds of $5,030,000 from notes payable to
Cornell. We used the proceeds from these notes to fund operating losses of
approximately $2,938,000, pay down accounts payable, notes payable and other
settlements of approximately $1,401,000, purchase equipment and tooling in the
amount of $391,000, and to invest in Broadata in the amount of $300,000. During
January 2005, the Company received proceeds of $565,000 from an additional note
payable to Cornell to fund the settlement with the Internal Revenue Service.
With the sale of the Convertible Debenture in May 2005 to Highgate, $2,265,000
46
of the proceeds were paid to Cornell to repay promissory notes in the amount of
$1,700,000 and $565,000.
Prior Equity Line of Credit Agreement
In conjunction with efforts to improve the results of our operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
with Cornell. We subsequently terminated that agreement, and on April 8, 2003,
we entered into an amended equity line agreement (the "Equity Line Agreement")
with Cornell. Under the Equity Line Agreement, we had the right to draw up to
$5,000,000 from Cornell against an equity line of credit (the "Equity Line"),
and to put to Cornell shares of our common stock in lieu of repayment of the
draw. The number of shares to be issued was determined by dividing the amount of
the draw by the lowest closing bid price of our common stock over the five
trading days after the advance notice was tendered. Cornell was required under
the Equity Line Agreement to tender the funds requested by us within two trading
days after the five-trading-day period used to determine the market price.
During the year ended December 31, 2004, we drew an aggregate amount of
$2,150,000 under the Equity Line Agreement, pursuant to draws on the Equity
Line, net of fees of $86,000, and issued a total of 57,464,386 shares of common
stock to Cornell under the Equity Line Agreement. At our direction, Cornell
retained the proceeds of the draws under the Equity Line Agreement and applied
them as payments on the notes to Cornell, discussed above.
Pursuant to the Equity Line Agreement, in connection with each draw, we agreed
to pay a fee of 4% of the amount of the draw to Cornell as consideration for its
providing the Equity Line. Total fees paid for the year ended December 31, 2004
were $128,000. Of these payments, $86,000 was offset against additional paid-in
capital as shares were issued under the Equity Line Agreement and $68,000 was
recorded as deferred offering costs for total deferred offering costs of $68,000
at December 31, 2004. These deferred offering costs were expensed as the Equity
Line Agreement was terminated in conjunction with the sale of the Convertible
Debenture in May 2005.
Standby Equity Distribution Agreement
We entered into a Standby Equity Distribution Agreement (the "Agreement") dated
May 21, 2004, with Cornell. Under the Agreement, we had the right, at our sole
discretion, to sell periodically to Cornell shares of our common stock for an
aggregate purchase price of up to $20 million. The purchase price for the shares
sold to Cornell was to be equal to the lowest volume-weighted average price of
our common stock during the pricing period consisting of the five consecutive
trading days after we gave an advance notice. The periodic sale of shares was
known as an advance. We could request an advance, by giving a written advance
notice to Cornell, and could not request advances more frequently than every
seven trading days. A closing was to be held on the first trading day after the
end of the pricing period. The maximum advance amount was one million dollars
($1,000,000) per advance, with a minimum of seven trading days between advances.
In addition, we could not request advances if the shares to be issued in
connection with such advances would result in Cornell owning more than 9.9% of
our outstanding common stock.
Cornell was to retain a commitment fee of 5% of the amount of each advance under
the Agreement.
With the sale of the Convertible Debenture in May 2005, the Standby Equity
Distribution Agreement and related agreements were terminated.
47
Convertible Debenture Transaction
On May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate, relating to the issuance of a 5% Secured Convertible
Debenture, due December 31, 2007, in the aggregate principal amount of
$3,750,000 (the "Convertible Debenture").
In connection with the issuance of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to
Highgate, and legal fees of $5,668. As such, of the total purchase amount of
$3,750,000, the net proceeds to us were $1,228,567, which we received following
the closing of the sale of the Convertible Debenture. We used these proceeds for
general corporate and working capital purposes.
The Convertible Debenture bears interest at a rate of 5%. Highgate is entitled
to convert, at its option, all or part of the principal amount owing under the
Convertible Debenture into shares of our common stock at a conversion price
equal to the lesser of (a) $0.10 per share, or (b) an amount equal to the lowest
closing bid price of the Common Stock as listed on the OTC Bulletin Board, as
quoted by Bloomberg L.P. for the twenty (20) trading days immediately preceding
the conversion date. Except as otherwise set forth in the Convertible Debenture,
Highgate's right to convert principal amounts owing under the Convertible
Debenture into shares of our common stock is limited as follows:
1. Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the market price of our
stock is $0.10 per share or less at the time of conversion;
2. Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the price of our stock is
greater than $0.10 per share at the time of conversion,
provided, however, that Highgate may convert in excess of the
foregoing amounts if we and Highgate mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), Highgate may, in its sole discretion,
accelerate full repayment of all debentures outstanding and
accrued interest thereon or may, notwithstanding any
limitations contained in the Convertible Debenture and/or the
Purchase Agreement, convert the Convertible Debenture and
accrued interest thereon into shares of our common stock
pursuant to the Convertible Debenture.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Additional Convertible Debenture Transaction
On December 30, 2005, we entered into a securities purchase with Cornell
Capital, relating to the issuance of a 5% Secured Convertible Debenture, due
July 30, 2008, in the aggregate principal amount of $1,500,000 (the "Cornell
Debenture").
48
We also paid a commitment fee of $120,000 and a structuring fee of $10,000 to
Cornell Capital. As such, of the total amount of $1,500,000, the net proceeds to
us were $1,370,000. We will use these proceeds for general corporate and working
capital purposes, at our discretion.
The Cornell Debenture bears interest at a rate of 5%. Cornell Capital is
entitled to convert, at its option, all or part of the principal amount owing
under the Debenture into shares of the Company's common stock at a conversion
price equal one hundred percent (100%) of the lowest closing bid price of the
Common Stock as listed on the OTC Bulletin Board, as quoted by Bloomberg L.P.
for the twenty (20) trading days immediately preceding the Conversion Date,
subject to certain restrictions and limitations set forth in the Cornell
Debenture.
Under the terms of the Cornell Debenture, except upon an event of default as
defined in the Cornell Debenture, Cornell Capital may not convert the Cornell
Debenture for a number of shares of common stock in excess of that number of
shares of common stock which, upon giving effect to such conversion, would cause
the aggregate number of shares of Common Stock beneficially owned by Cornell
Capital and its affiliates to exceed 4.99% of the outstanding shares of the
common stock following such conversion.
Pursuant to the Cornell Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of our common stock. If paid in stock, the conversion price shall be
the closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Also pursuant to the Cornell Debenture, we have the right to redeem, by giving 3
days' written notice to Cornell Capital, a portion or all of the Cornell
Debenture then outstanding by paying an amount equal to one hundred five percent
(105%) of the amount redeemed plus interest accrued thereon. In the event that
we redeem only a portion of the outstanding principal amount of the Cornell
Debenture, Cornell Capital may convert all or any portion of the unpaid
principal or interest of the Cornell Debenture not being redeemed by us.
Additionally, if after the earlier to occur of (x) fifteen (15) months following
the date of the purchase of the Cornell Debenture or (y) twelve (12) months
following the date on which the initial registration statement is declared
effective, all or any portion of the Cornell Debenture remains outstanding, then
we, at the request of Cornell Capital, are required to redeem such amount
outstanding at the rate of five hundred thousand dollars ($500,000) per each
30-day period. Finally, upon the occurrence of an event of default as defined in
the Cornell Debenture, Cornell Capital can convert all outstanding principal and
accrued interest under the Cornell Debenture irrespective of any of the
limitations set forth in the Cornell Debenture and/or the Purchase Agreement,
and in such event, all such principal and interest shall become immediately due
and payable.
In connection with the Purchase Agreement, we also agreed to grant to Cornell
Capital warrants (the "Warrants") to purchase up to an additional 10,000,000
shares of our common stock. The Warrants have an exercise price of $0.09 per
share, and expire three years from the date of issuance. The Warrants also
provide for cashless exercise if at the time of exercise there is not an
effective registration statement or if an event of default has occurred.
Additionally, we entered into an investor registration rights agreement (the
"Registration Rights Agreement") with Cornell Capital, pursuant to which we
agreed to file, within 120 days of the closing of the purchase of the Cornell
Debenture, a registration statement to register the resale of shares of our
common stock issuable to Cornell Capital upon conversion of the Cornell
Debenture. We agreed to register the resale of up to 42,608,696 shares,
consisting of 32,608,696 shares underlying the Cornell Debenture, and 10,000,000
shares underlying the Warrants. We agreed to keep such registration statement
effective until all of the shares issuable upon conversion of the Cornell
49
Debenture have been sold. In the event that we issue more than 32,608,696 shares
of its common stock upon conversion of the Cornell Debenture, we will file
additional registration statements as necessary.
We also entered into a security agreement (the "Security Agreement") with
Cornell Capital, pursuant to which we granted a second position security
interest in all of our property, including goods; inventory; contract rights and
general intangibles; documents, receipts, and chattel paper; accounts and other
receivables; products and proceeds; and any interest in any subsidiary, joint
venture, or other investment interest to secure our obligation under the Cornell
Debenture and the related agreements.
We also entered into an escrow agreement (the "Escrow Agreement") with Cornell
Capital relating to the holding and disbursement of payment of the purchase
price of the Cornell Debenture and cash payments made by us in payment of the
obligations owing under the Cornell Debenture. We agreed with Cornell Capital to
appoint David Gonzalez as the Escrow Agent under the Escrow Agreement.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
21.
By way of background, we have previously entered into financing transactions
with Cornell Capital. In April 2003, we had entered into an equity line of
credit agreement with Cornell Capital. Between December 2003 and March 2004, we
drew a total of $2,150,000 on the equity line, and issued a total of 57,464,386
shares of common stock to Cornell Capital. In May 2004, we entered into a
standby equity distribution agreement with Cornell Capital, but the agreement
was terminated before any funds were drawn or any shares were issued. Between
June 2003 and January 2005, Cornell Capital loaned to us an aggregate of
$5,595,000 pursuant to promissory notes issued to Cornell Capital. These notes
were paid in full by May 2005.
Highgate and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers. Additionally, the escrow agent appointed in
connection with the purchase and sale of both the Cornell Capital debenture
transaction and the Highgate debenture transaction is David Gonzalez, who is an
officer of Cornell Capital.
The Company does not anticipate that it will use any of the proceeds of the sale
of the Cornell Debenture to Cornell Capital to repay the debenture sold to
Highgate.
Forward-looking statements
Certain of the statements contained in this Report (other than the historical
financial data and other statements of historical fact) are forward-looking
statements. These statements include, but are not limited to our expectations
with respect to the development of a new offices or divisions; the achievement
of certain revenue goals; the receipt of new business and contracts; and our
intentions with respect to financing our operations in the future. Additional
forward-looking statements may be found in the "Risk Factors" Section of this
report, together with accompanying explanations of the potential risks
associated with such statements.
Forward-looking statements made in this report, are made based upon management's
good faith expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with such expectations, or that the effect of
future developments on CirTran will be those anticipated by management.
Forward-looking statements may be identified by the use of words such as
"believe," "expect," "plans," "strategy," "prospects," "estimate," "project,"
"anticipate," "intends" and other words of similar meaning in connection with a
discussion of future operating or financial performance.
50
You are cautioned not to place undue reliance on these forward looking
statements, which are current only as of the date of this Report. We disclaim
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. Many
important factors could cause actual results to differ materially from
management's expectations, including those listed in the "Risk Factors" Section,
as well as the following:
* unpredictable difficulties or delays in the development of new
products and technologies;
* changes in U.S. or international economic conditions, such as
inflation, interest rate fluctuations, foreign exchange rate
fluctuations or recessions in CirTran's markets;
* pricing changes to our supplies or products or those of our
competitors, and other competitive pressures on pricing and
sales;
* difficulties in obtaining or retaining the management,
engineering, and other human resource competencies that we
need to achieve our business objectives;
* the impact on CirTran or a subsidiary from the loss of a
significant customer or a few customers;
* risks generally relating to our international operations,
including governmental, regulatory or political changes;
* transactions or other events affecting the need for, timing
and extent of our capital expenditures; and
* the extent to which we reduce outstanding debt.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements appear at the end of this report beginning with the
Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized, and reported
within the required time periods, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer, who is
also our Chief Financial Officer, as appropriate, to allow for timely decisions
regarding disclosure.
51
As required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer/Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures as of
December 31, 2005. In our evaluation, we identified deficiencies that existed in
the design or operation of our internal control over financial reporting that we
and our independent registered public accounting firm considered to be "material
weaknesses." A material weakness is a significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial information will not be
prevented or detected.
The deficiencies in our internal control over financial reporting related
primarily to the failure to properly measure and disclose equity and debt
transactions. The deficiencies were detected in the evaluation process and the
transactions have been appropriately recorded and disclosed in this Form 10-KSB.
We are in the process of improving our internal control over financial reporting
in an effort to resolve these deficiencies through improved supervision and
training of our accounting staff, but additional effort is needed to fully
remedy these deficiencies. Our management and directors will continue to work
with our auditors and outside advisors to ensure that our controls and
procedures are adequate and effective.
Based on the matters identified above, our Chief Executive Officer/Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective. These deficiencies have been disclosed to our Board of Directors.
Changes in Internal Control over Financial Reporting. As noted above, we are in
the process of improving our internal control over financial reporting in an
effort to resolve these deficiencies through improved supervision and training
of our accounting staff, but additional effort is needed to fully remedy these
deficiencies. Our management and directors will continue to work with our
auditors and outside advisors to ensure that our controls and procedures are
adequate and effective.
Section 404 Assessment. Section 404 of the Sarbanes-Oxley Act of 2002 requires
management's annual review and evaluation of our internal controls, and an
attestation of the effectiveness of these controls by our independent registered
public accountants beginning with our Form 10-K for the fiscal year ending on
December 31, 2007. We plan to dedicate significant resources, including
management time and effort, in connection with our Section 404 assessment. The
evaluation of our internal controls will be conducted under the direction of our
senior management. We will continue to work to improve our controls and
procedures, and to educate and train our employees on our existing controls and
procedures in connection with our efforts to maintain an effective controls
infrastructure at our Company.
Limitations on Effectiveness of Controls. A system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the system will meet its objectives. The design of a control system is
based, in part, upon the benefits of the control system relative to its costs.
Control systems can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. In addition, the design of any control system is based in part upon
assumptions about the likelihood of future events.
52
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Officers
The following sets forth the names, ages and positions of our directors and
officers and the officers of our operating subsidiaries, CirTran Corporation
(Utah) and CirTran Asia, along with their dates of service in such capacities.
Name Age Positions
Iehab J. Hawatmeh 39 President, Chief Executive Officer,
Chief Financial Officer, Secretary and
Director of CirTran Corporation; President
of CirTran Corporation (Utah).
Served since July 2000.
Raed Hawatmeh 40 Director since June 2001.
Trevor Saliba 32 Director since June 2001.
Senior Vice-President,
Sales and Marketing.
Served since January 2002.
Shaher Hawatmeh 40 Chief Operating Officer
Served since June 2004
Charles Ho 51 President, CirTran-Asia
Served since June 2004
Iehab J. Hawatmeh, MBA
Chairman, President & CEO
Mr. Iehab Hawatmeh founded CirTran Corporation in 1993 and has been its
Chairman, President and CEO since its inception. Mr. Hawatmeh oversees all daily
operation including financial, technical, operational and sales functions for
the Company. Under Mr. Hawatmeh's direction, the Company has seen its annual
sales exceed $20 million, its employment exceed 360 and completed two strategic
acquisitions. Prior to forming the Company, Mr. Hawatmeh was the Processing
Engineering Manager for Tandy Corporation overseeing the company's entire
contract manufacturing printed circuit board assembly division. In addition, Mr.
Hawatmeh was responsible for developing and implementing Tandy's facility
Quality Control and Processing Plan model which is used by CirTran today. Mr.
Hawatmeh received his Master's of Business Administration from University of
Phoenix and his Bachelor's of Science in Electrical and Computer Engineering
from Brigham Young University. Iehab and Shaher Hawatmeh are brothers.
53
Raed Hawatmeh.
Director
Mr. Raed Hawatmeh, who is not related to Iehab Hawatmeh, has served as a
director since June 2001. Mr. Raed Hawatmeh has been a self-employed investor
and venture capitalist for the past five years, specializing in financing
start-up companies in various industries.
Trevor M. Saliba, MS
Senior Vice President,
Worldwide Business Development
Mr. Saliba is responsible for sales and marketing activities worldwide and is
responsible for overseeing all worldwide business development strategies for the
Company. Mr. Saliba was elected to the Board of Directors in 2001. From 1997 -
2001 he was President and CEO of Saliba Corp., a privately held contracting firm
he founded. From 1995-1997 he was an Associate with Morgan Stanley. From 1992 -
1995 he was Vice President of Sales and Marketing for SNJ Industries. Mr. Saliba
holds a Bachelors Degree in Business Administration and a Masters Degree in
Finance from La Salle University and has completed an Advanced Graduate Program
in Engineering and Management at the University of California, Berkeley.
In June 2002 Mr. Saliba filed for personal bankruptcy in the U.S. Bankruptcy
Court in Los Angeles, California, which has not yet been discharged. The
bankruptcy was unrelated to Mr. Saliba's involvement in CirTran.
James Snow
Vice President,
Product Development
President - Racore Technology Corporation
Mr. Snow is the Vice President of Product Development for CirTran Corporation
and also President of Racore Technology Corp., a wholly owned subsidiary of the
Company. Mr. Snow directly oversees the design, planning and management of
Racore's proprietary Local Area Network (LAN) products and provides network
consulting services to clients. Mr. Snow held the position of Director of
Forward Planning and Project Engineering for Phillips Telecommunications and
Data Systems (a Division of N.V. Phillips) from 1982 - 1992. In addition he was
a Principle Engineer for Digital Equipment Corp. from 1992 - 1994. Mr. Snow
holds a Bachelor's degree in Electrical Engineering from Brigham Young
University and Business Management from Brookhaven College.
Shaher Hawatmeh
Chief Operating Officer
Mr. Shaher Hawatmeh joined the Company in 1993 as its Controller shortly after
its founding. Today, Mr. Hawatmeh directly oversees all daily manufacturing
production, customer service, budgeting and forecasting for the Company.
Following the companies acquisition of Pro Cable Manufacturing in 1996, Mr.
Hawatmeh directly managed the entire Company, supervising all operations for
approximately two years and successfully oversaw the integration of this new
division into the Company. Prior to joining CirTran, Mr. Hawatmeh worked for the
Utah State Tax Commission. Mr. Hawatmeh earned his Master's of Business
Administration with an emphasis in Finance from the University of Phoenix and
his Bachelor's of Science in Business Administration and a Minor in Accounting.
Iehab and Shaher Hawatmeh are brothers.
54
Charles Ho
President, CirTran-Asia
Mr. Ho, who became the President of our CirTran-Asia division on June 15, 2004,
served for six years as the chairman of Meicer Semiconductor Co., Ltd., one of
the leading semiconductor manufacturers located in China, and was a co-founder
of two of the leading design and manufacturing firms of DVD and CD players: Lead
Data Co., Ltd., and Media Group. Mr. Ho has served as CEO for Uking System Inc.
since 1986 and is still holds that position. Mr. Ho has a Master of Business
Administration Degree from the University of South Australia and Bachelor of
Science degree in Industrial Design from National Taipei University of
Technology.
At this time, the Company does not have an audit committee. The Company's Board
of Directors acts as the Company's audit committee. Similarly, the Company's
Board of Directors has determined that the Company does not have an audit
committee financial expert as defined under Securities and Exchange Commission
rules.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who beneficially own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and greater
than 10% shareholders are required by regulation of the Securities and Exchange
Commission to furnish us with copies of all Section 16(a) forms which they file.
Based solely on its review of the copies of such forms furnished to us during
the fiscal year ended December 31, 2005, we are aware of the following untimely
filings:
Iehab Hawatmeh, Raed Hawatmeh, Trevor Saliba and Shaher Hawatmeh all filed
untimely Forms 5.
Code of Ethics. The Company has not yet adopted a code of ethics. The Board of
Directors anticipates that it will adopt a code of ethics during the second
quarter of 2006, and that we will file the code of ethics as an exhibit to our
second quarterly report.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2005, 2004,
and 2003, 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.
55
Annual Compensation Long-Term Compensation Awards
------------------------- -----------------------------------
Restricted
Bonus/ Stock Stock
Name and Salary Commission Awards Options All Other
Principal Position Year ($) ($) ($) (#) Compensation
-------------------------------------------------------------------------------------------------
Iehab J. Hawatmeh 2005 225,000 114,219 6,000,000 -
President, Secretary, 2004 200,000 - - 3,500,000 -
Treasurer and Director 2003 175,000 - - 6,500,000 -
2002 175,000 - - 1,850,000
-------------------------------------------------------------------------------------------------
2005 120,000 31,895 5,000,000 -
Trevor M. Saliba 2004 108,000 - - 4,250,000 -
Sr. Vice President and 2003 127,000 - - 3,000,000 -
Director of CirTran Corporation 2002 118,000 - - 500,000
-------------------------------------------------------------------------------------------------
2005 - - - 4,000,000 -
2004 - - - 2,500,000 -
Raed S. Hawatmeh 2003 - - - 3,000,000 -
Director of CirTran Corporation 2002 - - - 500,000 -
-------------------------------------------------------------------------------------------------
2005 460,126 500,000 -
2004 - 157,389 - - -
Charles Ho 2003 - - - - -
President of CirTran Asia 2002 - - - - -
-------------------------------------------------------------------------------------------------
Option/SAR Grants in the Year Ended December 31, 2005
-------------- ------------ ------------ ----------------- ---------------
Number of % of Total
Securities Options
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
-------------- ------------ ------------ ----------------- ---------------
Iehab Hawatmeh 6,000,000 30.00% $0.022 - $0.027 Jan - Dec 2010
-------------- ------------ ------------ ----------------- ---------------
Trevor Saliba 5,000,000 25.00% $0.022 - $0.027 Jan - Dec 2010
-------------- ------------ ------------ ----------------- ---------------
Raed Hawatmeh 4,000,000 20.00% $0.022 - $0.027 Jan - Dec 2010
-------------- ------------ ------------ ----------------- ---------------
Charles Ho 500,000 2.00% $0.06 Jan 2006
-------------- ------------ ------------ ----------------- ---------------
Option/SAR Grants in the Year Ended December 31, 2004
-------------- ------------ ------------ ----------------- ---------------
Number of % of Total
Securities Options
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
-------------- ------------ ------------ ----------------- ---------------
Iehab Hawatmeh 3,500,000 14.58% $0.015 - $0.03 Jan - Dec 2009
-------------- ------------ ------------ ----------------- ---------------
Trevor Saliba 4,250,000 17.71% $0.015 - $0.03 Jan - Dec 2009
-------------- ------------ ------------ ----------------- ---------------
Raed Hawatmeh 3,500,000 14.58% $0.015 - $0.03 Jan - Dec 2009
-------------- ------------ ------------ ----------------- ---------------
56
Aggregated Option/SAR Exercises in the Year Ended December 31, 2005 and December
31, 2004 Option/SAR Values
-------------- ------------ ------------ ------------- ---------------
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
at FY Options/SARs at
Shares End (#) FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
-------------- ------------ ------------ ------------- ---------------
Iehab Hawatmeh 8,000,000 $198,000 - $ -
-------------- ------------ ------------ ------------- ---------------
Trevor Saliba 4,000,000 $100,000 3,000,000/0 $ 71,000/0
-------------- ------------ ------------ ------------- ---------------
Raed Hawatmeh 3,000,000 $73,000 5,250,000/0 $ 123,500/0
-------------- ------------ ------------ ------------- ---------------
Charles Ho - - 500,000/0 -
-------------- ------------ ------------ ------------- ---------------
Aggregated Option/SAR Exercises in the Year Ended December 31, 2005 and December
31, 2004 Option/SAR Values
-------------- ------------ ------------ ------------- ---------------
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
at FY Options/SARs at
Shares End (#) FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
-------------- ------------ ------------ ------------- ---------------
Iehab Hawatmeh 1,500,000 $33,750 - $ -
-------------- ------------ ------------ ------------- ---------------
Trevor Saliba 2,250,000 $56,250 - $ -
-------------- ------------ ------------ ------------- ---------------
Raed Hawatmeh 750,000 $11,250 2,250,000/0 $ 52,500/0
-------------- ------------ ------------ ------------- ---------------
Options issuable in connection with Manufacturing Agreement -- On June 10, 2004,
we entered into an exclusive manufacturing agreement with certain Developers,
including Charles Ho, the President of CirTran-Asia. Under the terms of the
agreement, we, through our wholly owned subsidiary CirTran-Asia, have the
exclusive right to manufacture certain products developed by the Developers or
any of their affiliates. In connection with this agreement, through April 14,
2006, we had identified seven products, in connection with which we agreed to
issue options to purchase shares common stock to the Developers upon the sale,
shipment and payment for specified amounts of units of a the identified
products, as set forth below. The options will be exercisable at $0.06 per
share, vest on the grant date and expire one year after issuance. The schedule
of units and potential options that will be issued follows:
57
--------------------- ------- --------- ------------- -------- -------------
Options Each Options
for Multiple Options Issued
Product Initial Initial of Units for Each Through
Units Units Above Initial Multiple April 14,
Sold(1) Units of Units 2006
--------------------- ------- --------- ------------- -------- -------------
Ab King Pro 500,000 500,000 100,000 100,000 1,500,000 (3)
--------------------- ------- --------- ------------- -------- -------------
Ab Roller 500,000 500,000 200,000 100,000 -
--------------------- ------- --------- ------------- -------- -------------
Ab Trainer Club Pro 25,000 500,000 15,000 100,000 -
--------------------- ------- --------- ------------- -------- -------------
Instant Abs 100,000 500,000 50,000 100,000 -
--------------------- ------- --------- ------------- -------- -------------
Hot Dog Express (2) 300,000 1,000,000 100,000 200,000 -
--------------------- ------- --------- ------------- -------- -------------
Condiment Caddy 200,000 250,000 100,000 100,000 -
--------------------- ------- --------- ------------- -------- -------------
Denise Austin Pilates 200,000 500,000 100,000 100,000 -
--------------------- ------- --------- ------------- -------- -------------
(1) Except as set forth in Notes (2) and (3), the options set forth in this
table are issuable to Charles Ho, President of our subsidiary CirTran-Asia.
(2) Of the options for initial units sold for this product, Mr. Ho, President
of CirTran-Asia, is entitled to receive 700,000, with the remaining 300,000
going to the other developer. For each multiple of units above the initial
units, Mr. Ho and the other developer are each entitled to receive an additional
100,000 options, for an aggregate of 200,000 options.
(3) Of the options issued in connection with this product, Mr. Ho received
500,000, and two other developers each received 500,000 options.
As of April 14, 2006, we had issued a total of 1,500,000 options pursuant to the
agreement relating to the Ab King Pro, but had not received sufficient orders or
shipped sufficient quantities of the other products listed in the table to
trigger the issuance of additional options. Of the 1,500,000 options issued, Mr.
Ho received 500,000 options. The 500,000 options were issued at $0.06 per share
and the balance of the options for the Ab King Pro expired in January 2006.
During 2004, Mr. Ho received approximately $157,400 in commissions in connection
with the manufacturing agreement. During 2005, Mr. Ho received approximately
$460,200 in commissions in connection with the manufacturing agreement. As of
April 14, 2006, Mr. Ho had received approximately $97,000 in commissions in
connection with the manufacturing agreement.
Mr. Ho's commissions are calculated by predetermined percentages from
manufacturing agreements and/or appendixes. Most of the commissions are
calculated using the sales price less freight and cost of sales to the factory,
that amount is then multiplied by the contract percentage, per unit for each
product, after the payment has been received.
58
Employment Agreements
On July 1, 2004, CirTran Corporation entered into an employment agreement with
Iehab Hawatmeh, dated as of June 26, 2004. The agreement, which is for a term of
five years and renews automatically on a year-to year basis, provides for a base
salary of $225,000, plus a bonus of 5% of our earnings before interest, taxes,
depreciation, and amortization, payable quarterly, as well as any other bonus
our board of directors may approve. Under the Agreement, Mr. Hawatmeh agreed to
serve as our Chief Executive Officer and President and to perform such other
duties as delegated by our board of directors. The agreement provides for
benefits including health insurance coverage, cell phone, car allowance, life
insurance, and D&O insurance. Under the Agreement, Mr. Hawatmeh's employment may
be terminated for cause, or upon his death or disability. In the event that Mr.
Hawatmeh is terminated without cause, we are obligated to pay him, as a
severance payment, an amount equal to five full years of his then-current annual
base compensation, half upon such termination and half one year later, together
with a continuation of insurance benefits for a period of five years.
Additionally, on July 1, 2004, CirTran Corporation entered into an employment
agreement with Trevor Saliba, dated as of June 26, 2004. The agreement, which is
for a term of three years and renews automatically on a year-to year basis,
provides for a base salary of $120,000, plus a bonus of 1% of our gross sales
generated directly by Mr. Saliba, a bonus of 5% of all gross investments made
into CirTran which are directly generated and arranged by Mr. Saliba, a bonus of
1% of the net purchase price of any acquisitions completed by us which are
directly generated and arranged by Mr. Saliba (payable in CirTran common stock),
as well as any other bonus our board of directors may approve. Under the
Agreement, Mr. Saliba agreed to serve as our Executive Vice President of Sales
and Marketing, and to perform such other duties as delegated by our board of
directors. The agreement provides for benefits including health insurance
coverage, cell phone, car allowance, life insurance, and D&O insurance. Under
the Agreement, Mr. Saliba's employment may be terminated for cause, or upon his
death or disability. In the event that Mr. Saliba is terminated without cause,
we are obligated to pay him, as a severance payment, an amount equal to one
years' salary. If the Agreement expires of its terms or is terminated for any
reason, Mr. Saliba may not compete with us for a period of one year from the
date of termination of the agreement. Mr. Saliba also agreed not to solicit our
employees or customers, or attempt to induce anyone to cease doing business with
us for a period of two years after the termination of the agreement.
On July 1, 2004, we also entered into an employment agreement, dated as of June
26, 2004, with Shaher Hawatmeh, the brother of Iehab Hawatmeh. The agreement,
which is for a term of three years and renews automatically on a year-to year
basis, provides for a base salary of $150,000, plus a bonus of 1% of our
earnings before interest, taxes, depreciation, and amortization, payable
quarterly, as well as any other bonus our board of directors may approve. Under
the Agreement, Mr. Shaher Hawatmeh agreed to serve as our Chief Operating
Officer, and to perform such other duties as delegated by our board of
directors. The agreement provides for benefits including health insurance
coverage, cell phone, life insurance, and D&O insurance. Under the Agreement,
Mr. Shaher Hawatmeh's employment may be terminated for cause, or upon his death
or disability. In the event that Mr. Shaher Hawatmeh is terminated without
cause, we are obligated to pay him, as a severance payment, an amount equal to
one years' salary. If the Agreement expires of its terms or is terminated for
any reason, Mr. Shaher Hawatmeh may not compete with us for a period of one year
from the date of termination of the agreement. Mr. Shaher Hawatmeh also agreed
not to solicit our employees or customers, or attempt to induce anyone to cease
doing business with us for a period of two years after the termination of the
agreement.
On June 15, 2004, our subsidiary, CirTran-Asia, entered into an employment
agreement with Charles Ho. The agreement, which is for a term of three years and
renews automatically on a year-to year basis, provides that for each additional
product that Mr. Ho procures pursuant to the agreement between CirTran-Asia and
Michael Casey Enterprises, LTD., Mr. Ho shall be entitled to receive such
compensation as provided for in that agreement in the form of options to
59
purchase shares of CirTran common stock. Under the Agreement, CirTran-Asia will
not provided benefits to Mr. Ho., and his employment may be terminated for
cause, or upon his death or disability. If the Agreement expires of its terms or
is terminated for any reason, Mr. Ho may not compete with us for a period of one
year from the date of termination of the agreement. Mr. Ho also agreed not to
solicit our employees or customers, or attempt to induce anyone to cease doing
business with us for a period of two years after the termination of the
agreement.
2001 Stock Plan
The 2001 Stock Plan has been fully distributed.
2002 Stock Plan
The 2002 Stock Plan has been fully distributed.
2003 Stock Plan
In November 2003, our board approved and adopted our 2003 Stock Plan, or the
2003 Plan, subject to shareholder approval. An aggregate of 35,000,000 shares of
our common stock are subject to the 2003 Plan, which provides for grants to
employees, officers, directors and consultants of both non-qualified (or
non-statutory) stock options and "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended). The 2003 Plan
also provides for the grant of certain stock purchase rights, which are subject
to a purchase agreement between us and the recipient. The purpose of the 2003
Plan is to enable us to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to such
persons, and to promote the success of our business.
The 2003 Plan is administered by our board of directors, which designates from
time to time the individuals to whom awards are made under the 2003 Plan, the
amount of any such award and the price and other terms and conditions of any
such award. The 2003 Plan shall continue in effect until the date which is ten
years from the date of its adoption by the board of directors, subject to
earlier termination by our board. The board may suspend or terminate the 2003
Plan at any time.
The board determines the persons to whom options are granted, the option price,
the number of shares to be covered by each option, the period of each option,
the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the 2003 Plan for more than an aggregate of 15,000,000
shares in any given fiscal year. We do not receive any monetary consideration
upon the granting of options. Options are exercisable in accordance with the
terms of an option agreement entered into at the time of grant.
The board may also award our shares of common stock under the 2003 Plan as stock
purchase rights. The board determines the persons to receive awards, the number
of shares to be awarded and the time of the award. Shares received pursuant to a
stock purchase right are subject to the terms, conditions and restrictions
determined by the board at the time the award is made, as evidenced by a
restricted stock purchase agreement.
As of April 8, 2005, 35,000,000 options to purchase shares of common stock and
no stock purchase rights had been granted under the 2003 Plan. Therefore, the
2003 Plan had been fully distributed.
60
2004 Stock Plan
In December 2004, our board approved and adopted our 2004 Stock Plan, or the
2004 Plan, subject to shareholder approval. An aggregate of 40,000,000 shares of
our common stock are subject to the 2003 Plan, which provides for grants to
employees, officers, directors and consultants of both non-qualified (or
non-statutory) stock options and "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended). The 2004 Plan
also provides for the grant of certain stock purchase rights, which are subject
to a purchase agreement between us and the recipient. The purpose of the 2004
Plan is to enable us to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to such
persons, and to promote the success of our business.
The 2004 Plan is administered by our board of directors, which designates from
time to time the individuals to whom awards are made under the 2004 Plan, the
amount of any such award and the price and other terms and conditions of any
such award. The 2004 Plan shall continue in effect until the date which is ten
years from the date of its adoption by the board of directors, subject to
earlier termination by our board. The board may suspend or terminate the 2004
Plan at any time.
The board determines the persons to whom options are granted, the option price,
the number of shares to be covered by each option, the period of each option,
the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the 2004 Plan for more than an aggregate of 15,000,000
shares in any given fiscal year. We do not receive any monetary consideration
upon the granting of options. Options are exercisable in accordance with the
terms of an option agreement entered into at the time of grant.
The board may also award our shares of common stock under the 2004 Plan as stock
purchase rights. The board determines the persons to receive awards, the number
of shares to be awarded and the time of the award. Shares received pursuant to a
stock purchase right are subject to the terms, conditions and restrictions
determined by the board at the time the award is made, as evidenced by a
restricted stock purchase agreement.
As of December 31, 2005, 38,000,000 options to purchase shares of common stock
and no stock purchase rights have been granted under the 2004 Plan.
Securities authorized for issuance under equity compensation plans
The following table sets forth information about the Company's equity
compensation plans, including the number of securities to be issued upon the
exercise of outstanding options, warrants, and rights; the weighted average
exercise price of the outstanding options, warrants, and rights; and the number
of securities remaining available for issuance under the specified plan through
April 14, 2006.
61
------------------------------ ----------------------- ------------------- ---------------------
Weighted average Number of
Number of securities exercise price of securities
to be issued upon outstanding remaining available
exercise of options, for future issuance
outstanding options, warrants, and under equity
Plan Category warrants, and rights rights compensation plans
------------------------------ ----------------------- ------------------- ---------------------
Equity compensation plans
approved by shareholders 0 0 0
------------------------------ ----------------------- ------------------- ---------------------
Equity compensation plans 2002 Plan: 2002 Plan: 2002 Plan:
not approved by shareholders
500 options $0.0001/share 0 options
2003 Plan: 2003 Plan: 2003 Plan:
3,750,000 options $0.01/share 0 options
2004 Plan: 2004 Plan: 2004 Plan:
13,000,000 options $0.03/share 2,000,000
options
------------------------------ ----------------------- ------------------- ---------------------
Total 16,750,500 $0.03/share 2,000,000
------------------------------ ----------------------- ------------------- ---------------------
ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of the 616,586,117
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of April 14, 2006, by (i) each
person who is currently a director, (ii) each executive officer, (iii) all
current directors and executive officers as a group and (iv) each person who, to
our knowledge, is the beneficial owner of more than 5% of our outstanding common
stock.
Except as otherwise indicated, the persons named in the table have sole voting
and dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable. Beneficial ownership is determined
according to the rules of the Securities and Exchange Commission, and generally
means that person has beneficial ownership of a security if he or she possesses
sole or shared voting or investment power over that security. Each director,
officer, or 5% or more shareholder, as the case may be, has furnished us
information with respect to beneficial ownership. Except as otherwise indicated,
we believe that the beneficial owners of the common stock listed below, based on
the information each of them has given to us, have sole investment and voting
power with respect to their shares, except where community property laws may
apply.
--------------------------------------------------------------------------------
Percent
Name and Address Relationship Common Shares of Class
--------------------------------------------------------------------------------
Saliba Private Annuity Trust (1) 5% 75,698,990 12.28%
115 S. Valley Street Shareholder
Burbank, CA 91505
--------------------------------------------------------------------------------
Iehab J. Hawatmeh Director, 62,288,465 10.10%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5% Shareholder
--------------------------------------------------------------------------------
Raed Hawatmeh (3) Director 31,007,530 5.03%
10989 Bluffside Drive & 5%
Studio City, CA 91604 Shareholder
--------------------------------------------------------------------------------
Trevor Saliba (2) Director 13,275,000 2.15%
13848 Valleyheart Drive
Sherman Oaks, CA 91423
--------------------------------------------------------------------------------
All Officers and Directors as 182,269,985 17.28%
a Group (3 persons)
--------------------------------------------------------------------------------
______________________
62
(1) Includes 13,189,620 shares held by the Saliba Living Trust. Thomas L.
Saliba and Betty R. Saliba are the trustees of The Saliba Living Trust and
Thomas L. Saliba is the sole trustee of The Saliba Private Annuity Trust. These
persons control the voting and investment decisions of the shares held by the
respective trusts. Mr. Thomas L. Saliba is a nephew of the grandfather of Mr.
Trevor Saliba, one of our directors and officers. Mr. Trevor Saliba is one of
five passive beneficiaries of Saliba Private Annuity Trust and has no control
over its operations or management. Mr. Saliba disclaims beneficial control over
the shares indicated.
(2) Includes options to purchase up to 1,000,000 shares each that can be
exercised anytime at exercise prices of $0.027 per share.
(3) Includes options to purchase up to 6,250,000 shares that can be exercised
anytime at exercise prices of $0.02 - $0.03 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An explanation of the relationship between CirTran and Abacas Ventures, Inc., is
as follows:
Two trusts, the Saliba Living Trust and the Saliba Private Annuity Trust
(collectively, the "Saliba Trusts"), were investors in Circuit Technology, a
Utah corporation and predecessor entity of the Company. The trustees of the
trusts are Tom and Betty Saliba, and Tom Saliba, respectively. (Tom Saliba is
the nephew of the grandfather of Trevor Saliba, one of the directors of
CirTran.) In July 2000, CirTran Corporation merged with Circuit Technology.
Through that merger, the Saliba Trusts became shareholders of CirTran. The
Saliba Trusts are also two of the shareholders of an entity named Abacas
Ventures, Inc. ("Abacas"). At the time of the merger, CirTran was in default on
several of its obligations, including an obligation to Imperial Bank. The Saliba
Trusts, through Abacas, purchased the bank's claim against CirTran to protect
their investment in CirTran. Since that time, Abacas has continued to settle
debts of CirTran to improve Abacas's position and to take advantage of certain
discounts that creditors of CirTran offered to settle their claims. On two
occasions, the Abacas shareholders have agreed to convert outstanding debt owed
by CirTran to Abacas into shares of CirTran common stock (discussed below).
Abacas continues to work with the Company to settle claims by creditors against
CirTran, and, on occasion, to provide funding. There can be no assurance that
Abacus will agree to convert its existing debt, or any debt it acquires in the
future, into shares of CirTran, or that conversions will occur at a price and on
terms that are favorable to CirTran. If Abacus and CirTran cannot agree on
acceptable conversion terms, Abacus may demand payment of some or all of the
debt. If CirTran does not have sufficient cash or credit facilities to pay the
amount then due and owing by CirTran to Abacus, Abacus may exercise its rights
as a senior secured lender and commence foreclosure or other proceedings against
the assets of CirTran. Such actions by Abacus could have a material adverse
effect upon CirTran and its ability to continue in business.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,499,090 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.075 per share, for the aggregate
amount of $1,500,000.
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.
63
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 2004 and 2003, the Company was advanced $3,128,281 and
$350,000, respectively, and made cash payments of $3,025,149 and $875,000,
respectively.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable.
The total of these obligations was $1,263,713. The Company has recorded this
transaction as a $1,263,713 non-cash increase to the note payable owed to
Abacas, pursuant to the terms of the Abacas agreement.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $1,530,587 and $163,742 as of December 31, 2004 and 2003,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $430,828 and $230,484 as of December 31, 2004 and 2003,
respectively, and is included in accrued liabilities.
In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 of
principal and accrued interest in return for the Company's issuing 51,250,000
shares of our restricted common stock to the shareholders of Abacas. No
registration rights were granted.
As of December 31, 2001, Iehab Hawatmeh had loaned us a total of $1,390,125. The
loans were demand loans, bore interest at 10% per annum and were unsecured.
Effective January 14, 2002, we entered into four substantially identical
agreements with existing shareholders pursuant to which we issued an aggregate
of 43,321,186 shares of restricted common stock at a price of $0.075 per share
for $500,000 in cash and the cancellation of $2,749,090 principal amount of our
debt. Two of these agreements were with the Saliba Private Annuity Trust, one of
our principal shareholders, and a related entity, the Saliba Living Trust. The
Saliba trusts are also principals of Abacas Ventures, Inc., which entity
purchased our line of credit in May 2000. (See "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Liquidity and Financing Arrangements.") Pursuant to the
Saliba agreements, the trusts were issued a total of 26,654,520 shares of common
stock in exchange for $500,000 cash and the cancellation of $1,499,090 of debt.
We used the $500,000 cash from the sale of the shares for working capital. As a
result of this transaction, the percentage of our common stock owned by the
Saliba Private Annuity Trust and the Saliba Living Trust increased from
approximately 6.73% to approximately 17.76%. Mr. Trevor Saliba, one of our
directors and officers, is a passive beneficiary of the Saliba Private Annuity
Trust. Pursuant to the other two agreements made in January 2002, we issued an
aggregate of 16,666,666 shares of restricted common stock at a price of $0.075
per share in exchange for the cancellation of $1,250,000 of notes payable by two
shareholders, Mr. Iehab Hawatmeh (our president, a director and our principal
shareholder) and Mr. Rajai Hawatmeh. Of these shares, 15,333,333 were issued to
Iehab Hawatmeh in exchange for the cancellation of $1,150,000 in debt. As a
result of this transaction, the percentage of our common stock owned by Mr.
Hawatmeh increased from 19.9% to approximately 22.18%.
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.
64
In 1999, Circuit entered into an agreement with Cogent Capital Corp., or
"Cogent," a financial consulting firm, whereby Cogent agreed to assist and
provide consulting services to Circuit in connection with a possible merger or
acquisition. Pursuant to the terms of this agreement, we issued 800,000
(pre-forward split) restricted shares (12,000,000 post-forward split shares) of
our common stock to Cogent in July 2000 in connection with our acquisition of
the assets and certain liabilities of Circuit. The principal of Cogent was
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
Also, as of December 31, 2004 the Company owed I&R Properties, LLC, the previous
owner of our principal office and manufacturing facility for unpaid accrued rent
and accrued interest. The Company settled with owed I&R Properties, LLC., on
accrued rent and interest of $400,000 by issuing 10,000,000 shares of
unregistered common stock in March 2005.
Management believed at the time of each of these transactions and continues to
believe that each of these transactions were as fair to the Company as could
have been made with unaffiliated third parties.
ITEM 13. EXHIBITS
Copies of the following documents are included as exhibits to this report
pursuant to Item 601 of Regulation S-B.
Exhibit No. Document
3.1 Articles of Incorporation (previously filed as Exhibit No. 2 to
our 8-K dated July 1, 2000, Commission File No. 33-13674-LA, and
incorporated herein by reference).
3.2 Bylaws (previously filed as Exhibit No. 3 to our 8-K dated July
1, 2000, Commission File No. 33-13674-LA, and incorporated herein
by reference).
10.1 Securities Purchase Agreement between CirTran Corporation and
Highgate House Funds, Ltd., dated as of May 26, 2005 (previously
filed as an exhibit to the Company's Current Report on Form 8-K,
filed with the Commission on June 3, 2005, and incorporated
herein by reference).
10.2 Form of 5% Convertible Debenture, due December 31, 2007, issued
by CirTran Corporation (previously filed as an exhibit to the
Company's Current Report on Form 8-K, filed with the Commission
on June 3, 2005, and incorporated herein by reference).
10.3 Investor Registration Rights Agreement between CirTran
Corporation and Highgate House Funds, Ltd., dated as of May 26,
2005 (previously filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on June 3, 2005,
and incorporated herein by reference).
10.4 Security Agreement between CirTran Corporation and Highgate House
Funds, Ltd., dated as of May 26, 2005 (previously filed as an
exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on June 3, 2005, and incorporated herein by
reference).
10.5 Escrow Agreement between CirTran Corporation, Highgate House
Funds, Ltd., and David Gonzalez dated as of May 26, 2005
(previously filed as an exhibit to the Company's Current Report
on Form 8-K, filed with the Commission on June 3, 2005, and
incorporated herein by reference).
10.6 Termination Agreement between CirTran Corporation and Cornell
Capital Partners, LP, dated as of May 26, 2005 (previously filed
as an exhibit to the Company's Current Report on Form 8-K, filed
with the Commission on June 3, 2005, and incorporated herein by
reference).
65
10.7 Standby Equity Distribution Agreement between CirTran Corporation
and Cornell Capital Partners, LP, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.8 Registration Rights Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.9 Placement Agent Agreement between CirTran Corporation and
Newbridge Securities Corporation, dated as of May 21, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.10 Escrow Agreement by and among CirTran Corporation, Cornell
Capital Partners, LP, and Butler Gonzalez LLP, dated as of May
21, 2004 (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB/A, filed with the Commission on
December 22, 2004, and incorporated herein by reference).
10.11 Exclusive Manufacturing Agreement ("Exclusive Agreement") by and
among Michael Casey; Michael Casey Enterprises, Ltd.; Charles Ho;
Uking System Industry Co., Ltd.; David Hayek; HIPMG, Inc. and
CirTran-Asia, Inc., dated as of June 10, 2004 (previously filed
as an exhibit to the Company's Quarterly Report on Form 10-QSB/A,
filed with the Commission on December 22, 2004, and incorporated
herein by reference).
10.12 Appendix A-1 to Exclusive Agreement for AbKing Pro (previously
filed as an exhibit to the Company's Registration Statement on
Form SB-2/A, filed with the Commission on January 24, 2006, and
incorporated herein by reference)
10.13 Appendix A-2 to Exclusive Agreement for AbRoller (previously
filed as an exhibit to the Company's Registration Statement on
Form SB-2/A, filed with the Commission on January 24, 2006, and
incorporated herein by reference) (portions of this exhibit have
been redacted pursuant to a request for confidential treatment
and have been filed separately with the Securities and Exchange
Commission).
10.14 Appendix A-3 to Exclusive Agreement for AbTrainer Club Pro
(previously filed as an exhibit to the Company's Registration
Statement on Form SB-2/A, filed with the Commission on January
24, 2006, and incorporated herein by reference) (portions of this
exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission).
10.15 Appendix A-4 to Exclusive Agreement for Instant Abs (previously
filed as an exhibit to the Company's Registration Statement on
Form SB-2/A, filed with the Commission on January 24, 2006, and
incorporated herein by reference) (portions of this exhibit have
been redacted pursuant to a request for confidential treatment
and have been filed separately with the Securities and Exchange
Commission).
10.16 Appendix A-5 to Exclusive Agreement for Hot Dog Express
(previously filed as an exhibit to the Company's Registration
Statement on Form SB-2/A, filed with the Commission on January
24, 2006, and incorporated herein by reference) (portions of this
exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission).
10.17 Appendix A-7 to Exclusive Agreement for Condiment Caddy
(previously filed as an exhibit to the Company's Registration
Statement on Form SB-2/A, filed with the Commission on January
24, 2006, and incorporated herein by reference) (portions of this
66
exhibit have been redacted pursuant to a request for confidential
treatment and have been filed separately with the Securities and
Exchange Commission).
10.18 Appendix A-8 to Exclusive Agreement for Denise Austin Pilates
product (previously filed as an exhibit to the Company's
Registration Statement on Form SB-2/A, filed with the Commission
on January 24, 2006, and incorporated herein by reference)
10.19 Employment Agreement with Iehab Hawatmeh, dated as of July 1,
2004 (previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB/A, filed with the Commission on December
22, 2004, and incorporated herein by reference).
10.20 Employment Agreement with Shaher Hawatmeh, dated as of July 1,
2004 (previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB/A, filed with the Commission on December
22, 2004, and incorporated herein by reference).
10.21 Employment Agreement with Trevor Saliba, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.22 Employment Agreement with Charles Ho, dated as of July 1, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB/A, filed with the Commission on December 22, 2004,
and incorporated herein by reference).
10.23 Letter Agreement between MET Advisors and CirTran Corporation,
dated August 1, 2003 (previously filed as an exhibit to the
Company's Quarterly Report on Form 10-QSB/A, filed with the
Commission on December 22, 2004, and incorporated herein by
reference).
10.24 Consulting Agreement between CirTran Corporation and Cogent
Capital Corp., dated September 14, 2003 (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-QSB/A, filed
with the Commission on December 22, 2004, and incorporated herein
by reference).
10.25 Agreement between CirTran Corporation and Transactional Marketing
Partners, Inc., dated as of October 1, 2004 (previously filed as
an exhibit to the Company's Quarterly Report on Form 10-QSB/A,
filed with the Commission on December 22, 2004, and incorporated
herein by reference).
10.26 Promissory Note, payable to Cornell Capital Partners, for
$230,000, dated June 9, 2003 (previously filed as an exhibit to
an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.27 Promissory Note, payable to Cornell Capital Partners, for
$100,000, dated July 16, 2003 (previously filed as an exhibit to
an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.28 Promissory Note, payable to Cornell Capital Partners, for
$100,000, dated August 28, 2003 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.29 Promissory Note, payable to Cornell Capital Partners, for
$200,000, dated September 26, 2003 (previously filed as an
exhibit to an amendment to the Company's registration statement
on form SB-2, SEC File No. 333-128549, filed with the Commission
on December 20, 2005, and incorporated herein by reference).
10.30 Promissory Note, payable to Cornell Capital Partners, for
$300,000, dated October 3, 2003 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
67
10.31 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated October 23, 2003 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.32 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated November 10, 2003 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.33 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated December 5, 2003 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.34 Promissory Note, payable to Cornell Capital Partners, for
$150,000, dated December 23, 2003 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.35 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated January 29, 2004 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.36 Promissory Note, payable to Cornell Capital Partners, for
$250,000, dated February 27, 2004 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.37 Promissory Note, payable to Cornell Capital Partners, for
$1,000,000, dated March 23, 2004 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.38 Promissory Note, payable to Cornell Capital Partners, for
$1,700,000, dated June 17, 2004 (previously filed as an exhibit
to an amendment to the Company's registration statement on form
SB-2, SEC File No. 333-128549, filed with the Commission on
December 20, 2005, and incorporated herein by reference).
10.39 Preferred Manufacturing Agreement between the Company and
Broadata Communications, Inc., dated as of April 14, 2004
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB, filed with the Commission on May 17, 2004, and
incorporated herein by reference).
10.40 Subscription Agreement between CirTran Corporation and the Saliba
Living Trust (previously filed as an exhibit to a Current Report
on Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.41 Subscription Agreement between CirTran Corporation and the Saliba
Private Annuity Trust (previously filed as an exhibit to a
Current Report on Form 8-K filed with the Commission on April 14,
2005, and incorporated herein by reference).
10.42 Subscription Agreement between CirTran Corporation and Trevor M.
Saliba (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.43 Subscription Agreement between CirTran Corporation and Basem
Neshiewat (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.44 Subscription Agreement between CirTran Corporation and Sam
Attallah (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
68
10.45 Subscription Agreement between CirTran Corporation and Amer
Hawatmeh (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.46 Subscription Agreement between CirTran Corporation and Anwar
Ajnass (previously filed as an exhibit to a Current Report on
Form 8-K filed with the Commission on April 14, 2005, and
incorporated herein by reference).
10.47 Subscription Agreement between CirTran Corporation and I&R
Properties, LLC (previously filed as an exhibit to a Current
Report on Form 8-K filed with the Commission on April 14, 2005,
and incorporated herein by reference).
10.48 PFE Properties, LLC, Membership Acquisition Agreement between
CirTran Corporation and Rajayee Sayegh, dated as of March 31,
2005 (previously filed as an exhibit to a Current Report on Form
8-K filed with the Commission on April 14, 2005, and incorporated
herein by reference).
10.49 Exclusive Manufacturing and Supply Agreement, dated as of April
21, 2005, by and between CirTran Corporation and Guthy-Renker
Corporation (portions of this exhibit have been redacted pursuant
to a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission)
(previously filed as an exhibit to an amendment to the Company's
registration statement on form SB-2, SEC File No. 333-128549,
filed with the Commission on December 20, 2005, and incorporated
herein by reference).
10.50 Promissory Note, payable to Cornell Capital Partners, for
$565,000 (previously filed as an exhibit to an amendment to the
Company's registration statement on form SB-2, SEC File No.
333-128549, filed with the Commission on December 20, 2005, and
incorporated herein by reference).
10.51 Exclusive Manufacturing Agreement, dated as of January 19, 2005,
by and between CirTran Corporation and Advanced Beauty Solutions,
LLC (previously filed as an exhibit to a Current Report on Form
8-K filed with the Commission on February 28, 2005, and
incorporated herein by reference - portions of this exhibit were
redacted pursuant to a request for confidential treatment and
were filed separately with the Commission).
10.52 Amendment No. 2 to Exclusive Manufacturing Agreement, dated as of
July 7, 2005, by and between CirTran Corporation and Advanced
Beauty Solutions, LLC (previously filed as an exhibit to an
amendment to the Company's registration statement on form SB-2,
SEC File No. 333-128549, filed with the Commission on December
20, 2005, and incorporated herein by reference).
10.53 Watt Plaza Office Sublease, between the Company and the Fredrick
R. Weisman Philanthropic Foundation, dated as of October 24, 2005
10.54 Exclusive manufacturing and supply agreement between the Company
and Arrowhead Industries, Inc., dated as of December 28, 2005
(previous filed as an exhibit to Current Report Form 8-K filed
with the commission on January 18, 2006 and incorporated herein
by reference).
21 Subsidiaries of the Registrant
31. Certification of President and Chief Financial Officer
32 Certification pursuant to 18 U.S.C. Section 1350
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
69
The aggregate fees billed for professional services rendered by Hansen Barnett &
Maxwell, for the audit of the registrant's annual financial statements and
review of the financial statements included in the registrant's Form 10-QSB or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for fiscal year 2005 and 2004
were $86,734 and $85,740, respectively.
(2) AUDIT-RELATED FEES
The aggregate fees billed for assurance and related services by Hansen Barnett &
Maxwell, that are reasonably related to the performance of the audit or review
of the registrant's financial statements for fiscal year 2005 and 2004 were $0
and $0, respectively.
(3) TAX FEES
The aggregate fees billed for each of the fiscal years ended December 31, 2005
and 2004, for professional services rendered by Hansen Barnett & Maxwell for tax
compliance, tax advice, and tax planning, for those fiscal years were $4,425 and
$2,967, respectively. Services provided included preparation of federal and
state income tax returns.
(4) ALL OTHER FEES
The aggregate fees billed in each of the fiscal years ended December 31, 2005
and 2004, for products and services provided by Hansen Barnett & Maxwell other
than those services reported above, for those fiscal years were $0 and $12,598,
respectively.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
Not applicable.
(6) If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees.
Not applicable.
70
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CIRTRAN CORPORATION
Date: April 14, 2006 By: /s/ Iehab J. Hawatmeh, President
(Principal Executive Officer,
Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 14, 2006 Iehab J. Hawatmeh
President, Chief Financial Officer
/s/ Iehab J. Hawatmeh and Director
----------------------------
Date: April 14, 2006 Raed Hawatmeh, Director
/s/ Raed Hawatmeh
----------------------------
Date: April 14, 2006 Trevor Saliba, Director
/s/ Trevor Saliba
----------------------------
71
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 Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 F-4
Consolidated Statement of Stockholders' Equity (Deficit) for
the Years Ended December 31, 2004 and 2005 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS Registered with the Public Company
AND Accounting Oversight Board
BUSINESS CONSULTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CirTran Corporation
and Subsidiaries as of December 31, 2005 and 2004, 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
Salt Lake City, Utah
March 29, 2006
F-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 2004
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,427,865 $ 81,101
Trade accounts receivable, net of
allowance for doubtful accounts
of $158,374 and $41,143, respectively 3,358,981 1,288,719
Inventory, Net of reserve of
$751,296 and $547,405, respectively 2,271,604 1,453,754
Prepaid Deposits 142,188 -
Other 252,941 153,062
--------------------------------------------------------------------------------
Total Current Assets 7,453,579 2,976,636
Property and Equipment, Net 2,686,737 840,793
Investment in Securities, at Cost 300,000 300,000
Other Assets, Net 361,581 8,000
Deposits 100,000 100,000
Deferred Offering Costs - 68,000
--------------------------------------------------------------------------------
Total Assets $ 10,901,897 $ 4,293,429
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 1,239,519 $ 1,104,392
Accrued liabilities 1,222,018 2,066,022
Deferred revenue 119,945 -
Derivative liability 4,910,303 -
Convertible Debenture 996,252 -
Current maturities of long-term notes payable 12,610 1,815,875
Notes payable to stockholders 95,806 18,586
Notes payable to related parties - 1,530,587
--------------------------------------------------------------------------------
Total Current Liabilities 8,596,453 6,535,462
--------------------------------------------------------------------------------
Long-Term Notes Payable, Less Current Maturities 1,037,390 -
--------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, par value $0.001; authorized
750,000,000 shares; issued and outstanding
shares: 583,368,569 and 474,118,569 net of
0 and 3,000,000 shares held in treasury at
no cost at December 31, 2005 and 2004,
respectively 583,364 474,114
Additional paid-in capital 20,012,000 16,083,455
Accumulated deficit (19,327,310) (18,799,602)
--------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) 1,268,054 (2,242,033)
--------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity (Deficit) $ 10,901,897 $ 4,293,429
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Net Sales $ 12,992,512 $ 8,862,715
Cost of Sales (6,706,135) (7,030,934)
Writedown of carrying value of inventories (38,089) (13,000)
--------------------------------------------------------------------------------
Gross Profit 6,248,288 1,818,781
--------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative expenses 5,923,075 3,362,933
Non-cash employee compensation expense 135,000 332,181
--------------------------------------------------------------------------------
Total Operating Expenses 6,058,075 3,695,114
--------------------------------------------------------------------------------
Loss From Operations 190,213 (1,876,333)
--------------------------------------------------------------------------------
Other Income (Expense)
Interest (1,225,252) (495,637)
Gain on forgiveness of debt 337,761 1,713,648
Gain on derivative valuation 169,570 -
--------------------------------------------------------------------------------
Total Other Expense, Net (717,921) 1,218,011
--------------------------------------------------------------------------------
Net Loss $ (527,708) $ (658,322)
--------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.00) $ (0.00)
--------------------------------------------------------------------------------
Basic and diluted weighted-average
common shares outstanding 554,085,007 451,620,617
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2005
Common Stock
-------------------------- Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
---------------------------------------------------------------------------------------------------------------
Balance - December 31, 2003 349,087,699 $ 349,088 $ 12,876,941 $(18,141,280) $ (4,915,251)
Shares issued for conversion
of notes payable to equity
line investor 57,464,386 57,460 2,006,540 - 2,064,000
Shares issued for settlement
of notes payable 1,542,495 1,542 53,458 - 55,000
Shares issued for
settlement expense 1,000,000 1,000 59,000 - 60,000
Shares issued as settlement
of salaries, accrued salaries
and related interest 45,273,989 45,274 498,014 - 543,288
Options granted to employees,
consultants and attorneys - - 334,952 - 334,952
Exercise of stock options
by directors and employees 14,250,000 14,250 259,500 - 273,750
Exercise of stock options by
consultants and attorneys 5,500,000 5,500 (4,950) - 550
Net loss - - - (658,322) (658,322)
---------------------------------------------------------------------------------------------------------------
Balance - December 31, 2004 474,118,569 474,114 16,083,455 (18,799,602) (2,242,033)
Shares issued for purchase of
PFE 20,000,000 20,000 780,000 - 800,000
Shares issued for settlement
of notes payable & accrued
interest 51,250,000 51,250 2,004,694 - 2,055,944
Shares issued for
settlement expense 13,000,000 13,000 491,371 - 504,371
Options granted to employees,
consultants and attorneys - - 229,330 - 229,330
Exercise of stock options
by directors and employees 18,500,000 18,500 429,000 - 447,500
Exercise of stock options by
consultants and attorneys 6,500,000 6,500 (5,850) - 650
Net loss - - - (527,708) (527,708)
---------------------------------------------------------------------------------------------------------------
Balance - December 31, 2005 583,368,569 $ 583,364 $ 20,012,000 $(19,327,310) $ 1,268,054
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (527,708) $ (658,322)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 324,955 249,395
Accretion expense 826,124 -
Provision for doubtful accounts 117,231 12,267
Provision for obsolete inventory 38,090 13,000
Loss on disposal of property and equipment - 33,238
Gain on forgiveness of debt (337,761) (1,713,881)
Non-cash compensation expense 135,000 226,250
Abandoned offering costs expensed 68,000 -
Amortization of loan discount and loan costs 108,719 -
Intrinsic value of options issued to employees 12,000 -
Loan costs and interest witheld from loan proceeds 67,168 145,000
Stock issued for employee compensation - 105,931
Stock and warrants issued for settlement expense 654,153 60,000
Options issued to attorneys and consultants for
services 217,330 209,952
Change in valuation of derivative (169,569)
Accrued Interest Expense 111,986 -
Changes in assets and liabilities:
Trade accounts receivable (2,128,289) (1,211,799)
Prepaid Deposits (99,879) -
Inventories (855,940) (219,326)
Prepaid expenses and other assets (277,987) 14,419
Accounts payable 291,143 515,690
Accrued liabilities (446,455) 538,132
Deferred revenue 119,945 -
--------------------------------------------------------------------------------
Total adjustments (1,224,036) (1,021,732)
--------------------------------------------------------------------------------
Net cash used in operating activities (1,751,744) (1,680,054)
--------------------------------------------------------------------------------
Cash flows from investing activities
Cash aquired with PFE acquisition 39,331 -
Purchase of investment - (300,000)
Net change in deposits - (100,000)
Purchase of property and equipment (295,346) (545,824)
--------------------------------------------------------------------------------
Net cash used in investing activities (256,015) (945,824)
--------------------------------------------------------------------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank - (9,623)
Proceeds from notes payable to stockholders 123,220 18,500
Payments on notes payable to stockholders - (31,752)
Proceeds from notes payable, net of cash paid for
offering costs 3,102,067 2,927,000
Principal payments on notes payable - (466,463)
Proceeds from notes payable to related parties 95,586 3,128,281
Payment on notes payable to related parties - (3,025,149)
Proceeds from exercise of options and warrants to
purchase common stock 33,000 111,500
Exercise of options issued to attorneys and
consultants for services 650 550
--------------------------------------------------------------------------------
Net cash provided by financing activities 3,354,523 2,652,844
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,346,764 26,966
Cash and cash equivalents at beginning of year 81,101 54,135
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,427,865 $ 81,101
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2005 2004
--------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 173,300 $ 298,542
Noncash investing and financing activities
Notes issued for accounts payable and capital lease
obligations $ - $ 711,894
Acquisition of PFE Properties, LLC for stock and
assumption of note payable 1,868,974 -
Common stock issued for settlement of note payable
and accrued interest 2,148,913 2,204,999
Deposit applied to purchase of property and equipment 100,000 -
Common stock issued for accrued rent and interest 411,402 -
Accrued interest converted to notes payable - 9,158
Stock options exercised for settlement of accrued
interest and accrued compensation 233,500 61,000
Note issued for settlement of notes payable and
accrued interest - 551,819
Fees withheld from notes payable for Equity Line
Agreement - 86,000
Loan costs included in notes payable 50,850 -
Deferred offering costs withheld from notes payable
proceeds - 128,000
Shares issued as settlement of salaries, accrued
salaries and related interest - 437,357
Stock options exercised for settlement of notes
payable to stockholders 46,000 -
Loan fees incurred as part of convertible debenture
(derivative) 380,765 -
Convertible debenture proceeds used to settle
notes payable outstanding 2,315,850 -
Initial recognition of derivative liability 5,079,872 -
The accompanying notes are an integral part of these financial statements.
F-7
CIRTRAN CORPORATION AND SUBSIDIARIES
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.
In June 2004, the Company incorporated CirTran-Asia, Inc., a Utah corporation,
as a wholly owned subsidiary. CirTran-Asia was formed to manufacture, either
directly or through foreign subcontractors, certain products under exclusive
manufacturing agreements.
On March 31, 2005, Cirtran Corporation acquired a 100% ownership interest in PFE
Properties, LLC (see Note 6). Following the acquisition of the PFE interests,
PFE will continue to own the building. PFE will remain a separate LLC due to
liability issues and the Company will continue to make intercompany lease
payments under the 2003 lease.
In December 2005, the Company incorporated CirTran Products, Inc., a Utah
corporation, as a wholly owned subsidiary. CirTran Products was formed to offer
products for sale at retail. The new division will be run from the Company's Los
Angeles Office. The Company anticipates that consumer products built by the
Company's wholly owned subsidiary CirTran Asia, as well as other products to be
acquired, will be available for retail sale in 2006.
Principles of Consolidation -- The consolidated financial statements include the
accounts of CirTran Corporation, and its wholly owned subsidiaries, Racore
Technology Corporation, CirTran-Asia Inc, CirTran Products, Inc. and PFE
Properties, LLC. 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.
Shipping and handling fees are included as part of net sales. The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of goods sold.
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.
Accounts Receivable -- Accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. Specific reserves are estimated by
management based on certain assumptions and variables, including the customer's
financial condition, age of the customer's receivables and changes in payment
histories. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when
received.
F-8
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
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.
Preproduction Design and Development Costs -- The Company incurs certain costs
associated with the design and development of molds and dies for its contract
manufacturing segment. These costs are held as deposits on the balance sheet
until the molds or dies are finished and ready for use. At that point the costs
are included as part of production equipment in property and equipment and
amortized over their useful lives. The company holds title to all molds and
dies. At December 31, 2005 and 2004 the company held $100,000 and $100,000,
respectively in deposits. Capitalized costs associated with molds and dies
included in property and equipment for the years ended December 31, 2005 and
2004 was $761,200 and $412,200, respectively.
Property and Equipment -- Depreciation is provided in amounts sufficient to
relate the cost of depreciable assets to operations over the estimated service
lives. Leasehold improvements are amortized over the shorter of the life of the
lease or the service life of the improvements. The straight-line method of
depreciation and amortization is followed for financial reporting purposes.
Maintenance, repairs, and renewals which neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in operating results.
Depreciation and amortization expense for the years ended December 31, 2005 and
2004 was $324,955 and $249,395, respectively.
Patents -- Legal fees and other direct costs incurred in obtaining patents in
the United States and other countries are capitalized. Patents costs are
amortized over the estimated useful life of the patent. During the year ended
December 31, 2005, the Company capitalized $35,799 in patent related legal
costs. The Company is amortizing this patent over its 7 year life. Amortization
expense was $5,114 during the year ended December 31, 2005.
Impairment of Long-Lived Assets -- The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
occurred that indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
over their remaining life in measuring whether the assets are recoverable. As of
December 31, 2005, the Company does not consider any of its long-lived assets to
be impaired.
Financial Instruments with Derivative Features -- The Company does not hold or
issue derivative instruments for trading purposes. However, the Company has
convertible debentures that contain embedded derivatives that require separate
valuation from the convertible debentures. The Company recognizes these
F-9
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
derivatives as liabilities in its balance sheet and measures them at their
estimated fair value, and recognizes changes in their estimated fair value in
earnings (losses) in the period of change. The Company has estimated the fair
value of these embedded derivatives using the Black-Scholes model based on the
historical volatility of its common stock. The fair value of derivative
instruments are re-measured each quarter.
Advertising Costs -- The Company expenses advertising costs as incurred.
Advertising expenses for the years ended December 31, 2005 and 2004 were $33,111
and $26,801, respectively.
Stock-Based Compensation -- At December 31, 2005, the Company has one
stock-based employee compensation plan, which is described more fully in Note
15. 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, 2005 and 2004, the Company recognized compensation expense relating
to stock options and warrants of $364,330 and $226,250, respectively. During the
years ended December 31, 2005 and 2004, the Company recognized compensation
expense relating to the issuance of common stock of $0, and $105,931,
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,
-----------------------
2005 2004
--------------------------------------------------------------------------------
Net loss, as reported $(527,708) $(658,322)
Add: Stock-based employee compensation expense
included in net loss 364,330 332,181
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (211,247) (517,924)
--------------------------------------------------------------------------------
Pro forma net loss $(374,625) $(844,065)
--------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------
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-10
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Risk -- Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist primarily 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, 2005 and 2004, this allowance was $158,374 and $41,143, respectively.
During the year ended December 2005, sales to two customers accounted for 27
percent and 10 percent of net sales, respectively. Sales from both of these
customers were part of the contract manufacturing segment. Account receivables
from one customer equaled 71% of consolidated accounts receivable at December
31, 2005, which created a concentration of credit risk.
During the year ended December 2004, sales to two customers accounted for 52
percent and 14 percent of net sales, respectively. Sales from these customers
were from the contract manufacturing segment and the electronics assembly
segment, respectively. No individual customer account receivable balance at
December 31, 2004, created a concentration of credit risk.
Fair Value of Financial Instruments -- The carrying amounts reported in the
accompanying consolidated financial statements for cash, accounts receivable,
notes payable and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments. The carrying
amounts of the Company's debt obligations approximate fair value.
Reclassifications -- Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
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 228,673,577 and 14,250,500
in potentially issuable common shares at December 31, 2005 and 2004,
respectively. The potentially issuable common shares at December 31, 2005 and
2004 were excluded from the calculation of diluted loss per share because the
effects are anti-dilutive.
New Accounting Standards -- In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is
an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation." This
new standard eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and requires such transactions to be
accounted for using a fair-value-based method and the resulting cost recognized
in the Company's financial statements. This new standard is effective for
interim and annual periods beginning after December 15, 2005. The Company is
currently evaluating SFAS No. 123 as revised and intends to implement it in the
first quarter of 2006. At December 31, 2005, all employee options were fully
vested. Therefore, the implementation of this standard will not initially have a
material impact on the Company's financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). The Company will be required to
apply this statement to inventory costs incurred after December 31, 2005. The
Company is currently evaluating what effect this statement will have on the
Company's financial position and results of operations.
F-11
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary
Assets." SFAS No. 153 amends APB Opinion No. 29, "Accounting for Non-monetary
Transactions," to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections-A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. The Company will be required to apply this
statement for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected
to have a material effect on the Company's financial position or results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments -- an amendment of FASB Statements No. 133 and 140 (SFAS
155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities and related interpretations.
SFAS 155 permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation
and clarifies which interest-only strips and principal-only strips are not
subject to recognition as liabilities. SFAS 155 eliminates the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective for the Company for all financial instruments
acquired or issued beginning January 1, 2007. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156
amends SFAS 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset. It
also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable. SFAS 156
permits an entity to use either the amortization method or the fair value
measurement method for each class of separately recognized servicing assets and
servicing liabilities. SFAS 156 is effective for the Company as of January 1,
2007. The adoption of this standard is not expected to have a 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 $527,708 and $658,322 for the years
ended December 31, 2005 and 2004, respectively. As of December 31, 2005 and
2004, the Company had an accumulated deficit of $19,327,310 and $18,799,602,
respectively, and a total stockholders' equity (deficit) of $1,268,054 and
($2,242,033), respectively. In addition, the Company used, rather than provided,
cash in its operations in the amounts of $1,751,744 and $1,680,054 for the years
ended December 31, 2005 and 2004, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraphs, recoverability of
F-12
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
As discussed in Note 13, the Company had entered into an equity line of credit
agreement and a standby equity distribution agreement with a private investor.
With the sale by the Company of the Convertible Debenture in May 2005, this and
all other agreements relating to the equity line and the standby equity
distribution agreement were terminated.
NOTE 3 - INVESTMENT IN SECURITIES AT COST
On April 13, 2004, the Company entered into a stock purchase agreement with an
unrelated party under which the Company purchased 400,000 shares of the
investee's Series B Preferred Stock (the "Preferred Shares") for an aggregate
purchase price of $300,000 cash. This purchase was made at fair value. The
Preferred Shares are convertible, at the Company's option, into an equivalent
number of shares of investee common stock, subject to adjustment. The Preferred
Shares are not redeemable by the investee. As a holder of the Preferred Shares,
the Company has the right to vote the number of shares of investee common stock
into which the Preferred Shares are convertible at the time of the vote. The
investment represents less than a 5% interest in the investee. The investment
does not have a readily determinable fair value and is stated at historical
cost, less an allowance for impairment when circumstances indicate an investment
has been impaired. The Company periodically evaluates its investments as to
whether events and circumstances have occurred which indicate possible
impairment. No indicators of impairment were noted for the year ended December
31, 2005.
Separate from the purchase of the Preferred Shares, the Company and the investee
also entered into a Preferred Manufacturing Agreement. Under this agreement, the
Company will perform exclusive "turn-key" manufacturing services handling most
of the investee's manufacturing operations from material procurement to complete
finished box-build of all of investee products. The initial term of the
agreement is three years, continuing month to month thereafter unless terminated
by either party. Sales under this agreement totaled $163,473 and $538,233 for
the periods ended December 31, 2005, and December 31, 2004, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
2005 2004
-------------------------------------------------------------------
Raw materials $ 924,101 $ 895,723
Work-in process 144,993 356,160
Finished goods 1,202,510 201,871
-------------------------------------------------------------------
$ 2,271,604 $ 1,453,754
-------------------------------------------------------------------
F-13
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
During 2005 and 2004, write downs of $38,090 and $13,000, respectively, were
recorded to reduce items considered obsolete or slow moving to their market
value.
NOTE 5 - ACQUISITION OF PFE PROPERTIES, LLC
On March 31, 2005, the Company purchased a 100% interest in PFE Properties LLC
(PFE). PFE was previously owned by a relative of the President and CEO. PFE owns
the land and building in which the Company's manufacturing facilities and
administrative offices are located. The liabilities of PFE on the date of
acquisition include a mortgage note payable of $1,050,000, secured by the
building. The Company acquired PFE by issuing 20,000,000 shares of the Company's
restricted common stock with a fair value of $800,000 on the date of acquisition
and assuming the mortgage note payable of $1,050,000 and accounts payable of
$18,974. The results of operations for PFE have been included beginning March
31, 2005. The additional $800,000 for the purchase of PFE was allocated between
the land and building value.
The balance sheet of PFE as of March 31, 2005, is presented as follows:
Current Assets $ 98,535
Property and Equipment 1,770,439
----------------
Total Assets Acquired 1,868,974
----------------
Accounts Payable 18,974
Mortgage Note Payable 1,050,000
----------------
Total Liabilities Assumed 1,068,974
----------------
Net Assets Acquired $ 800,000
================
The pro forma information is presented as if the Company had acquired
PFE on January 1, 2004, as follows:
Year Ended December 31,
2005 2004
--------------------------------------------------------------------------------
Net Sales $ 12,992,512 $ 8,862,715
Net Loss $ (539,722) $ (613,378)
Basic loss per share $ - $ -
Diluted loss per share $ - $ -
F-14
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2005 2004 in Years
----------------------------------------------------------------- -------------
Land $ 360,000 $ - N/A
Building 1,410,439 - 39
Production equipment 3,584,140 3,220,847 5-10
Leasehold improvements 997,714 992,018 7-10
Office equipment 185,556 159,199 5-10
Other 47,789 47,789 3-7
-----------------------------------------------------------------
6,585,638 4,419,853
Less accumulated depreciation
and amortization 3,898,901 3,579,060
-----------------------------------------------------------------
$ 2,686,737 $ 840,793
-----------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders -- The Company had amounts due to stockholders
from three separate notes. The balance due to stockholders at December 31, 2005
and 2004, was $95,806 and $18,586, respectively. Interest associated with
amounts due to stockholders is accrued at 10 percent. Unpaid accrued interest
was $0 and $7,976 at December 31, 2005 and 2004, respectively, and is included
in accrued liabilities. These notes are due on demand.
During the year ended December 31, 2005, in lieu of a cash exercise price of
$23,000, the stockholders forgave $23,000 of notes payable owed to them by the
Company to exercise 1,000,000 options to purchase shares of the Company's common
stock.
Notes Payable to Related Party -- During 2002, the Company entered into a verbal
bridge loan agreement with Abacas Ventures, Inc. (Abacas). This agreement
allowed the Company to request funds from Abacas to finance the build-up of
inventory relating to specific sales. The loan bore interest at 24% and was
payable on demand. There were no required monthly payments. During the years
ended December 31, 2005 and 2004, the Company was advanced $95,586 and
$3,128,281, respectively, and made cash payments of $0 and $3,025,149,
respectively.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable.
The total of these obligations was $1,263,713. The Company recorded this
transaction as a $1,263,713 non-cash increase to the note payable owed to
Abacas, pursuant to the terms of the Abacas agreement.
During March 2005, the Company issued 51,250,000 shares of the Company's
restricted common stock for payment of $2,055,944 in principal and accrued
interest on the note. Because Abacas is a related party, no gain or loss on
forgiveness of debt was recognized.
F-15
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
The total principal amount owed to Abacas between the note payable and the
bridge loan was $0 and $1,530,587 as of December 31, 2005, and 2004,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $0 and $430,828 as of December 31, 2005 and 2004,
respectively.
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 were held in escrow and were treated as treasury stock recorded at
no cost. The fair value of the 3,000,000 shares was less than the carrying
amount of the note payable. Because 75 percent of the balance had not been paid
by May 18, 2002, the Company was required to prepare and file with the
Securities & Exchange Commission, at its own expense, a registration statement
with respect to the escrowed shares.
As of December 31, 2005, the Company was in default of its obligations under the
settlement agreement and the total payment due thereunder had not been made. A
registration statement with respect to the escrowed shares was not filed and the
Company did not replace the escrowed shares with registered, free-trading shares
as per the terms of the agreement. The plaintiff filed a Confession of Judgment
and proceeded with execution thereon. The shares in escrow were released and
issued as partial settlement of $92,969 on the note payable outstanding.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which was 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 estimated that the probability of the
$109,125 being considered additional rent expense was remote and disputed the
claim. This lawsuit was settled in 2006. (See Note 17)
Litigation - During 2003 and 2004, an investment firm filed suits in the U.S.
District Court for the District of Utah seeking payment of a commission
consisting of common stock valued at 1,750,000 for allegedly introducing the
Company to the Equity Line Investor (See Note 10). The case was previously
dismissed in a New York court. The Company estimated that the risk of loss was
remote; therefore no accrual had been made prior to December 31, 2005. These
suits were settled in 2006. (See Note 17)
F-16
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Various vendors have notified the Company that they believe they have claims
against the Company totaling $18,810. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued for these claims, and they
are included in accounts payable. During the year ended December 31, 2005, the
Company determined that the statute of limitations had expired for various
vendors. Amounts of $174,990 were written off and recorded as a gain on
forgiveness of debt. However, there can be no assurance that any or all of these
vendors will agree with the Company's determination, and the Company may be
subject to claims or litigation in the future.
In addition, various vendors have notified the Company that they believe they
have claims against the Company totaling $164,802. The Company has determined
the probability of realizing any loss on these claims is remote. The Company has
made no accrual for these claims and is currently in the process of negotiating
the dismissal of these claims with the various vendors.
Registration Rights - In connection with the Company's entering into an Equity
Line of Credit Agreement, the Company granted to the equity line investor (the
"Equity Line Investor") registration rights, in connection with which the
Company was required to file a registration statement covering the resale of
shares put to the Equity Line Investor under the equity line. The Company was
also required to keep the registration statement effective until two years
following the date of the last advance under the equity line.
Also, in connection with the Company's entering into a standby equity
distribution agreement, the Company granted to the investor registration rights,
in connection with which the Company was required to file a registration
statement covering the resale of shares put to the investor under the standby
equity distribution agreement. The Company was also required to keep the
registration statement effective until two years following the date of the last
advance under the standby equity distribution agreement.
In connection with the Company's issuance of a convertible debenture (discussed
below), the Equity Line of Credit Agreement and the Standby Equity Distribution
Agreement, together with all associated registration rights, were terminated.
In May 2005, in connection with the Company's issuance of a convertible
debenture (discussed below), the Company granted to the debenture holder
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
100,000,000 shares, and to keep such registration statement effective until all
of the shares issuable upon conversion of the debenture have been sold. The
Company filed the registration statement on September 23, 2005. As of the date
of this report, the registration statement had not been declared effective.
In December 2005, in connection with the Company's issuance of a convertible
debenture (discussed below), the Company granted to the debenture holder
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
32,608,696 shares and 10,000,000 warrants, and to keep such registration
statement effective until all of the shares issuable upon conversion of the
debenture have been sold.
F-17
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Accrued Payroll Tax Liabilities -- In November 2004, the Internal Revenue
Service (IRS) accepted the Company's Amended Offer in Compromise (Offer) to
settle delinquent payroll taxes, interest and penalties. The acceptance of the
Offer required the Company to pay $500,000 by February 3, 2005. The Company made
the required payment on February 2, 2005. Additionally, the Offer requires the
Company to remain current in its payment of taxes for 5 years, and the Company
may not claim any net operating losses for the years 2001 through 2015, or until
the Company pays taxes in an amount equal to the taxes waived by the offer in
compromise. The outstanding balance of delinquent payroll taxes, interest and
penalties was $1,955,767 on the settlement date. The future cash payments
specified by the Offer, including interest and principal, were less than the
carrying amount of the payable; therefore the Company reduced the carrying
amount of the liability to the total future cash payments of $500,000 and
recorded a gain of $1,455,767 during the year ended December 31, 2004. The
payments to the IRS were made according to the settlement agreement during
January 2005.
Further, the Utah State Tax Commission has entered into an agreement to allow
the Company to pay the tax liability owing to the State of Utah in equal monthly
installments of $4,000. Through December 2005, the Company had made the required
payments. The balance owed to the State of Utah as of December 31, 2005, and
December 31, 2004, was $98,316 and $223,660, respectively, including taxes,
penalties and interest. See Note 17 for the settlement of the remaining balance.
Manufacturing Agreement -- On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain Developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
has the exclusive right to manufacture the certain products developed by the
Developers or any of their affiliates. The Developers will continue to provide
marketing and consulting services related to the products under the agreement.
Should the Developers terminate the agreement early, they must pay the Company
$150,000. Revenue is recognized when products are shipped. Title passes to the
customer or independent sales representative at the time of shipment.
In connection with this agreement the Company agreed to issue options to
purchase 1,500,000 shares common stock to the Developers upon the sale, shipment
and payment for 200,000 units of a fitness product. In addition, the Company
agreed to issue options to purchase 300,000 shares of common stock to the
Developers for each multiple of 100,000 units of the fitness product sold in
excess of the initial 200,000 units within twenty-four months of the agreement
(June 2004). The options will be exercisable at $0.06 per share, vest on the
grant date and expire one year after issuance. As of December 31, 2005, the
Company had sold, shipped and received payment for, 257,577 units of the fitness
product. In January 2005, the Company issued 1,500,000 options under the terms
of the agreement. See Note 14.
F-18
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In connection with the above manufacturing agreement, the Company agreed to
issue various options to purchase shares of common stock to the Developers upon
the sale, shipment, and payment of certain quantities of the additional
products. In addition, the Company agreed to issue additional options to
purchase common stock to the developers for each multiple of units sold in
excess of the initial units within the first twenty-four months of the
agreements. The schedule of units and potential options that will be issued
follows:
Options Each Multiple of Options for
Initial for Initial Units above Each Multiple
Product Units Units Sold Initial Units of Units
--------------------------------------------------------------------------------
1 500,000 500,000 200,000 200,000
2 25,000 500,000 15,000 100,000
3 100,000 500,000 50,000 100,000
4 300,000 1,000,000 100,000 200,000
5 200,000 250,000 100,000 100,000
6 200,000 500,000 100,000 100,000
As of December 31, 2005, the Company had not sold, shipped and received payment
for enough units to require the issuance of options related to the additional
products under these agreements. Because the Developers must provide future
services for the options to vest, the options are treated as unissued for
accounting purposes. The cost of these options will be recognized when the
options are earned.
NOTE 9 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 2005 and 2004:
2005 2004
--------------------------------------------------------------------------------
Notes payable to Equity Line Investor,
no periodic interest, matures 70 to 131
days after issuance $ - $ 1,700,000
Note payable to a company, interest at
8.00%, matured August 2002, collateralized
by 3,000,000 shares of the Company's common
stock held in escrow - 115,875
Mortgage payable to a bank, interest at 12.50%,
monthly payments of $10,938 to $12,699 through
November 2008, unpaid principal due in full
December 2008, secured by building 1,050,000 -
--------------------------------------------------------------------------------
Total Notes Payable $ 1,050,000 $ 1,815,875
Less current maturities (12,610) (1,815,875)
--------------------------------------------------------------------------------
Long-Term Portion of Notes Payable $ 1,037,390 $ -
--------------------------------------------------------------------------------
F-19
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2004, the Company converted five notes
payable and accrued interest of $551,819 into notes with Abacus (see Note 2).
Accrued interest of $27,020 associated with these notes payable was not
converted to the note payable with Abacus; therefore, a gain on forgiveness of
debt was recorded for $27,020 for the year ended December 31, 2004.
In March 2004, the Company settled a note payable with a financial institution.
The outstanding loan balance and accrued interest at the time of settlement was
$189,663. The balance was settled for $90,000 in cash and 542,495 shares of
common stock valued at $30,000. A gain on forgiveness of debt of $61,370 was
recorded on this transaction.
In April 2004, the Company settled three notes payable with a financing company.
The outstanding loan balances and accrued interest at the time of settlement was
$192,043. The balance was settled for $75,000 in cash. A gain on forgiveness of
debt of $117,043 was recorded on this transaction.
In November 2004, the Company settled a note payable with a corporation. The
outstanding loan balance and accrued interest at the time of settlement was
$75,000. The balance was settled for $50,000 in cash and 1,000,000 shares of
common stock valued at $25,000.
In December 2004, the Company settled a note payable with a financial
institution. The outstanding loan balance and accrued interest at the time of
settlement was $36,902. The balance was settled for $10,000 in cash. A gain on
forgiveness of debt of $26,902 was recorded on this transaction.
In December 2004, the Company settled a note payable with an individual. The
outstanding loan balance and accrued interest at the time of settlement was
$145,779. The balance was settled for $120,000 in cash. A gain on forgiveness of
debt of $25,779 was recorded on this transaction.
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. During the year ended December 31, 2005 the Company was out of
compliance on several notes payable, primarily due to a failure to make monthly
payments. In instances where the Company was out of compliance, the amounts were
shown as current. Additionally, all default provisions were accrued as part of
the principal balance of the related notes payable.
Notes Payable to Equity Line Investor -- At December 31, 2004, the Company owed
$1.7 million to Cornell Capital Partners, LP ("Cornell"), pursuant to an
unsecured promissory note. The note was repayable over 193 days and was past due
as of March 31, 2005. The note stated that if the Company did not repay the note
when due, a default interest rate of 24% would apply to the unpaid balance. The
Company recorded accrued interest of $105,074 on the note.
In January 2005, the Company entered into an additional promissory note with
Cornell for $565,000. The Company received proceeds of $503,500, net of loan
costs of $61,500. The terms of the note included a 9% premium or $50,850,
resulting in a total note payable of $615,850. The premium was amortized to
interest expense over the life of the loan. The terms of the loan stated that
interest only payments would be made for the first six months. The Company would
repay the principal, interest, and premium over the next six months. The loan
was due January 2006. The Company amortized $11,057 of the premium as interest
expense prior to settling the loan as discussed below.
F-20
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
All notes to Cornell were paid on May 27, 2005, with funds acquired from
Highgate House Funds, Ltd. ("Highgate"), in connection with the issuance of a
convertible debenture. (See Note 11) Payment of accrued interest was not
required as part of the repayment. In connection with the repayment, the
remaining premium of $39,793 was immediately amortized as interest expense. The
gain from forgiveness of debt on both Cornell notes totaled $162,774.
In December 2005, the Company entered into a transaction for the issuance of an
additional convertible debenture to Cornell for $1,500,000. (See Note 11.)
The total principal amount owed to Cornell Capital Partners, LP was $1,500,000
and $1,700,000 as of December 31, 2005, and 2004, respectively.
Mortgage Note Payable -- In conjunction with the acquisition of PFE, the Company
assumed a mortgage note payable for $1,050,000. The note bears interest at 12.5%
per annum. Interest only payments are required through January 2006. Starting in
February 2006, principal and interest payments will be required based on a
twenty-year amortization of the note. The entire balance of principal and unpaid
interest will be due in December 2008.
The following is a schedule of future maturities on notes payable:
Year Ending December 31,
------------------------------------------------
2006 12,610
2007 14,280
2008 16,170
2009 1,006,940
------------------------------------------------
Total $ 1,050,000
------------------------------------------------
NOTE 10 - LEASES
During 2005, the Company leased a satellite office in Los Angeles, CA. This
office is used for sales and promotions. The Company entered into a two-year
sublease agreement with an unrelated party on of October 24, 2005. Additionally,
the Company has a lease for a facility in China that expires in 2006.
The following is a schedule of future minimum lease payments under the operating
leases:
Year Ending December 31,
------------------------------------------------
2006 65,944
2007 44,878
------------------------------------------------
Total $ 110,822
------------------------------------------------
The building lease provides for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
$55,410 and $213,688 for the years ended December 31, 2005 and 2004,
respectively.
F-21
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONVERTIBLE DEBENTURES
Highgate - On May 26, 2005, the Company entered into an agreement with Highgate
to issue to Highgate a $3,750,000, 5% Secured Convertible Debenture (the
"Debenture"). The Debenture is due December 2007 and is secured by all of the
Company's property.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at December 31, 2005 was $111,986.
At any time, Highgate may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of the Company's common stock for the twenty trading days immediately
preceding the conversion date. The Company has the right to redeem a portion or
the entire Debenture then outstanding by paying 105% of the principal amount
redeemed plus accrued interest thereon.
Highgate's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Highgate may convert up to $250,000 worth of the principal amount
plus accrued interest of the Debenture in any consecutive 30-day
period when the market price of the Company's stock is $0.10 per
share or less at the time of conversion;
(ii) Highgate may convert up to $500,000 worth of the principal amount
plus accrued interest of the Debenture in any consecutive 30-day
period when the price of the Company's stock is greater than $0.10
per share at the time of conversion; provided, however, that
Highgate may convert in excess of the foregoing amounts if the
Company and Highgate mutually agree; and
(iii) Upon the occurrence of an event of default, Highgate may, in its
sole discretion, accelerate full repayment of all debentures
outstanding and accrued interest thereon or may convert the
Debentures and accrued interest thereon into shares of the
Company's common stock.
Except in the event of default, Highgate may not convert the Debenture for a
number of shares that would result in Highgate owning more than 4.99% of the
Company's outstanding common stock.
As discussed in Note 8, the Company granted Highgate registration rights related
to the issuance of the debenture.
The Company determined that the features of the Debenture fell under derivative
accounting treatment. As of December 31, 2005 the carrying value of the
Debenture was $996,252. The carrying value will be accreted each quarter over
the life of the Debenture until the carrying value equals the face value of
$3,750,000. The fair value of the derivative liability as of December 31, 2005
was $3,175,287.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were paid to Cornell to repay promissory notes. Fees of $256,433 were withheld
from the proceeds, were capitalized, and are being amortized over the life of
the note. As such, of the total Debenture of $3,750,000, the net proceeds to the
F-22
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Company were $1,228,567. The proceeds were used for general corporate and
working capital purposes, at the Company's discretion.
Cornell - On December 30, 2005, the Company entered into an agreement with
Cornell to sell to Cornell a $1,500,000, 5% Secured Convertible Debenture (the
"Cornell Debenture"). The Cornell Debenture is due July 30, 2008 and has a
security interest of all the Company's property, junior to the Highgate security
interest.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of the Company's common stock at a conversion price equal
to an amount equal to the lowest closing bid price of the Company's common stock
for the twenty trading days immediately preceding the conversion date. The
Company has the right to redeem a portion or the entire Cornell Debenture then
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts into shares of the Company's common
stock is limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal amount
plus accrued interest of the Cornell Debenture in any consecutive
30-day period when the market price of the Company's stock is
$0.10 per share or less at the time of conversion;
(ii) Cornell may convert up to $500,000 worth of the principal amount
plus accrued interest of the Cornell Debenture in any consecutive
30-day period when the price of the Company's stock is greater
than $0.10 per share at the time of conversion; provided, however,
that Cornell may convert in excess of the foregoing amounts if the
Company and Cornell mutually agree; and
(iii) Upon the occurrence of an event of default, Cornell Capital
Partners, LP may, in its sole discretion, accelerate full
repayment of the debenture outstanding and accrued interest
thereon or may convert the Debenture and accrued interest thereon
into shares of the Company's common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
the Company's outstanding common stock.
The Cornell Debenture was issued with 10,000,000 warrants with an exercise price
of $0.09 per share that vest immediately and have a three year life.
As discussed in Note 8, the Company granted Cornell registration rights related
to the issuance of the Cornell Debenture and warrants.
The Company determined that the features on the Cornell Debenture and the
associated warrants fell under derivative accounting treatment. As of December
31, 2005 the carrying value of the Cornell Debenture was $0. The carrying value
will be accreted each quarter over the life of the Cornell Debenture until the
F-23
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
carrying value equals the face value of $1,500,000. The fair value of the
derivative liability as of December 31, 2005 was $1,735,016.
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the Cornell Debenture. As such, of the total Cornell Debenture of $1,500,000,
the net proceeds to the Company were $1,370,000. The proceeds will be used for
general corporate and working capital purposes, at the Company's discretion
NOTE 12 - 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,
2005 and 2004, were as follows:
2005 2004
--------------------------------------------------------------------------------
Deferred Income Tax Assets:
Inventory reserve $ 280,233 $ 266,026
Bad debt reserve 102,903 15,346
Vacation reserve 26,602 26,809
Research and development credits 27,285 27,285
Net operating loss carryforward 4,676,769 4,597,493
Depreciation - 2,668
Intellectual property 101,095 115,581
--------------------------------------------------------------------------------
Total Deferred Income Tax Assets 5,214,887 5,051,208
Valuation allowance (5,213,178) (5,051,208)
Deferred Income Tax Liability - depreciation (1,709) -
--------------------------------------------------------------------------------
Net Deferred Income Tax Asset $ - $ -
--------------------------------------------------------------------------------
The Company has sufficient long-term deferred income tax assets to offset the
deferred income tax liability related to depreciation. The long-term deferred
income tax assets relate to the net operating loss carryforward and the
intellectual property.
The Company has sustained net operating losses in both periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero and consequently, there is no income
tax provision or benefit presented for the years ended December 31, 2005 and
2004.
As of December 31, 2005, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $12,538,254. 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
F-24
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
in ownership. The realization of tax benefits relating to net operation loss
carryforwards is limited due to the settlement related to amounts previously due
to the IRS discussed in Note 8.
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, 2005 and 2004:
2005 2004
--------------------------------------------------------------------------------
Benefit at statuatory rate (34%) $(179,421) $(223,829)
Non-deductible expenses 21,399 38,099
Change in valuation allowance 161,970 207,457
State tax benefit, net of federal tax benefit (17,416) (21,727)
Return to provision 13,468 -
--------------------------------------------------------------------------------
Net Benefit from Income Taxes $ - $ -
--------------------------------------------------------------------------------
NOTE 13 - STOCKHOLDERS' EQUITY
Common Stock Issuances -- During the year ended December 31, 2005, the Company
issued 51,250,000 shares of the Company's restricted common stock for payment of
principal and accrued interest on the note to Abacus. (See Note 7.)
During the year ended December 31, 2005, the Company issued 10,000,000 shares of
the Company's restricted common stock for payment of accrued rent and accrued
interest of $411,402. Because the rent was owed to a related party, no gain or
loss on forgiveness of debt was recognized.
During the year ended December 31, 2005, the Company issued 3,000,000 shares of
the Company's restricted common stock as partial payment on a note payable for
$92,969. (See Note 8.) As of the date of this report, the registration statement
had not been declared effective.
On March 31, 2005, the Company acquired a 100% interest in PFE Properties, LLC
for 20,000,000 shares of the Company's restricted common stock. (See Note 5)
During the year ended December 31, 2004, the Company issued 542,495 shares and
1,000,000 shares of common stock in 2004 with a fair value of $30,000 and
$25,000, respectively, based on the per share fair value of the Company's common
stock on the dates of issuance, as part of a settlement agreements for notes
payable. (See Note 9)
During the year ended December 31, 2004, the Company settled a legal claim by
issuing 1,000,000 shares of common which resulted in a settlement expense of
$60,000, which was the fair value of the shares issued based on the per share
fair value of the Company's common stock on the date of issuance.
During 2004, the Company issued 45,273,989 shares of the Company's restricted
common stock to officers of the Company. The shares were valued at $543,288
based on the fair value of the Company's stock on the date of issuance. The
shares were issued as settlement of accrued compensation of $431,770, accrued
interest of $5,587, and compensation of $105,931.
F-25
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Equity Line of Credit Agreement - On November 5, 2002, the Company entered into
an Equity Line of Credit Agreement (the "Equity Line Agreement") with Cornell.
The Company subsequently terminated the Equity Line Agreement, and on April 8,
2003, the Company entered into an amended equity line agreement (the "Amended
Equity Line Agreement") with Cornell. Under the Amended Equity Line Agreement,
the Company had the right to draw up to $5,000,000 from Cornell against an
equity line of credit (the "Equity Line"), and to put to Cornell shares of the
Company's common stock in lieu of repayment of the draw. The number of shares to
be issued was determined by dividing the amount of the draw by the lowest
closing bid price of the Company's common stock over the five trading days after
the advance notice was tendered. Cornell was required under the Amended Equity
Line Agreement to tender the funds requested by the Company within two trading
days after the five-trading-day period used to determine the market price. Upon
the issuance of the Convertible Debenture, the Amended Equity Line Agreement was
terminated.
Standby Equity Distribution Agreement - The Company entered into a Standby
Equity Distribution Agreement dated May 21, 2004, with Cornell. Under the
Agreement, the Company had the right, at its sole discretion, to draw up to $20
million on the standby equity facility (the "SEDA Facility") and put to Cornell
shares of its common stock in lieu of repayment of the draws. The number of
shares to be issued in connection with each draw was determined by dividing the
amount of the draw by the lowest volume-weighted average price of the Company's
common stock during the five consecutive trading days after the advance was
sought. The maximum advance amount was $1,000,000 per advance, with a minimum of
seven trading days between advances. Cornell was to retain 5% of each advance as
a fee under the Agreement. The term of the Agreement was to run over a period of
twenty-four months after a registration statement related to the Agreement was
declared effective or until the full $20 million had been drawn, whichever came
first. The Company had made no draws against the SEDA Facility and issued no
shares in connection with the SEDA Facility.
With the issuance of the Convertible Debenture on May 27, 2005, the SEDA
Facility and related agreements were terminated. (See Note 12.)
NOTE 14 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under APB No. 25 and related interpretations.
Under APB 25, compensation expense is recognized if an option's exercise price
on the measurement date is below the fair value of the Company's common stock.
For options that provide for cashless exercise or that have been modified, the
measurement date is considered the date the options are exercised or expire.
Those options are accounted for as variable options with compensation adjusted
each period based on the difference between the market value of the common stock
and the exercise price of the options at the end of the period. The Company
accounts for options and warrants issued to non-employees, including the
developers mentioned in Note 7, at their fair value in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Stock Option Plan - During November 2003, the Company adopted the 2003 Stock
Option Plan (the "2003 Plan") with 35,000,000 shares of common stock reserved
for issuance there under. Also, during December 2004, the Company adopted the
2004 Stock Option Plan (the "2004 Plan") with 40,000,000 shares of common stock
reserved for issuance there under. The Company's Board of Directors administers
the plans and has discretion in determining the employees, directors,
independent contractors and advisors who receive awards, the type of awards
(stock, incentive stock options or non-qualified stock options) granted, and the
term, vesting, and exercise prices.
F-26
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Non-Employee Options - During the year ended December 31, 2005, the Company
granted options to purchase 7,000,000 shares of common stock to counsel for the
Company with an exercise price of $0.0001 per share. The options were five year
options and vested on the date granted. Legal expense of $195,803 was recorded
for the fair value of options issued. During 2005, 5,000,000 of these options
and 1,500,000 previously issued options were exercised by counsel for proceeds
of $650.
During 2004, the Company granted options to purchase 6,500,000 shares of common
stock to attorneys for services at exercise prices of $0.0001 per share. The
options were all five year options and vested on the dates granted. Legal
expense of $209,952 was recorded for the fair value of options issued during
2004. 5,000,000 of these options were exercised in 2004 for cash proceeds of
$500. An additional 500,000 of previously issued options were exercised in 2004
for cash proceeds of $50.
Employee Options - During the year ended December 31, 2005, the Company granted
options to purchase 19,000,000 shares of common stock to directors and employees
of the Company pursuant to the 2004 Plan. These options are five year options
that vested on the date of grant. The related exercise prices ranged from $0.022
to $0.027 per share. These options had intrinsic value of $12,000 which was
recognized as non-cash compensation expense. A total of 18,500,000 options were
exercised during the year ended December 31, 2005, for $33,000 in cash, $135,000
in compensation, $256,500 in accrued compensation, and $23,000 as payment on a
shareholder note payable. The $135,000 of compensation was recorded in
conjunction with the cashless exercise of 3,000,000 of the options.
During 2004, the Company granted options to purchase 24,000,000 shares of common
stock to directors and employees of the Company pursuant to the 2003 and 2004
Plans. These options are five year options that vested on the date of grant. The
related exercise prices range from $0.01 to $0.03 per share. Non-cash
compensation relating to the grant of these options was recognized for $125,000
during 2004, based upon the intrinsic value of options on the grant date.
14,250,000 of these options were exercised during 2004 for $111,500 of cash,
$101,250 of compensation and $61,000 of accrued compensation. The $101,250 of
compensation was recorded in conjunction with the cashless exercise of 4,500,000
of the options.
Developer Options - During the year ended December 31, 2005, the Company granted
options to purchase 1,500,000 shares of common stock to developers as described
in Note 8 at exercise prices of $0.06 per share. The options were all five-year
options and vested on the dates granted. Two of the developers were employees
and together were issued 1,000,000 of the options. The exercise price equaled
the fair value of the common shares at the time these options were granted;
therefore, the options had no intrinsic value. The fair value of these options
of $42,052 was estimated using the Black-Scholes option pricing model with the
following assumptions: risk free interest rate ranging of 4.00%, dividend yield
of 0.0%, volatility of 302%, and expected average life of .5 years. None of
these options were exercised during the year ended December 31, 2005.
The remaining 500,000 developer options were issued to a non-employee under the
terms described above. Because the developer was a non-employee, cost of goods
sold of $21,526 was recorded for the fair value of options issued during the
year ended December 31, 2005. These options were valued using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate
ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and expected
average life of .5 years. None of these options were exercised during the year
ended December 31, 2005.
A total of 12,750,000 employee options and 4,000,500 non-employee options were
outstanding as of December 31, 2005.
F-27
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock option activity for the years ended December 31, 2004 and
2005, is as follows:
Weighted
Average
Exercise
Shares Price
------------ ----------
Outstanding at December 31, 2003 3,850,500 $ 0.02
Granted 30,500,000 $ 0.02
Exercised (19,750,000) $ 0.01
Cancelled (350,000) $ 0.14
-----------
Outstanding at December 31, 2004 14,250,500 $ 0.02
Granted 27,500,000 $ 0.02
Exercised (25,000,000) $ 0.02
Cancelled - $ -
-----------
Outstanding at December 31, 2005 16,750,500 $ 0.02
===========
Excercisable at December 31, 2005 16,750,500 $ 0.02
===========
The fair value of stock options was determined at the grant dates using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended December 31, 2005 and 2004:
2005 2004
------------- -------------
Expected dividend yield - -
Risk free interest rate 4.13% 3.39%
Expected volatility 268% 300%
Expected life .12 years .10 years
Weighted average fair value per share $ 0.02 $ 0.02
A summary of stock option and warrant grants with exercise prices less than,
equal to or greater than the estimated market value on the date of grant during
the years ended December 31, 2005 and 2004 is as follows:
Weighted
Weighted Average
Average Fair
Options Exercise Value of
Granted Price Options
---------- ---------- ---------
Year Ended - December 31, 2005
Grants with exercise prices less
than the estimated market value
of the common stock 13,000,000 $ 0.01 $ 0.02
Grants with exercise prices equal
to the estimated market value of
the common stock 14,500,000 $ 0.03 $ 0.01
Grants with exercise prices greater
than the estimated market value of
the common stock - $ - $ -
Year Ended - December 31, 2004
Grants with exercise prices less than
the estimated market value of the
common stock 12,750,000 $ 0.01 $ 0.03
Grants with exercise prices equal to
the estimated market value of the
common stock 17,750,000 $ 0.02 $ 0.01
Grants with exercise prices greater
than the estimated market value of
the common stock - $ - $ -
F-28
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock options outstanding and exercisable at December 31, 2005
follows:
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------
Weighted-
Range Average Weighted Weighted-
of Remaining Average Average
Exercise Options Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------- ----------- ----------- -------- ----------- --------
$0.0001 3,500,500 4.10 $0.0001 3,500,500 $0.0001
$0.0200 - $0.0300 11,750,000 3.82 $0.0251 11,750,000 $0.0251
$0.0600 1,500,000 0.02 $0.0600 1,500,000 $0.0600
Other Warrants - In connection with the Cornell convertible debenture the
company issued 10,000,000 warrants to purchase shares of the Company's common
stock. The warrants had an exercise price of $0.09 per share, vested
immediately, and have a 3 year life. The registration rights associated with the
warrants caused derivative accounting treatment of the debenture and the
warrants. The warrants were measured at their fair value using the Black-Scholes
pricing model with the following assumptions: risk free interest rate of 4.37%,
dividend yield of 0.0%, volatility of 163.31%, and expected average life of 3
years. These warrants were recorded as part of the derivative liability on the
balance sheet and will be re-measured at their fair value for every reporting
period.
NOTE 15 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has three reportable segments: electronics assembly, Ethernet
technology, and contract manufacturing. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables. The
Ethernet technology segment designs and manufactures Ethernet cards. The
contract manufacturing segment manufactures, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement. The
accounting policies of the segments are consistent with those described in the
summary of significant accounting policies. The Company evaluates performance of
each segment based on earnings or loss from operations. Selected segment
information is as follows:
F-29
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Electronics Ethernet Contract
Assembly Technology Manufacturing Total
--------------------------------------------------------------------------------
December 31, 2005
Sales to external customers 3,002,038 125,451 9,865,023 $ 12,992,512
Intersegment sales 49,015 - - 49,015
Segment income (loss) 2,084,254) (233,394) 1,789,940 (527,708)
Segment assets 5,609,386 183,231 5,109,280 10,901,897
Depreciation and amortization 223,755 1,843 99,357 324,955
December 31, 2004
Sales to external customers $ 3,354,057 $ 49,714 $ 5,458,944 $ 8,862,715
Intersegment sales 11,610 167 - 11,777
Segment loss (375,864) 74,665 (357,123) (658,322)
Segment assets 3,085,208 208,043 1,000,178 4,293,429
Depreciation and amortization 220,940 2,438 26,017 249,395
December 31,
-------------------------------
Sales 2005 2004
--------------------------------------------------------------------------------
Total sales for reportable segments $ 13,041,527 $ 8,874,492
Elimination of intersegment sales (49,015) (11,777)
--------------------------------------------------------------------------------
Consolidated net sales $ 12,992,512 $ 8,862,715
--------------------------------------------------------------------------------
December 31,
-------------------------------
Total Assets 2005 2004
--------------------------------------------------------------------------------
Total assets for reportable segments $ 10,901,897 $ 4,293,429
Adjustment for intersegment amounts - -
--------------------------------------------------------------------------------
Consolidated total assets $ 10,901,897 $ 4,293,429
--------------------------------------------------------------------------------
NOTE 16 - GEOGRAPHIC INFORMATION
All revenue-producing assets are located in the United States of America or
China. Revenues are attributed to the geographic areas based on the location of
the customers purchasing the products. The Company's net sales and assets by
geographic area are as follows:
F-30
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Revenues Revenue-producing assets
--------------------------------------------------------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
United States of America $12,694,817 $ 8,850,775 $ 280,490 $ 454,610
China - - 663,420 386,183
Other 297,695 11,940 - -
--------------------------------------------------------------------------------
$12,992,512 $ 8,862,715 $ 943,910 $ 840,793
--------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS
Accrued Payroll Tax Liabilities - In January 2006, the Utah State Tax Commission
reduced the remaining accrued payroll taxes, penalties and interest due on prior
period payroll taxes and were paid the amount of $98,316.
Settlement of Litigation - On January 26, 2006, a settlement was reached related
to the leased facilities in Colorado. The Company settled the remaining claim
for $200,000 cash. This amount was recorded in full at December 31, 2005 and is
included in accrued liabilities.
On February 24, 2006 the Company entered into a settlement agreement with the
investment firm discussed in Note 8. The Company issued 4,000,000 shares of
restricted stock with a fair value of $0.044 per share. Warrants were also
issued to purchase 7,000,000 shares of the Company's common stock with an
exercise price of $0.05 cents per share and a life of 5 years. The value of the
shares and warrants of $464,186 was accrued in 2005 as an accrued liability.
Convertible Debenture - In January 2006, Highgate converted $750,000 of its
convertible debenture into 24,193,548 shares of the Company's common stock at a
conversion rate of $0.031 per share, which was the lower of $0.10 or 100% of the
lowest closing bid price of the Company's commons stock over the 20 trading days
preceding the conversion.
Stock Options - During January 2006, an employee exercised options to purchase
1,000,000 shares of common stock with an exercise price of $0.027 per share.
These options were exercised as payment of accrued compensation of $27,000.
On January 27, 2006, counsel for the Company exercised options to purchase
2,000,000 shares of common stock with an exercise price of $0.0001 per share.
During February 2006, an employee exercised options to purchase 1,000,000 shares
of common stock with an exercise price of $0.027 per share. These options were
exercised as payment of accrued compensation of $27,000.
During March 2006, a director exercised options to purchase 1,000,000 shares of
common stock with an exercise price of $0.027 per share. These options were
exercised as payment of accrued compensation of $27,000.
F-31