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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, 2006, 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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for its most recent fiscal year: $8,739,208
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 16, 2007, was $10,057,622.
As of April 16, 2007, the Registrant had outstanding 687,350,529 shares of
Common Stock, par value $0.001.
Documents incorporated by reference: None
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Description of Properties 31
3. Legal Proceedings 32
4. Submission of Matters to a Vote of Security Holders 35
Part II
5. Market for Common Equity and Related Stockholder Matters 35
6. Management's Discussion and Analysis or Plan of Operation 39
7. Financial Statements 60
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 60
8A. Controls and Procedures 61
Part III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 62
10. Executive Compensation 65
11. Security Ownership of Certain Beneficial Owners and Management 74
12. Certain Relationships and Related Transactions 76
13. Exhibits 79
14. Principal Accountant Fees and Services 86
Signatures 88
2
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.
Corporate Background and Overview
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.
3
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.
On March 30, 2007, the Company filed a definitive proxy statement in connection
with a Special Meeting of Shareholders (the "Special Meeting") to be held at the
Company's headquarters, on Monday, April 30, 2007, at 10:00 a.m., M.D.T. The
purpose of the Special Meeting is to vote on a proposed amendment to the
Company's Articles of Incorporation (as amended) that would increase the
authorized capital of the Company to include 1,500,000,000 shares of common
stock and a 1.2 shares for one share forward stock split.
Corporate 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.
The Company has several new programs in development. These programs represent a
new emphasis into consumer products contract manufacturing and marketing. These
new programs have the potential to carry higher profit margins than electronic
manufacturing and as a result, the Company, through its subsidiaries, is
investing substantial resources into developing these activities.
We are organized into four principal divisions: CirTran USA, CirTran Asia,
CirTran Products, and, Diverse Media Group which is responsible for marketing
the new programs.
CirTran Asia
------------
During 2004, we established a new division, CirTran-Asia, Inc. 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.
CirTran Products
----------------
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
4
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales.
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 16, 2007, we
have concentrated our product development efforts into three areas, home and
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 separate trademarked names owned by CirTran Products. We are presently
preparing to launch various programs where Diverse Media Group will operate as
the marketer, campaign manager and distributor in various product categories
including beauty products, entertainment products, software products, and
fitness and consumer products.
Diverse Media Group
-------------------
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.
On November 28, 2006, we announced that Diverse Media Group, had signed a
two-year lease on a 1.150 sq. ft. facility in Bentonville, Arkansas, in close
proximity to Wal-Mart's world headquarters. The office, which will be managed by
Mr. Oliver Mulcahy, is strategically located to help create and manage an
ongoing relationship with Wal-Mart / Sam's Club stores to facilitate the
distribution of products through Wal-Mart stores on behalf of DMG clients.
CirTran USA
We have three principal business segments: electronics assembly and manufacture;
ethernet technology; and contract manufacturing.
Electronics Assembly and Manufacture
------------------------------------
As of December 31, 2005 and 2006, approximately 23% and 28% 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
5
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 "turn-key" manufacturing services 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.
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.
6
As noted above, CirTran has established a dedicated satellite office for
CirTran-Asia, and has retained Mr. Charles Ho to lead the 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.
During 2006 the Company has developed several items, in the fitness and exercise
products category and in the household and kitchen appliance / health and beauty
aids markets, that are being manufactured in China, through our subsidiary.
Sales of theses products contributed approximately 56% of revenues reported in
2006. This represents a significant portion of revenues generated by the Company
and it is anticipated that offshore contract manufacturing will continue to be
the main emphasis of the Company.
Main Business Areas
The Company has three main business areas of focus. They are: fitness and
exercise products; household and kitchen appliances / health and beauty aids;
and electronics products and manufacturing.
Fitness Products
----------------
The Company began manufacturing fitness products in May 2004. To date, we have
manufactured and sold over 12 different fitness products. We manufacture all of
our fitness products through our CirTran Asia operation.
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.
On May 11, 2005, CirTran Asia, UKING System Industry Co., Ltd., and Charles Ho
filed suit against the developers, including Michael Casey and David Hayek, 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 pertaining to the contract. As of the date of this Report, the
case was proceeding in the discovery stage and the Company intends to vigorously
pursue this action.
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 $2,600,000.
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 these announcements, CirTran-Asia has manufactured and shipped
orders and has received $1,400,000 as payment for such shipments.
7
New Fitness Products
--------------------
On November 30, 2006, CirTran announced that is had signed an exclusive
manufacturing agreement to produce a new fitness product, the CorEvolution(TM),
in China. The three-year agreement, signed November 28, 2006, involves the
custom manufacturing using the capabilities of CirTran's wholly owned
subsidiary, CirTran Asia. The new customer has committed to minimum orders,
amounting to $1.2 million in revenues for the first year, $1.8 million for the
second year and $2.4 million for the third year of the five-year contract. The
new fitness product is uniquely designed to strengthen and rehabilitate the
lower back and adjacent areas of human body. Since this announcement, and
through the date of this Report, CirTran-Asia had manufactured and shipped
units, and received payments of approximately $60,000. In 2007, CirTran-Asia
received a second order for $168,000.
Household and Kitchen Appliances and Health and Beauty Aids
-----------------------------------------------------------
The Company began manufacturing household and kitchen appliance products in
January 2005. To date, we have manufactured and sold 3 different household and
kitchen appliance products. We manufacture a majority of our household and
kitchen appliance products through our CirTran Asia operation.
The health and beauty aids / household and kitchen appliance products include
the following:
On January 24, 2005, the company announced a contract is with a New York
Customer where CirTran became an exclusive manufacturer of the Hot Dog Express,
which would be sold nationwide on TV, primarily through via infomercials. the
contract runs through 2007, with minimum revenues to CirTran of $1.8 million per
year, or $5.4 million over three years. Since these announcements, and through
the date of this Report, CirTran-Asia had manufactured and shipped units, and
received payments of approximately $1,850,000. CirTran is in the process of
exercising its rights under the contract which includes terminating the
relationship due to customers failure to meet the minimum purchase requirements
during 2006. CirTran is planning on marketing the product on its own through its
retail channels.
ABS Products and ABS Bankruptcy Proceedings - On January 19, 2005, CirTran
Corporation signed an Exclusive Manufacturing Agreement with Advanced Beauty
Solutions L.L.C. ("ABS"), a company related to the manufacture of a hair product
in California. In early October 2005, we were notified that ABS had defaulted on
its obligation to its financing company. We stopped shipping under credit and
exercised our rights permitted by the agreements, as discussed below.
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 October 2005, following the notice of ABS's default, 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 directly to ABS 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, we 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.
8
Since November 2005, we have been pursuing our rights under the agreement and
have been offering the flat iron product for sale directly to ABS's customers.
In doing so, we sold to ABS's international customers directly approximately
$430,000 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.
On June 6, 2006, the Company and ABS signed an agreement (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS. Pursuant to the settlement of ABS's
bankruptcy proceedings and the Asset Purchase Agreement, the Company has an
allowed claim against the ABS's estate in the amount of $2,350,000, of which
$750,000 was 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.
Under the Asset Purchase Agreement, the Company agreed to 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 TrueCeramic
Pro flat iron unit sold by ABS (the "Royalty Obligation").
The Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings (collectively, the "Assets"). Under the Asset Purchase Agreement,
the Royalty Obligation is capped at $4,135,000. To the extent the amounts paid
9
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 agreed to pay ABS an amount equal to $435,000 less the royalty payments
made to date. As part of the settlement, the Company agreed to 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 resolved a related dispute with ICG in which ICG assigned $65,000 of its
secured claim against ABS to the Company.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
(a) The Royalty Obligation payments will be made exclusively to ICG
and MFC (collectively, the "Secured Parties") until (i) the
Secured Parties have been paid in full on account of their
$1,243,208 secured claim, or (ii) the Secured Parties have been
paid $100,000 in payments under the Royalty Obligation, whichever
comes first.
(b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
(c) Following the payments to the Secured Parties and others as set
forth immediately above, the remaining Royalty Obligation payments
will be used for distribution to allowed general unsecured claims
not including those of the Company and certain insiders with
unpaid notes (the "Insider Noteholders").
(d) Following payments as set forth in (a), (b), and (c) above, the
Royalty Obligation payments will be shared pro rata among the
Insider Noteholders (with a total allowed aggregate claim of
$2,100,000), and the Company (with a general unsecured claim in
the amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the Company
begins to share in the Royalty Obligation payments is $435,000.
The Company is currently under contract with two direct marketing companies to
supply them with True Ceramic Pro flat irons ("TCP"). Since June 6, 2006, the
date of the ABS bankruptcy settlement, through the date of this Report, CirTran
Products received orders of approximately $2,025,000 for the TCP product. CTP
continues to generate sales to the direct marketing companies of TCP units and
other ancillary hair care products and the program is expected to continue being
profitable during 2007.
With respect to the hair dryers, as of April 16, 2007, we had not received any
orders or shipped any products, either to ABS or its customers, however the hair
dryers are being approved for manufacture in China and will be marketed in
conjunction with the TCP marketing program.
Hinge Helper - 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
10
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, and tested the
show in mid 2006, but results did not justify the media spending.
The Hinge Helper is a hand tool designed and developed for use by household
customers as well as tradesmen. 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 three years, and Arrowhead agreed to purchase a minimum of
ten million 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 were sent to Arrowhead. As of May 18,
2006, the product samples were approved. Arrowhead had released, and the Company
shipped, 1,500 units to test media. Arrowhead tested the show in mid 2006, but
results did not justify the media spending and the roll out.
Arrowhead has recently signed a licensing agreement with CirTran and DMG to
manufacture and market the product via internet, direct marketing and through
retailers. DMG will pay a royalty of 11% to Arrowhead based on a percentage of
sales in 2007. The percentage of unit sales increases by 1% per year until it
reaches 15% in the year 2011. The new contract was executed in February 2007 and
expires in 2011. To date the Hinge Helper project has not generated significant
revenues. The item has been presented to buyers at several major retailers, such
as Lowes, Wal-Mart and Sams Club and is an item of interest. Our sales
representative, in our Bentonville office, will continue to promote and develop
the item for inclusion in future sales modules to the retailers. We expect to
have the product at retailers sometime in June 2007.
New Household and Kitchen Appliance Products / Health and Beauty Aids
---------------------------------------------------------------------
On September 20, 2006, CirTran announced DMG, signed an exclusive marketing and
distribution agreement with Maryland-based Natural Product Solutions for its
VirMax for Men and Women DS product line. The project was discontinued on
February 8, 2007 due to lower than expected customer response to the test phase
of the DRTV campaign. A termination settlement was negotiated and executed with
Natural Product Solutions that cancelled any further obligations the Company may
have had to market and distribute the product in for the return of inventory of
product that was on hand.
On September 21, 2006, CirTran announced that DMG signed an exclusive marketing
and distribution agreement with Awareness Technologies, Inc., a Los
Angeles-based company, for its WebWatcher Computer Monitoring Software.
Awareness Technologies has successfully created a unique, completely
undetectable software surveillance tool that is being used to help parents
monitor and control their children's internet activity in protecting them from
potential online predators. The software's secondary platform is being
positioned to assist companies and government agencies in monitoring their
employees' computer usage in an effort to increase efficiency in the workplace
by reducing employees' non-work related activities. DMG will be providing all
marketing and distribution channels for Direct Response TV, Radio, Print,
Live-Shopping, Retail, and Catalog. Since the execution of the agreement, we
have been trying to formulize a different arrangement with customer based on
initial price point tests. Until the customer agrees to the arrangement, we have
placed a hold on this project.
11
On October 11, 2006, CirTran announced that DMG had signed a retail distribution
and marketing agreement with Wines and Wines, a Miami-based distributor of fine
wines and spirits from around the world. Under the terms of the agreement, DMG
would use its best efforts to market and distribute all Wines and Wines products
exclusively into various distributors and retailers such as Southern Wine and
Spirits, Trader Joe's, Beverages and More, Wal-Mart, Sam's Club, Costco, Young's
Markets and Vendome nationally, as well as restaurants, liquor stores and
entertainment venues exclusively throughout California. As of the date of this
Report, the product had been presented to retailers and resulted in high
interest. It was decided that the labeling needed to be changed by the customer.
Once the new labeling is completed and accepted by retailers, we will be able to
place the product on retailers shelves.
On November 7, 2006, CirTran announced that DMG signed an exclusive contract to
market and distribute the Solar Style line of solar chargers to major retailers
in the U.S. and abroad. Solar Style offers a diverse line of products with
multiple connectors, all based on the latest advancements in PV Solar charging
to convert sunlight into usable energy for personal electronic devices. Solar
Style also includes, or offers as options, AC car battery chargers with many of
its products. As of the date of this report, we are working with the client on
developing the product and placing the product at the retail channels to include
Walmart and Radio Shack stores.
On November 15, 2006, CirTran announced that DMG signed an exclusive licensing,
manufacturing and marketing agreement with Beautiful Eyes(R), Inc., of Malibu,
California, for a new "hot lashes" product which it will bring to the sold-on-TV
and retail marketplaces. Under the terms of the agreement, DMG will have access
to the patented technology developed by Beautiful Eyes and its founder, former
model Alexandra Roberts, and the designs, technical drawings, manufacturing
specifications and know-how, trade secrets and other proprietary information and
technology. DMG will develop a new product for sale through TV infomercials and
at mass retail, which it will market through its personal and healthcare
products division. As of the date of this Report, we are working with the client
on developing the product and already submitted samples for their approval.
On January 5, 2007, CirTran announced that DMG had signed an agreement with
Discus Dental, the world's largest direct dental manufacturer, wherein DMG would
market Discus Dental's popular BreathRx product to major retailers nationwide.
It has been determined that it is no longer in the best interest of the Company
to pursue this project. If circumstances change the Company will review the
project for reinstatement.
On February 5, 2007, CirTran announced that it had completed taping a TV
infomercial with Evander Holyfield for the "The Real Deal Grill(TM)," a new
electric indoor/outdoor cooking appliance it will manufacture and market
carrying the name and endorsement of the former four-time former world
heavyweight champion. The Real Deal Grill includes a deluxe stand and multiple
interchangeable cooking surfaces, with numerous never before seen add-on items
making it the most versatile "must-have" cooking appliance for any occasion from
camping in the mountains, tailgating at a game, or grilling at home. Full
national roll-out of the video and print ads set is scheduled for late May 2007.
As of the date of this Report, we were waiting for the final edited version of
the infomercial.
On February 13, 2007, CirTran announced that it had signed an agreement to
manufacture and market a new patent pending portable luggage handle and scale
ideal for travelers weighing a suitcase or package. As of the date of this
Report, we were working with the client on developing a final version of the
product and are expecting to submit samples for final approval in May 2007. Once
we have approvals, the product will be placed at retails shelves including
Walmart, Sams Club and Office Depot.
On March 12, 2007, CirTran announced that it had signed a contract with Easy
Life Products Corporation (ELP) of Venice, California, to manufacture and market
a new beauty product. The yet named new product is a pencil compact combined
with a sharpener and pencil holder. Planned add-ons for the product include
12
pencil caps, blotting tissue dispenser, eyelash curler, pencil cap organizer, an
eyebrow brush and two-in-one tweezers, with patents now pending for the pencil
sharpener, eyelash curler and the tweezers with the U.S. Patent Office. As of
the date of this Report, we were working with the client on developing the
product and building final samples for approval.
Electronics Business
--------------------
Since its inception in 1993, the Company has been focusing on its electronics
business and lines of product. To date, we have manufactured and sold numerous
electronic products and lines. We manufacture all of our electronics products
through CirTran Corporation and our Racore Technologies subsidiary.
Our electronics business and lines of product include the following:
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 final phase of
the contract. On March 14, 2006, we announced that we had received a $250,000
order to build and deliver the first production run of the next generation
SafetyNet(TM) RadioBridge(TM) which we redesigned at the request and on behalf
of Aegis Assessments, Inc., a Scottsdale, Arizona-based homeland security
contractor. We delivered the new, redesigned units and received payment in full
from Aegis in April 2006. Since these announcements, CirTran Corporation has
manufactured and shipped additional orders and has received $100,000 as payment
for such shipments.
On November 14, 2006 we announced that Racore had received, processed and
shipped its first order from Lear Siegler Services, Inc., of San Antonio, Texas,
and that Lear Siegler had opened an account to facilitate ordering and
processing add-on business. Lear Siegler's first order was for 100 Racore 8192
100FX 100 Mbps Fiber Optic PCI Fast Ethernet Network Adapters with ST Fiber
Connectors. Since this announcement, the product has been manufactured and
shipped, and a payment of $3,400 has been received.
Additional information about the Company, including its industry background,
competition, market and business strategy, and other information is as follows:
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 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
13
and the contract manufacturer supplies only labor. Turnkey contracts involve
design, manufacturing and engineering support, the procurement of all materials,
and sophisticated in-circuit and functional testing and distribution. The
manufacturing partnership between customers and contract manufacturers involves
an increased use of "just-in-time" inventory management techniques that minimize
the customer's investment in component inventories, personnel and related
facilities, thereby reducing costs.
We believe a second trend in the industry, which 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.
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and reliance
upon, the use of manufacturing specialists by many OEMs, marketing firms,
distributors and national retailers. We believe the trend towards outsourcing
manufacturing will continue. OEMs utilize manufacturing specialists for many
reasons, including the following:
* To Reduce Time to Market. Due to intense competitive pressures in
the electronics and general manufacturing industry, OEMs are faced with
increasingly shorter product life-cycles and, therefore, have a growing need to
reduce the time required to bring a product to market. We believe OEMs can
reduce their time to market by using a manufacturing specialist's manufacturing
expertise and infrastructure.
* To Reduce Investment. The investment required for internal
manufacturing has increased significantly as products have become more
technologically advanced and are shipped in greater unit volumes. We believe use
of manufacturing specialists allows OEMs to gain access to advanced
manufacturing capabilities while substantially reducing their overall resource
requirements.
* To Focus Resources. Because the electronics industry is
experiencing greater levels of competition and more rapid technological change,
many OEMs are focusing their resources on activities and technologies which add
the greatest value to their operations. By offering comprehensive electronics
assembly and related manufacturing services, we believe manufacturing
specialists allow OEMs to focus on their own core competencies such as product
development and marketing.
* To Access Leading Manufacturing Technology. Electronic products
and electronics manufacturing technology have become increasingly sophisticated
and complex, making it difficult for OEMs to maintain the necessary
technological expertise to manufacture products internally. We believe OEMs are
motivated to work with a manufacturing specialist to gain access to the
specialist's expertise in interconnect, test and process technologies.
14
* 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
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 2006 and 2005, CirTran Corporation spent approximately $271,000 and
$200,000, 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 $42,000 and $45,000, respectively. None of Racore's expenses were
paid for by its customers. We remain committed, particularly in the case of
Racore, to continuing to develop and enhance our product line as part of our
overall business strategy.
Beginning in 2004, Racore started working more aggressively on marketing
existing products by simplifying ordering and sales processing to existing
15
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.
Currently we are working to develop a state of the art radio bridge communicator
device that is designed for use in emergency situations. The devise will allow
members of various unrelated emergency response teams to communicate in a
controlled environment when multiple agencies, often times, using various radio
communicates technologies, must coordinate to achieve effectiveness in emergency
situations.
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 the date of this report, we had three individuals on our internal sales
staff, and we have a sales representative relationship with Mesa Management
Consulting LC ("MESA"), a firm that works as an independent contractor
generating new business and managing direct marketing engagements. Currently
MESA is involved with marketing the True Ceramic Pro Flat Iron and the Evander
Holyfield, "Real Deal Grill." 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 also opened an office in
Bentonville, Arkansas, in close proximity to Wal-Mart's world headquarters. The
office, which will be managed by an employee of the Company, Mr. Oliver Mulcahy,
who is responsible for developing and managing an ongoing relationship with
Wal-Mart / Sam's Club stores.
We had signed an agreement with Transactional Marketing Partners, Inc. ("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. In
September 2006, the agreement with TMP was not extended.
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
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
16
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 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 2006, 64% of our net sales were derived from pre-existing customers, whereas
during the year ended December 31, 2005, 38% of our net sales were derived from
customers that were also customers during the previous year. In 2006, 36% of our
sales were derived from new business, with the majority of those sales being
secured by exclusive manufacturing contracts. In 2006, our largest customer,
Tristar Products, a pre-existing customer, accounted for about 16% of our net
sales. Our second largest customer in 2006, was a new customer, Worldwide
Excellence, which accounted for 14% of net sales. The third largest customer was
a pre-existing customer, Dynojet, with 12% of our net sales. We anticipate that
our exclusive manufacturing contracts with CorEvlolution, Arrowhead Industries,
TFB Global and Easy Life Products will contribute significantly to our sales for
2007. Historically, a small number of customers accounted for a significant
portion of our electronics assembly and manufacture division gross 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 16, 2007, our backlog was
approximately $1,425,000 with confirmed deliveries dates. The Company also has a
total of approximately $20,000,000 of signed contracts for blanket quantities
(i.e. the full amount of the contract if minimum quantity orders are met), 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 contracts from Williams WorldWide Television for
$12,000,000 and CorEvolution for approximately $5,400,000 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. We had announced
many other contracts during 2005 and removed such contract amounts from back log
for the following reasons:
- Advanced Beauty Solutions contracts valued at $38 million to manufacture flat
irons and hair dryers,
Pursuant to ABS's petition to file for bankruptcy protection, CirTran has
purchased the assets of ABS from the court and begun manufacturing and marketing
ABS's sole asset, the TrueCeramicPro product. As a result of ABS's bankruptcy
and pursuant to the terms of our original contracts, the contracts were void.
- Guthy Renker contract valued at $32 million to manufacture the Supreme Pilates
fitness machine,
Pursuant to our exclusive manufacturing agreement dated, April 28, 2005, CirTran
had manufactured and delivered approximately $1,400,000 worth of product against
its $32,000,000 contracted amount. Pursuant to the client's breach of the
17
exclusive agreement, CirTran was forced to pursue legal remedies to protect its
exclusive rights. As a result of CirTran's legal actions, the client stop
placing orders with CirTran and continued with its breach by continuing to
manufacture and distribute with vendors other than CirTran.
- Emson's contract valued at $5.4 million to manufacture the Hot Dog Express
Based on the client's inability to meet its annual order commitments for 2006,
CirTran is in the process of terminating the licensing agreement with its client
and begin manufacturing, marketing and distributing the Hot Dog machine on its
own.
- Arrowhead's contract valued at $22 million to manufacture the Hinge Helper
tool,
Based on poor media results and the clients inability to effectively market and
distribute the Hinge Helper product, pursuant to the terms of the agreement, the
client opted to cease efforts to continue with this program and has assigned the
manufacturing, marketing and distribution rights to CirTran directly in February
2007 in exchange for a per unit royalty.
The value of the contracts mentioned above are for the full amount of the
contract if minimum quantity orders are met.
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. Sales in 2006
were lower than anticipated. However, the majority of the decrease can be
attributed to the ABS bankruptcy. Sales of the TCP flat irons, which were
prohibited by the bankruptcy proceedings, decreased by approximately $2,500,000.
Sales of the TCP flat irons resumed late in the third quarter 2006.
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 did not close. We
continued to work with Cogent, and they continue to provide strategic planning
and advice. It has been determined that it is no longer in the best interest of
the Company to pursue this deal. If circumstances change, the Company will
review the contract for reinstatement.
18
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. It has been determined that it is no longer in the best
interest of the Company to pursue this plan. If circumstances change the Company
will review the contract for reinstatement.
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 "turn-key" manufacturing services 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 16, 2007, we had no other acquisitions planned or anticipated.
RCG Group Agreement - On October 3, 2006, CirTran announced they have engaged
the services of The RCG Group ("RCG") to assist in certain financial
relations/corporate communications and other consulting services. RCG is being
retained to specifically assist the Company in developing and executing an
effective financial relations/corporate communications strategy. The primary
objective of such program will be to position CirTran to secure and then
maintain a listing on the American Stock Exchange or NASDAQ markets as soon as
is reasonably possible. Additionally, RCG has been retained to further assist
the Company in its endeavor to secure meaningful public, trading market
sponsorship from professional investors as well as certain members of the
institutional investment community.
TMP Agreement - On October 1, 2004, we entered into an agreement with 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. Since September 2006, the agreement with TMP
was not extended.
19
Evolve Agreement
----------------
On November 30, 2006, we entered into an Exclusive Manufacturing and Supply
Agreement (the "Evolve Agreement") with Evolve Projects, LLC ("Evolve"), an
Ohio-based limited liability company.
The term of the Evolve Agreement (the "Term") is for five years from execution,
and may be continued on a month-to-month basis thereafter. The Evolve Agreement
relates to the manufacturing and production of a new fitness product, The
CorEvloution Exercise Machine, (the "Product") Under the Evolve Agreement,
Evolve committed to minimum orders of at least 20,000 units during the first
year of the Term, at least 30,000 units during the second year of the Term, and
at least 40,000 units during the third year of the Term. During the Term, Evolve
agreed to purchase all of its requirements for the Product on an exclusive basis
from us.
The Product is designed to strengthen and rehabilitate the lower back and
adjacent areas of the body. Under the terms of the Evolve Agreement, Evolve will
own all right, title, and interest in and to the Product, and will market the
Product under its own trademarks, service marks, symbols or trade names.
On December 5, 2006, we announced that we had received the first purchase order
from Evolve for more than $54,000 of the Product. The Product will be
manufactured in China by our Asia-based subsidiary, CirTran Asia. We shipped and
received payment in full for the first order of Products during March 2007 and
have received purchase orders for an additional $350,000 worth of products. We
anticipate shipping these products in May 2007.
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
Furthermore, the Asian manufacturing market is growing at a rapid pace.
Particularly in China, therefore, management feels that the Company is
strategically positioned to hedge against unforeseen obstacles and continues its
efforts to increase establishing additional relationships with manufacturing
partners, facilities and personnel.
Regulation
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.
20
Employees
As of April 16, 2007, we employed a total staff of 105 persons in the United
States and 3 in China. 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. In our sales office in Bentonville, we employed 2 persons: 1
administrative and sales, 1 clerical assistant. In our China office, in
ShenZhen, we employed 1 administrative and 2 in Engineering. At this time we are
actively searching for additional qualified sales staff. We believe that our
relationship with our employees is good.
Recent Developments
Entry into Amendment Agreements
On January 12, 2007, CirTran Corporation (the "Company"), entered into two
agreements with Cornell Capital Partners, LP ("Cornell"), both of which amended
prior agreements with Cornell.
The Company entered into an Amended and Restated Investor Registration Rights
Agreement ("Amendment No. 2") with Cornell, which amended an agreement dated as
of August 23, 2006, as amended October 30, 2006. The purpose of Amendment No. 2
was to extend the filing deadline for a registration statement to be filed by
the Company to register the resale by Cornell of shares of the Company's common
stock issuable to Cornell upon conversion of a convertible debenture in the
aggregate principal amount of $1,500,000 (the "August Debenture") issued to
Cornell in August 2006. The new filing deadline for the registration statement
is June 1, 2007.
The Company also entered into an Investor Registration Rights Agreement
("Amendment No. 4") with Cornell, which amended an agreement dated as of
December 30, 2005, as most recently amended October 30, 2006. The purpose of
Amendment No. 4 was to extend the filing deadline for a registration statement
to be filed by the Company to register the resale by Cornell of shares of the
Company's common stock issuable to Cornell upon conversion of a convertible
debenture in the aggregate principal amount of $1,500,000 (the "December
Debenture") issued to Cornell in December 2005. The new filing deadline for the
registration statement is June 1, 2007.
New Director
On February 1, 2007, Fadi Nora was appointed as a director of the
Company.
Holyfield Infomercial
On February 5, 2007, CirTran announced that it had completed taping a
TV infomercial with Evander Holyfield for the "The Real Deal
Grill(TM)," a new electric indoor/outdoor cooking appliance it will
manufacture and market carrying the name and endorsement of the former
four-time former world heavyweight champion. The Real Deal Grill
includes a deluxe stand and multiple interchangeable cooking surfaces,
with numerous never before seen add-on items making it the most
versatile "must-have" cooking appliance for any occasion from camping
in the mountains, tailgating at a game, or grilling at home. Full
national roll-out of the video and print ads set is scheduled for late
May 2007. As of the date of this Report, we were waiting for the final
edited version of the infomercial.
21
Portable Luggage Handle and Scale
On February 13, 2007, CirTran announced that it had signed an agreement
to manufacture and market a new patent pending portable luggage handle
and scale ideal for travelers weighing a suitcase or package. As of the
date of this Report, we were working with the client on developing a
final version of the product.
Proxy Statement
On March 30, 2007, the Company filed a definitive proxy statement in
connection with a Special Meeting of Shareholders (the "Special
Meeting") to be held at the Company's headquarters, on Monday, April
30, 2007, at 10:00 a.m., M.D.T.. The purpose of the Special Meeting is
to vote on a proposed amendment to the Company's Articles of
Incorporation (as amended) that would increase the authorized capital
of the Company to include 1,500,000,000 shares of common stock and a
1.2 shares for one share forward stock split.
New Beauty Products
On March 12, 2007, the Company announced that it signed a contract with
Easy Life Products Corp. to manufacture and market new beauty products
developed by Hollywood makeup artists. Marketing of the product will be
directed toward the sold on TV and retail markets.
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.
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.
22
Our net loss for the year ending December 31, 2006, was $2,854,369, which
included a gain on forgiveness of debt of $6,930, compared to a net loss for the
year ending December 31, 2005, which was $527,708, which included a gain on
forgiveness of debt $337,761. 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, 2006, our current liabilities exceeded our current assets by
$4,863,641, compared to $1,142,874 as of December 31, 2005. For the year ended
December 31, 2006 and 2005, we had negative cash flows from operations of
$1,842,401 and $1,751,744, respectively. There can be no guarantee that our
current assets will ever 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, 2006 and 2005, 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, 2006 and 2005, 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 decreased in the year of 2006 as compared to 2005. Our sales
volumes for the previous four years have changed as indicated by the following
levels of net sales for the periods indicated: $1,215,245 for the year ended
December 31, 2003; $8,862,715 for the year ended December 31, 2004 and
$12,992,512 for the year ended December 31, 2005. For the year ended December
31, 2006 our sales were decreased to $8,739,208 which is a 32.7% decrease from
year ended December 31, 2005. 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.
We are involved in legal proceedings, several of which involve lawsuits filed
against us. 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.
23
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, Mr. Richard Ferrone, and
Mr. Shaher Hawatmeh (see "Executive Compensation"), and a key-man life insurance
policy for Mr. Iehab Hawatmeh, the untimely death or disability of Mr. Hawatmeh
could have a serious adverse affect on our operations.
Our international business activities subject us to risks that could adversely
affect our business.
For the year ended December 31, 2006, sales of products manufactured in the
United States accounted for 44.1 percent of our total net revenues, and sales of
products manufactured in China accounted for 55.9 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;
24
* 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;
* 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.
25
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. On March
30, 2007, we filed a definitive proxy statement with the SEC announcing our
annual shareholder meeting to be held April 30, 2007.
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly rapid
turnaround time for their OEM customers. We do not obtain firm, long-term
purchase commitments from our customers and have experienced a demand for
reduced lead-times in customer orders. Our customers may cancel their orders,
change production quantities or delay design and production for several factors.
Cancellations, reductions or delays by a customer or group of customers could
adversely affect our results of operations. Additional factors that affect the
electronics industry and that could have a material adverse effect on our
business include the inability of our customers to adapt to rapidly changing
technology and evolving industry standards and the inability of our customers to
develop and market their products. If our customers' products become obsolete or
fail to gain commercial acceptance, our results of operations may be materially
and adversely affected, which could make it difficult for us to continue as a
going concern.
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
A percentage of our revenue is generated from our electronics assembly and
manufacturing services. Of this amount our three largest customers generate
approximately 19% of the total electronic manufacturing 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
26
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:
---------------------------------------------------------------------------------------------------------------
Shares Issuable Upon Conversion Shares Issuable Upon Conversion Total Shares Issuable in
Hypothetical of $2,600,000 Principal Amount of $3,000,000 Principal Amount Connection with Conversion of
Conversion of Convertible Debenture by of Convertible Debentures by Aggregate Principal Amount of
Price Highgate House Funds, Ltd. Cornell Capital Partners Convertible Debentures
---------------------------------------------------------------------------------------------------------------
$0.01 260,000,000 300,000,000 560,000,000
---------------------------------------------------------------------------------------------------------------
$0.02 130,000,000 150,000,000 280,000,000
---------------------------------------------------------------------------------------------------------------
$0.03 86,666,667 100,000,000 186,666,667
---------------------------------------------------------------------------------------------------------------
$0.04 65,000,000 75,000,000 140,000,000
---------------------------------------------------------------------------------------------------------------
$0.05 52,000,000 60,000,000 112,000,000
---------------------------------------------------------------------------------------------------------------
$0.10 26,000,000 30,000,000 56,000,000
---------------------------------------------------------------------------------------------------------------
27
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.
Potential dilution related to Highgate and Cornell Capital 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 $1,618,947 at December 31, 2006. 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:
28
Conversion Price
Average Percent Dilution
Estimated Dilution Per Share Per Share
------------- ------------------ ----------------
$0.01 (1) (2) $0.0034 34.09%
$0.02 (1) (2) $0.0118 59.03%
$0.03 (1) (2) $0.0211 70.28%
$0.04 (2) $0.0307 76.68%
$0.05 (2) $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.
(2) At this conversion price, the Company would be required to increase the
number of its authorized common stock to convert the entire amount of the
Convertible Debentures 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
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.
29
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.
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.
30
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., www.diversemediagroup.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 West Valley City, Utah. The workspace includes 10,000
square feet of office space to support the Company's Administration, Sales, and
Engineering Staff. The 30,000 square feet of manufacturing space includes a
highly secured inventory area, shipping and receiving areas, and manufacturing
and assembly space that support six full surface-mount lines with
state-of-the-art equipment capable of placing over 360 million components per
year.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
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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 South 6000 West, 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 $1,940 on April
16, 2007. The term of the lease was for two years, running from July 18, 2004.
We are now on a month to month basis at the same amount as the lease.
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.
As of October 2006, CirTran had signed an agreement to rent a virtual office in
New York, New York. The payment terms are month to month with payments of $275
per month, all inclusive.
On November 28, 2006, CirTran announced that Diverse Media Group had signed a
two-year lease on a 1,150 square-foot facility in Bentonville, Arkansas, in
close proximity to Wal-Mart's world headquarters. The office, which will be
managed by Mr. Oliver Mulcahy, is strategically located to help create and
manage an ongoing relationship with Wal-Mart stores, to facilitate the
distribution of products through Wal-Mart stores on behalf of DMG marketing
clients. The lease payment is $1,470 per month, all inclusive. This lease
expires in November 2008.
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
We 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
November 14, 2006, the only remaining liability of Circuit Technology is C/S
Utilities, discussed below.
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C/S Utilities - 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
evaluate its options, and has been involved in settlement negotiations.
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. On March 30, 2006, CirTran Asia filed a
complaint against Mr. Robinson under Section 523 of the U.S. Bankruptcy Code
seeking a determination that any debts owed by Mr. Robinson to CirTran Asia is
excepted from any discharge granted to Mr. Robinson. This case was subsequently
settled, and the case was dismissed.
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, seeking damages in the amount of
$10,000,000. 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 denied. As of the
date of this Report, the case was proceeding in the discovery stage. Sales from
this product in the year ended December 31, 2005, were approximately $960,000,
and in the year ended December 31, 2006, were $0. 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.
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 "ABS
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
33
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 ABS 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 ABS
Bankruptcy Court.
On June 6, 2006, the Company and ABS signed an agreement (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS.
Pursuant to the settlement of ABS's bankruptcy proceedings and the Asset
Purchase Agreement, the Company has an allowed claim against the ABS's estate in
the amount of $2,350,000, of which $750,000 is to 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.
Under the Asset Purchase Agreement, the Company agreed to 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 Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings (collectively, the "Assets").
Under the Asset Purchase Agreement, the Royalty Obligation is 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 agreed to pay ABS an
amount equal to $435,000 less the royalty payments made to date. As part of the
settlement, the Company agreed to 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 resolved a related dispute with
ICG in which ICG assigned $65,000 of its secured claim against ABS to the
Company.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
34
a) The Royalty Obligation payments will be made exclusively to ICG
and MFC (collectively, the "Secured Parties") until (i) the
Secured Parties have been paid in full on account of their
$1,243,208.44 secured claim, or (ii) the Secured Parties have been
paid $100,000 in payments under the Royalty Obligation, whichever
comes first.
b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
c) Following the payments to the Secured Parties and others as set
forth immediately above, the remaining Royalty Obligation payments
will be used for distribution to allowed general unsecured claims
not including those of the Company and certain insiders with
unpaid notes (the "Insider Noteholders").
d) Following payments as set forth in (a), (b), and (c) above, the
Royalty Obligation payments will be shared pro rata among the
Insider Noteholders (with a total allowed aggregate claim of
$2,100,000), and the Company (with a general unsecured claim in
the amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the Company
begins to share in the Royalty Obligation payments is $435,000.
In a subsequent pleading, Mr. Dodo and ABS alleged that the Company had breached
the settlement agreement. As of the date of this report, the parties were
negotiating to resolve that subsequent claim and allegation.
CirTran v. Guthy-Renker Corporation and Ben Van De Bunt, Civil No. 20060980298,
Third Judicial District Court, Salt Lake County, State of Utah. In May 2006, the
Company filed suit against Guthy-Renker Corporation and one of its officers,
claiming breach of contract, breach of the implied covenant of good faith and
fair dealing, interference with economic relationships, misrepresentation, and
punitive damages. The suit seeks damages in an amount to be proven at trial. The
defendants filed a motion to stay litigation and compel arbitration in the
matter. The Company filed its response to the motion. On November 7, 2006, the
motion was granted. As of the date of this report, the Company was preparing for
arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 30, 2007, the Company filed a definitive proxy statement in connection
with a Special Meeting of Shareholders (the "Special Meeting") to be held at the
Company's headquarters, on Monday, April 30, 2007, at 10:00 a.m., M.D.T.. The
purpose of the Special Meeting is to vote on a proposed amendment to the
Company's Articles of Incorporation (as amended) that would increase the
authorized capital of the Company to include 1,500,000,000 shares of common
stock and a 1.2 shares for one share forward stock split.
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
35
December 31, 2006, 2005, and 2004, 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
---------------------- -------- -------
March 31, 2007 $0.02 $0.01
December 31, 2006 $0.03 $0.02
September 30, 2006 $0.03 $0.02
June 30, 2006 $0.06 $0.03
March 31, 2006 $0.07 $0.03
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
As of April 16, 2007, we had approximately 2998 shareholders of record holding
687,350,529 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 January 2006, Highgate converted $750,000 of its convertible debenture into
24,193,548 shares of the Company's restricted 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 common stock over the 20 trading days preceding the
conversion.
In February 2006, we issued 4,000,000 shares of our restricted common stock and
a warrant to purchase an additional 7,000,000 shares with an exercise price of
$0.06 per share in settlement of litigation.
In September 2006, Highgate converted $150,000 of its convertible debenture into
8,051,530 shares of the Company's restricted common stock at a conversion rate
of $0.01863 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.
In November 2006, Highgate converted $100,000 of accrued interest on its
convertible debenture into 5,128,205 shares of the Company's common stock at a
conversion rate of $0.019 per share, which was the lower of $0.10 or 100% of the
lowest closing bid price of the Company's common stock over the 20 trading days
preceding the conversion.
36
On May 24, 2006, we closed a private placement of shares of our common stock and
warrants (the "May Private Offering"). Pursuant to a securities purchase
agreement (the "Agreement"), we sold Fourteen Million, Two Hundred Eighty-five
Thousand, Seven Hundred Fifteen (14,285,715) shares of our Common Stock (the
"May Shares") to ANAHOP, Inc., a California corporation ("ANAHOP"). The
consideration paid for the May Shares was One Million Dollars ($1,000,000). In
addition to the Shares, we issued warrants (the "Warrants") to designees of
ANAHOP to purchase up to an additional 30,000,000 shares.
We used the proceeds from the May Private Offering, in part, to finance the cash
purchase portion of our acquisition of the assets of ABS, following approval of
the Bankruptcy Court.
On June 30, 2006, we closed a second private placement of shares of our common
stock and warrants (the "June Private Offering"). Pursuant to a securities
purchase agreement (the "Agreement"), we agreed to sell Twenty-Eight Million,
Five Hundred Seventy-One Thousand, Four Hundred Twenty-Eight (28,571,428) shares
of our Common Stock (the "June Shares") to ANAHOP. The total consideration to be
paid for the June Shares will be Two Million Dollars ($2,000,000) if all
tranches of the sale close.
Pursuant to the Agreement, ANAHOP agreed to pay Three Hundred Thousand Dollars
($300,000) at the time of closing, and an additional Two Hundred Thousand
Dollars ($200,000) within 30 days of the closing. (The payments of $300,000 and
$200,000 are referred to collectively as the "First Tranche Payment.") Upon the
receipt of the First Tranche Payment, we agreed to issue a certificate or
certificates to the Purchaser representing 7,142,857 of the June Shares.
The remaining $1,500,000 is to be paid by the ANAHOP as follows:
(i) No later than thirty calendar days following the date on which any
class of our capital stock is first listed for trading on either the Nasdaq
Small Cap Market, the Nasdaq Capital Market, the American Stock Exchange, or the
New York Stock Exchange, ANAHOP agreed to pay an additional $500,000 to the
Company; and
(ii) No later than sixty calendar days following the date on which any class
of our capital stock is first listed for trading on either the Nasdaq Small Cap
Market, the Nasdaq Capital Market, the American Stock Exchange, or the New York
Stock Exchange, ANAHOP agreed to pay an additional $1,000,000 to the Company.
(The payments of $500,000 and $1,000,000 are referred to collectively as the
"Second Tranche Payment.")
Upon receipt by us of the Second Tranche Payment, we agreed to issue a
certificate or certificates to ANAHOP representing the remaining 21,428,571 June
Shares.
Additionally, once the Company has received the Second Tranche Payment, the
Company agreed to issue warrants to designees of ANAHOP to purchase up to an
additional 63,000,000 shares.
We intend to use the proceeds from the June Private Placement for general
corporate purposes and working capital.
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
37
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 16, 2007, 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 16, 2007, we have issued 60,681,080 shares of our common
stock in connection with conversions of $1,350,000 of the Convertible
Debentures, after 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.
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.
38
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. 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 allowed us to target large-scale contracts.
CirTran Asia has established a satellite office in Shen Zhen, China, 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
2007. 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 May 18, 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 separate trademarked names owned by CirTran
Products.
The Company is currently under contract with two direct marketing companies to
supply them with the True Ceramic Pro flat irons ("TCP"). Since June 6, 2006,
the date of the ABS bankruptcy settlement and until the date to this report, CTP
39
generated net income of approximately $950,000 on sales of approximately
$2,025,000. CTP continues to generate sales to the direct marketing companies of
TCP units and other ancillary hair care products and the program is expected to
continue being profitable during 2007.
On March 21, 2006, we announced that we had formed a new subsidiary, Diverse
Media Group, 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 presently preparing to launch various programs where
Diverse Media Group will operate as the marketer, campaign manager and/or
distributor in various product categories including beauty products,
entertainment products, software products, and fitness and consumer products.
On May 26, 2006, Diverse Media Group Corp. ("DMG") entered into an assignment
and exclusive services agreement with Diverse Talent Group, Inc., a California
corporation, ("DT"). The Services Agreement has a 5 year term and was made
effective as of April 1, 2006. Pursuant to the Services Agreement, DMG and DT
entered into an exclusive operating relationship whereby DMG agreed to outsource
its talent agency operations to DT and to provide financing to DT to assist in
DT's growth. Under the Services Agreement, DMG and DT created a relationship
whereby DT would operate exclusively under the DMG business structure. The
project did not generate the type of synergy that was anticipated and it was
concluded that it would be in the best interest of the Company to terminate the
relationship with DT.
In March 2007 the Company entered into a term sheet agreement with Diverse
Talent Agency that was effective on April 1, 2007. As a result, the following
has been agreed to as a starting point for negotiations of a settlement between
the companies:
(i) The parties agree to terminate the original agreements and the
Company will assign back to DT all talent contracts and the
name "Diverse Media Group". DT will cause Diverse Media Group,
Inc., a publicly traded company, to issue 9,000,000 shares of
stock to escrow account.
(ii) Sale and registration of the shares are limited and are
subject to Diverse Media Group's first right of refusal on any
proposed stock sale.
The final terms and conditions of the settlement have yet to be determined.
Diverse Media will continue to develop relationships with talent agencies in
order to provide talent to produce infomercials for the direct marketing
industry and for product branding campaigns. It will continue to provide product
marketing, production, media funding & merchandising services to the direct
response & entertainment industries in concert with the original objectives of
its formation.
On October 3, 2006, CirTran announced they have engaged the services of The RCG
Group "RCG" to assist in certain financial relations/corporate communications
and other consulting services. RCG is being retained to specifically assist the
Company in developing and executing an effective financial relations/corporate
communications strategy. The primary objective of such program will be to
position CirTran to secure and then maintain a listing on the American Stock
40
Exchange or NASDAQ markets as soon as is reasonably possible. Additionally, RCG
has been retained to further assist the Company in its endeavor to secure
meaningful public, trading market sponsorship from professional investors as
well as certain members of the institutional investment community.
On November 28, 2006, CirTran announced that Diverse Media Group has signed a
two-year lease on a 1,150 square-foot facility in Bentonville, Arkansas, in
close proximity to Wal-Mart's world headquarters. The office, which will be
managed by Mr. Oliver Mulcahy, is strategically located to help create and
manage an ongoing relationship with Wal-Mart stores (NYSE: WMT ) , to facilitate
the distribution of products through Wal-Mart stores on behalf of DMG marketing
clients.
Fitness Products
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.
On May 11, 2005, CirTran Asia, UKING System Industry Co., Ltd., and Charles Ho
filed suit against the developers, including Michael Casey and David Hayek, 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 pertaining to the contract. As of the date of this Report, the
case was proceeding in the discovery stage and the Company intends to vigorously
pursue this action.
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 $2,600,000.
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 these announcements, CirTran-Asia has manufactured and shipped
orders and has received $1,400,000 as payment for such shipments.
New Product
On October 1, 2004, we entered into an agreement with 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'
41
written notice. In March 2006, the parties have agreed to six-month extensions
through In March 2006, the parties have agreed to six-month extensions through
September 2006. Since September 2006, the agreement with TMP was not extended.
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with Advanced Beauty Solutions L.L.C. ("ABS"), a company related to
the manufacture of a hair product in California. In early October 2005, we were
notified that ABS had defaulted on its obligation to its financing company. We
stopped shipping under credit and exercised our rights permitted by the
agreements, as discussed below.
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 October 2005, following the notice of ABS's default, 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 directly to ABS 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, we 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.
Since November 2005, we have been pursuing our rights under the agreement and
have been offering the flat iron product for sale directly to ABS's customers.
In doing so, we sold to ABS's international customers directly approximately
$430,000 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.
On June 6, 2006, the Company and ABS signed an agreement (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
42
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS. Pursuant to the settlement of ABS's
bankruptcy proceedings and the Asset Purchase Agreement, the Company has an
allowed claim against the ABS's estate in the amount of $2,350,000, of which
$750,000 was 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.
Under the Asset Purchase Agreement, the Company agreed to 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 TrueCeramic
Pro flat iron unit sold by ABS (the "Royalty Obligation").
The Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings (collectively, the "Assets"). Under the Asset Purchase Agreement,
the Royalty Obligation is 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 agreed to pay ABS an amount equal to $435,000 less the royalty payments
made to date. As part of the settlement, the Company agreed to 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 resolved a related dispute with ICG in which ICG assigned $65,000 of its
secured claim against ABS to the Company.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
(a) The Royalty Obligation payments will be made exclusively to ICG
and MFC (collectively, the "Secured Parties") until (i) the
Secured Parties have been paid in full on account of their
$1,243,208 secured claim, or (ii) the Secured Parties have been
paid $100,000 in payments under the Royalty Obligation, whichever
comes first.
(b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
(c) Following the payments to the Secured Parties and others as set
forth immediately above, the remaining Royalty Obligation payments
will be used for distribution to allowed general unsecured claims
not including those of the Company and certain insiders with
unpaid notes (the "Insider Noteholders").
(d) Following payments as set forth in (a), (b), and (c) above, the
Royalty Obligation payments will be shared pro rata among the
Insider Noteholders (with a total allowed aggregate claim of
$2,100,000), and the Company (with a general unsecured claim in
the amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the Company
begins to share in the Royalty Obligation payments is $435,000.
43
The Company is currently under contract with two direct marketing companies to
supply them with True Ceramic Pro flat irons ("TCP"). Since June 6, 2006, the
date of the ABS bankruptcy settlement, through the date of this Report, CirTran
Products received orders of approximately $2,025,000 for the TCP product. CTP
continues to generate sales to the direct marketing companies of TCP units and
other ancillary hair care products and the program is expected to continue being
profitable during 2007.
With respect to the hair dryers, as of April 16, 2007, we had not received any
orders or shipped any products, either to ABS or its customers, however the hair
dryers are being approved for manufacture in China and will be marketed in
conjunction with the TCP marketing program.
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, and tested the
show in mid 2006, but results did not justify the media spending.
The Hinge Helper is a hand tool designed and developed for use by household
customers as well as tradesmen. 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 three years, and Arrowhead agreed to purchase a minimum of
ten million 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 were sent to Arrowhead. As of May 18,
2006, the product samples were approved. Arrowhead had released, and the Company
shipped, 1,500 units to test media. Arrowhead tested the show in mid 2006, but
results did not justify the media spending and the roll out.
Through the date of this Report, Arrowhead has recently signed a licensing
agreement with CirTran and DMG to manufacture and market the product via
internet, direct marketing and through retailers. DMG will pay a royalty to
Arrowhead based a percentage of unit sales ranging from 11% in 2007 and increase
by 1% per year until it reaches 15% in the year 2011. The new contract was
executed in February 2007 and expires in 2011. To date the Hinge Helper project
has not generated significant revenues. The item has been presented to buyers at
several major retailers, such as Lowes, Wal-Mart and Sams Club and is an item of
interest. Our sales representative, in our Bentonville office, will continue to
promote and develop the item for inclusion in future sales modules to the
retailers. We expect to have the product at retailers sometime in June 2007.
44
On September 20, 2006, CirTran announced that DMG, signed an exclusive marketing
and distribution agreement with Maryland-based Natural Product Solutions for its
VirMax for Men and Women DS product line. The project was discontinued on
February 8, 2007 due to lower than expected customer response to the test phase
of the DRTV campaign. A termination settlement was negotiated and executed with
Natural Product Solutions that cancelled any further obligations the Company may
have had to market and distribute the product in for the return of inventory of
product that was on hand.
On September 21, 2006, CirTran announced that DMG signed an exclusive marketing
and distribution agreement with Awareness Technologies, Inc., a Los
Angeles-based company, for its WebWatcher Computer Monitoring Software.
Awareness Technologies has successfully created a unique, completely
undetectable software surveillance tool that is being used to help parents
monitor and control their children's internet activity in protecting them from
potential online predators. The software's secondary platform is being
positioned to assist companies and government agencies in monitoring their
employees' computer usage in an effort to increase efficiency in the workplace
by reducing employees' non-work related activities. DMG will be providing all
marketing and distribution channels for Direct Response TV, Radio, Print,
Live-Shopping, Retail, and Catalog. Since the execution of the agreement, we
have been trying to formulize a different arrangement with customer based on
initial price point tests. Until the customer agrees to the arrangement, we have
placed a hold on this project.
On October 11, 2006, CirTran announced that DMG had signed a retail distribution
and marketing agreement with Wines and Wines, a Miami-based distributor of fine
wines and spirits from around the world. Under the terms of the agreement, DMG
would use its best efforts to market and distribute all Wines and Wines products
exclusively into various distributors and retailers such as Southern Wine and
Spirits, Trader Joe's, Beverages and More, Wal-Mart, Sam's Club, Costco, Young's
Markets and Vendome nationally, as well as restaurants, liquor stores and
entertainment venues exclusively throughout California. As of the date of this
Report, the product had been presented to retailers and resulted in high
interest. It was decided that the labeling needed to be changed by the customer.
Once the new labeling is completed and accepted by retailers, we will be able to
place the product on retailers shelves.
On November 7, 2006, CirTran announced that DMG signed an exclusive contract to
market and distribute the Solar Style line of solar chargers to major retailers
in the U.S. and abroad. Solar Style offers a diverse line of products with
multiple connectors, all based on the latest advancements in PV Solar charging
to convert sunlight into usable energy for personal electronic devices. Solar
Style also includes, or offers as options, AC car battery chargers with many of
its products. As of the date of this report, we are working with the client on
developing the product and placing the product at the retail channels to include
Walmart and Radio Shack stores.
On November 15, 2006, CirTran announced that DMG signed an exclusive licensing,
manufacturing and marketing agreement with Beautiful Eyes(R), Inc., of Malibu,
California, for a new "hot lashes" product which it will bring to the sold-on-TV
and retail marketplaces. Under the terms of the agreement, DMG will have access
to the patented technology developed by Beautiful Eyes and its founder, former
model Alexandra Roberts, and the designs, technical drawings, manufacturing
specifications and know-how, trade secrets and other proprietary information and
technology. DMG will develop a new product for sale through TV infomercials and
at mass retail, which it will market through its personal and healthcare
products division. As of the date of this Report, we are working with the client
on developing the product and already submitted samples for their approval.
45
On January 5, 2007, CirTran announced that DMG had signed an agreement with
Discus Dental, the world's largest direct dental manufacturer, wherein DMG would
market Discus Dental's popular BreathRx product to major retailers nationwide.
It has been determined that it is no longer in the best interest of the Company
to pursue this project. If circumstances change the Company will review the
project for reinstatement.
On February 5, 2007, CirTran announced that it had completed taping a TV
infomercial with Evander Holyfield for the "The Real Deal Grill(TM)," a new
electric indoor/outdoor cooking appliance it will manufacture and market
carrying the name and endorsement of the former four-time former world
heavyweight champion. The Real Deal Grill includes a deluxe stand and multiple
interchangeable cooking surfaces, with numerous never before seen add-on items
making it the most versatile "must-have" cooking appliance for any occasion from
camping in the mountains, tailgating at a game, or grilling at home. Full
national roll-out of the video and print ads set is scheduled for late May 2007.
As of the date of this Report, we were waiting for the final edited version of
the infomercial.
On February 13, 2007, CirTran announced that it had signed an agreement to
manufacture and market a new patent pending portable luggage handle and scale
ideal for travelers weighing a suitcase or package. As of the date of this
Report, we were working with the client on developing a final version of the
product and are expecting to submit samples for final approval in May 2007. Once
we have approvals, the product will be placed at retails shelves including
Walmart, Sams Club and Office Depot.
On March 12, 2007, CirTran announced that it had signed a contract with Easy
Life Products Corporation (ELP) of Venice, California, to manufacture and market
a new beauty product. The yet named new product is a pencil compact combined
with a sharpener and pencil holder. Planned add-ons for the product include
pencil caps, blotting tissue dispenser, eyelash curler, pencil cap organizer, an
eyebrow brush and two-in-one tweezers, with patents now pending for the pencil
sharpener, eyelash curler and the tweezers with the U.S. Patent Office. As of
the date of this Report, we were working with the client on developing the
product and building final samples for approval.
Electronics Business and Lines of Products
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 final phase of
the contract. On March 14, 2006, we announced that we had received a $250,000
order to build and deliver the first production run of the next generation
SafetyNet(TM) RadioBridge(TM) which we redesigned at the request and on behalf
of Aegis Assessments, Inc., a Scottsdale, Arizona-based homeland security
contractor. We delivered the new, redesigned units and received payment in full
from Aegis in April 2006. Since these announcements, CirTran Corporation has
manufactured and shipped additional orders and has received $100,000 as payment
for such shipments.
On November 14, 2006 we announced that Racore had received, processed and
shipped its first order from Lear Siegler Services, Inc., of San Antonio, Texas,
and that Lear Siegler had opened an account to facilitate ordering and
processing add-on business. Lear Siegler's first order was for 100 Racore 8192
100FX 100 Mbps Fiber Optic PCI Fast Ethernet Network Adapters with ST Fiber
Connectors. Since this announcement, the product has been manufactured and
shipped, and a payment of $3,400 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
46
District of Los Angeles. The office, which opened in late November 2005, 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 leased office space in Los
Angeles, California and we have rented a virtual office in New York, New York.
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
2007.
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 May 18, 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 separate trademarked names owned by CirTran
Products.
Recent Developments
Lockdown Agreements - On July 20, 2006, the Company entered into a lockdown
agreement with Cornell (the "Cornell Agreement") and related to the Cornell
Debenture. Pursuant to the Cornell Agreement, Cornell agreed that it would not
convert any of the principal or interest on the Cornell Debenture or exercise
any of the Warrants granted to Cornell until the Company had taken the steps
necessary to increase its authorized capital. As such, the Company was able to
lock down 50,000,000 shares underlying the Cornell Debenture and 10,000,000
shares underlying the Cornell Warrants.
On July 20, 2006, the Company entered into a lockdown agreement with ANAHOP,
(the "ANAHOP Agreement"), Albert Hagar, and Fadi Nora, and related to the May
and June private placement transactions discussed above. Albert Hagar and Fadi
Nora were the designees to whom ANAHOP assigned the 30,000,000 warrants.
Pursuant to the ANAHOP Agreement, Hagar and Nora agreed that they would not
exercise any of the warrants they received in connection with the May or June
private offerings until the Company had taken the steps necessary to increase
our authorized capital. Additionally, ANAHOP agreed that it would not make the
Second Tranche Payment to purchase the Second Tranche Shares until we had taken
the steps necessary to increase its authorized capital. As such, under the
ANAHOP Agreement, the Company was able to lock down 21,428,571 shares (the
"Second Tranche Shares"), and 93,000,000 shares underlying the warrants issued
to Hagar and Nora in the May and June private placements.
47
Media Syndication Global Agreement
On July 3, 2006, the Company finalized a Marketing and Distribution Agreement
(the "MD Agreement") with Media Syndication Global, LLC, a Delaware limited
liability company ("MSG"). The MD Agreement relates to the marketing and
distribution by MSG of a product designed by Advanced Beauty Solutions, LLC
("ABS"), which were purchased by the Company.
Background
----------
In a Current Report filed with the SEC on June 13, 2006, the Company announced
that it had closed a transaction (the "Asset Purchase") whereby the Company
purchased certain assets of ABS, subject to the approval of the U.S. Bankruptcy
Court adjudicating the bankruptcy proceedings of ABS (the "Bankruptcy Court").
On June 7, 2006, the Bankruptcy Court entered an order approving the Asset
Purchase.
Pursuant to the order entered by the Bankruptcy Court, the Company was required
to give to Tristar Products, Inc. ("Tristar") a first-right opportunity to enter
into a world-wide marketing and distribution agreement with the Company. The
term of the first-right period ended on July 3, 2006.
Prior to the approval of the Asset Purchase by the Bankruptcy Court, and in
anticipation of such approval, the Company had entered into the MD Agreement
with MSG, subject to (A) the approval of the Asset Purchase by the Bankruptcy
Court; (B) the Company's completion of the purchase of ABS's assets; and (C) the
Company's failure to enter into a distribution agreement with Tristar. The
Company and MSG entered into the MD Agreement on April 24, 2006, although the
effective date of the MD Agreement was the date on which all three conditions
listed above were satisfied. Additionally, the MD Agreement provided to MSG the
opportunity to perform test marketing of the product, which was successfully
completed.
Pursuant to the MD Agreement, the Company granted to MSG the exclusive,
world-wide rights to advertise, promote, market, sell, and otherwise distribute
the True Ceramic Pro Bionic hair styler (the "Product"), designed by ABS.
Additionally, MSG agreed that during the term of the MD Agreement, MSG would
purchase 100% of its requirements of the Product, together with any products
that are substantially similar to the Product (a "Similar Product"), from the
Company. MSG also agreed that it would not purchase, manufacture, or cause any
third party to manufacture any Similar Product during the term of the MD
Agreement and for one year following the termination of the MD Agreement, except
from the Company.
Under the MD Agreement, MSG is required to purchase an initial minimum quantity
of 10,000 units, and yearly quantities of at least 400,000 units. The initial
term of the MD Agreement is for three years from the effective date. If MSG has
purchased the required minimum quantities during the initial term, the MD
Agreement will renew for additional one-year terms.
The MD Agreement may be terminated by either party upon 45 days' notice to the
other party upon the breach by the other party of any material terms, covenants,
conditions, or obligations under the MD Agreement. However, if the breach upon
which such notice of termination is based shall have been fully cured to the
reasonable satisfaction of the non-breaching party within such notice period,
then such notice of termination shall be deemed rescinded. The Company and MSG
agreed that such right of termination was in addition to such other rights and
remedies as the terminating party would have under applicable law.
The Company and MSG agreed that all customer lists, price lists, written and
unwritten marketing plans, techniques, methods and data, sales and transaction
data, and other information designated or deemed either by MSG or the Company as
48
being confidential or a trade secret, shall constitute confidential information
of MSG or the Company, respectively ("Confidential Information"). The Company
and MSG agreed to hold all Confidential Information in the strictest confidence
and shall protect all Confidential Information with the same degree of care that
MSG or the Company would exercise with respect to its own proprietary
information.
As of the date of this report, MSG had failed to order the minimum requirements
required in the agreement to maintain the exclusive marketing rights for the
product. The company has signed an agreement with Williams Worldwide Television
to have them market the product internationally and intends to market the
product nationally via DRTV and through retail channes on its own.
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
associated with 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.
The Company has also recorded revenue using a "Bill and Hold" method of revenue
recognition. The Securities & Exchange Commission ("SEC") in SAB 104 imposes
several requirements to be met in order to recognize revenue prior to shipment
of product.
The Commission's criteria are the following:
(i) The risks of ownership must have passed to the buyer
(ii) The customer must have made a fixed commitment to purchase the
goods, preferably in written documentation;
(iii) The buyer, not the seller, must request that the transaction be
on a bill and hold basis. The buyer must have a substantial
business purpose for ordering the goods on a bill and hold
basis
(iv) There must be a fixed schedule for delivery of the goods. The
date for delivery must be reasonable and must be consistent
with the buyer's business purpose (e.g., storage periods are
customary in the industry);
(v) The seller must not have retained any specific performance
obligations such that the earning process is not complete;
(vi) The ordered goods must have been segregated from the seller's
inventory and not be subject to being used to fill other
orders; and
(vii) The equipment [product] must be complete and ready for shipment
In effect, the Company secures a contractual agreement from the customer to
purchase a specific quantity of goods; however, shipment of the product is
scheduled for release over a specified period of time. The result is that the
Company maintains the customer's inventory, on site, until all releases have
been issued.
Agency fees are recognized when they are earned. This occurs only after the
talent, represented by the Company, has received payment for the services from
the buyer. The buyer remits funds to a trust checking account after all payroll
tax liabilities have been deducted from the gross amount due the talent. The
talent is paid the net amount, less the Company commission, (which is
49
approximately 10% of the gross amount due the talent) from the trust account.
The remainder of funds in the trust account, typically 10%, is then distributed
to the Company and recognized as revenue.
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.
Long-lived asset costs are amortized over the estimated useful life of the
asset. The Company is amortizing these long-lived asset costs over a 5 - 7 year
life. Amortization expense was $213,420 during the year ended December 31, 2006.
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."
During June 2006 the president of the Company loaned the Company a net amount of
$110,837 which was recorded as a note payable to the lender. In August 2006, the
Company made a payment to the lender which repaid the entire balance ($110,837)
of the loan.
During December 2005 the president of the Company loaned the Company $95,806
which was recorded as a note payable to the lender. The proceeds of this loan
were used to fund on going operations of the Company. In January 2006, the
Company made a payment to the lender which repaid the entire balance ($95,806)
of the loan.
50
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.
Results of Operations - Comparison of Years Ended December 31, 2006 and 2005
Sales and Cost of Sales
Net sales decreased 32.7% to $8,739,208 for the year ended December 31, 2006, as
compared to $12,992,512 for the year ended December 31, 2005. This sales
decrease can be attributed to several factors. The biggest factor contributing
to the decrease in net sales during the 2006 was attributed to the loss of sales
in the CirTran Asia division due to legal issues with the Ab King Pro fitness
exercise machine and True Ceramic Pro flat iron (see discussion previously under
"Legal Proceedings"). Those two products contributed approximately $3.5 million
in additional sales in 2005. The company has plans currently in place to start
an extensive marketing and sales campaigns to make up the losses in sales in
2007. The company is attempting to counteract the decrease in sales by adopting
a marketing approach that will be a value added service to current and potential
customers. Most contract manufacturers approach customers on a job-by-job basis.
CirTran approaches customers on a partner basis by providing a concept to
consumer solution. We have developed a program where we can provide our
customers with a complete process of getting projects to market by controlling
the material procurement, purchasing, and final assembly, and providing
marketing expertise to generate sales to the consumer. The contract
manufacturing division, had sales to new customers in the amount of $1,735,632.
As similar approach that emphasizes value added service to our customers has
resulted in sales to new customers in the electronics assembly and manufacture
division of $60,235 during the year ended December 31, 2006.
Cost of sales decreased by 21.3%, from $6,706,135 during year ended December 31,
2005, to $5,274,684 during year ended December 31, 2006. The decrease in cost of
sales and accordingly our gross profit margin is due to the decrease in revenue.
Our gross profit margin for the year ended December 31, 2006, was 38.3%, down
from 48.1% from the year ended December 31, 2005. The decrease in margins is
attributable to a change in our sales mix, in which manufacturing sales, which
carry higher margins, decreased by 50.7%, compared to electronics manufacturing
sales, which decreased by only 17.1%.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our four main areas of operations, i.e., Asia Division,
electronics assembly, Ethernet technology and media, during 2005 and 2006; 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 2006 $4,865,689 $3,563,118 $1,302,571
Manufacture 2005 9,865,023 5,739,436 4,125,587
-------------------------------------------------------------------------
Electronics 2006 2,487,291 1,694,398(2) 783,893
Assembly 2005 3,002,038 973,953(1) 2,028,085
--------------------------------------------------------------------------
Ethernet 2006 35,072 17,168(4) 17,904
Technology 2005 125,451 79,850(3) 45,601
--------------------------------------------------------------------------
Media 2006 1,360,156 0 1,360,156
2005 0 0 0
--------------------------------------------------------------------------
51
--------------------------------------------------------------------------
Year Total Pre-existing New
Sales Customers Customers
--------------------------------------------------------------------------
Contract 2006 $4,865,689 $3,130,057 $1,735,632
Manufacture 2005 9,865,023 5,266,812 4,598,211
--------------------------------------------------------------------------
Electronics 2006 2,487,291 2,418,056 60,235
Assembly 2005 3,002,038 2,831,534 170,504
--------------------------------------------------------------------------
Ethernet 2006 35,072 29,025 6,047
Technology 2005 125,451 101,004 24,447
--------------------------------------------------------------------------
Media 2006 1,360,156 0 1,360,156
2005 0 0 0
--------------------------------------------------------------------------
(1) Includes the write-down of carrying value of inventories of $17,364
(2) Includes the write-down of carrying value of inventories of $76,946
(3) Includes the write-down of carrying value of inventories of $20,725
(4) Includes the write-down of carrying value of inventories of $38,112
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, 2006 was $1,960,013, as
compared to $2,271,604 at December 31, 2005. The decrease in inventory is due to
the reduction in finished goods level carried over from 2005 and sold in 2006
that relate to the True Ceramic Pro flat irons.
Selling, General and Administrative Expenses
During the year ended December 31, 2006, selling, general and administrative
expenses were $5,951,001 versus $5,923,075 for 2005, a 0.5% increase. The
increase was due, in part, to a significant increase in DMG selling, general and
administrative of $1,143,217 in expenses for the year ended December 31, 2006,
which were primarily offset by the decreases of $630,369 in non-recurring
settlements, $247,602 of freight in, and $129,205 of loan and equity line fees,
as part of the year ended December 31, 2006, operating expense.
Other Income and Expense
Interest expense for 2006 was $3,032,229 as compared to $1,225,252 for 2005, an
increase of 147.5%. The increase is primarily due to the increase in accretion
expense related the convertible debentures. We had a gain on forgiveness of debt
related to previously unpaid liabilities in the amount of $6,930 and $337,761
for the years ended December 31, 2006, and December 31, 2005, respectively. We
had a gain on derivative valuation of $2,838,094 and $169,570 for the years
ended December 31, 2006, and December 31, 2005, respectively.
As a result of the above factors, our overall net loss increased 440.9% to
$2,854,369 for the year ended December 31, 2006, as compared to $527,708 for the
year ended December 31, 2005.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $22,181,679 at December 31, 2006, and
$19,327,310 at December 31, 2005. Our net loss for the year ended December 31,
52
2006 was $2,854,369, compared to $527,708 for the year ended December 31, 2005.
Our current liabilities exceeded our current assets by $4,863,641 as of December
31, 2006, and $1,142,874 as of December 31, 2005. The increase in the difference
is due to the settlement of and the payment for the assets of the ABS bankruptcy
which resulted in the acquisition of approximately $4,200,000 of non-current
assets. For the years ended December 31, 2006 and 2005, we recorded negative
cash flows from operations of $1,842,401 and $1,751,744, respectively.
Cash
We had cash on hand of $146,050 at December 31, 2006, compared to $1,427,865 at
December 31, 2005. The decrease in cash on hand is due to the acquisition of the
assets from the ABS bankruptcy estate, as mentioned above.
Net cash used in operating activities was $1,842,401 for the fiscal year ended
December 31, 2006. During 2006, net cash used in operations was primarily
attributable to $2,854,369 net losses from operations, a gain on derivative
valuation of $2,838,094, a decrease in accounts receivable of $106,078, a
decrease in inventory of $311,591 and an increase in accrued liabilities of
$284,638, partially offset by decreases in accounts payable of $85,018 and in
prepaid expenses of $182,929. The non-cash charge was for depreciation and
amortization of $526,428 and $2,467,394 in accretion expense.
Net cash used in investing activities during the fiscal years ended December 31,
2006, consisted of the property and equipment purchases of $304,725, $1,125,000
for acquisition of ABS assets, $587,643 of intangibles and a line of credit of
$241,744. 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 $2,819,698 during the fiscal year
ended December 31, 2006. Principal sources of cash were proceeds from
stockholder notes payable of $855,000, proceeds of $1,500,000 from convertible
debentures, $1,500,000 from stock issued in a private placement; proceeds from
the exercise of options and warrants to purchase common stock of $15,451. This
was offset by repayment of $1,050,753 on notes payable to stockholders, and
notes payable. Net cash provided by financing activities were $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, 2006, we had receivables of $982,096, net of a reserve for
doubtful accounts of $14,181, as compared to $3,358,981 at December 31, 2005,
net of a reserve of $158,374.
This decrease was primarily attributed to the reclassification of the unpaid
balance of accounts receivable from ABS. (See ABS history beginning on page 9).
The Company has implemented an aggressive process to collect past due accounts
over the past two years. Individual accounts are continually monitored for
collectibility. 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 $1,135,527 at December 31, 2006, as compared to $1,239,519
at December 31, 2005. This decrease is nominal.
53
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 $22,181,679 and a
total stockholders' equity of $1,618,947 at December 31, 2006. In addition,
during 2006 and 2005, we have used, rather than provided, cash in our
operations. As of December 31, 2006, our monthly operating costs and interest
expenses averaged approximately $754,000 per month.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors and are
seeking to replace our operating line of credit. It is unlikely that we will be
able, in our current financial condition, to obtain additional debt financing;
and if we did acquire more debt, we would have to devote additional cash flow to
paying the debt and securing the debt with assets. We may therefore have to rely
on equity financing to meet our anticipated capital needs. There can be no
assurances that we will be successful in obtaining such capital. If we issue
additional shares for debt and/or equity, this will dilute the value of our
common stock and existing shareholders' positions.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
Company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock on the Over the Counter Electronic Bulletin Board was obtained in July
2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short or the long term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
Highgate Convertible Debenture Transaction
On May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate House Funds, Ltd. ("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 "Highgate Debenture").
In connection with the issuance of the Highgate 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 Highgate Debenture. We used these proceeds for
general corporate and working capital purposes.
The Highgate 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
Highgate 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
54
quoted by Bloomberg L.P. for the twenty (20) trading days immediately preceding
the conversion date. Except as otherwise set forth in the Highgate Debenture,
Highgate's right to convert principal amounts owing under the Highgate 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 Highgate 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 Highgate 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
Highgate 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 Highgate Debenture and/or the Purchase Agreement,
convert the Highgate Debenture and accrued interest thereon into
shares of our common stock pursuant to the Highgate Debenture.
Pursuant to the Highgate 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.
As of April 16, 2007, there was $2,500,000 remaining in unpaid, and unconverted
principal under the Highgate Debenture.
Cornell Capital Debenture Transactions
On December 30, 2005, the Company entered into an agreement with Cornell Capital
Partners, L.P. ("Cornell") to issue to Cornell a $1,500,000, 5% Secured
Convertible Debenture (the "Cornell Debenture"). The Cornell Debenture is due
July 30, 2008, and is secured by all the Company's property, subordinate 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. The balance of accrued
interest owed at December 31, 2006, and December 31, 2005, was $150,336 and
zero, respectively.
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:
55
(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.
In connection with the issuance of the Cornell Debenture, 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, 2006 the carrying value of the Cornell Debenture was $580,594. The carrying
value will be accreted each quarter over the life of the Cornell Debenture until
the carrying value equals the face value of $1,500,000. The fair value of the
derivative liability relating to the Cornell debenture, excluding the warrants,
as of December 31, 2006 was $762,953. The fair value of the warrants was $20,038
as of December 31, 2006.
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
In connection with the Cornell Debenture, Cornell agreed that it could not
convert any amount of principal or interest of the Cornell Debenture in
accordance with the terms and conditions of the Lockdown Agreement by and
between the Company and Cornell July 20, 2006, until the Company has effectuated
an increase in its authorized capital. The Company and Cornell also agreed that
in the event that the Company had not effectuated such increase in its
authorized capital by October 30, 2006, which was subsequently extended to
December 31, 2006, such failure would constitute an event of default on parallel
with those set forth in the Purchase Agreement and subject to the same
consequences as those listed in the Purchase Agreement.
As of April 16, 2007, Cornell had not converted any of the Cornell Debenture
into shares of the Company's common stock.
Additionally, on August 23, 2006, the Company entered into another securities
purchase agreement (the "Purchase Agreement") with Cornell, relating to the sale
by the Company of a 5% Secured Convertible Debenture, due April 23, 2009, in the
aggregate principal amount of $1,500,000 (the "August Debenture").
56
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, 2006, was $26,712.
The Company also paid a commitment fee of $120,000 and a structuring fee of
$15,000 to Cornell. As such, of the total purchase amount of $1,500,000, the net
proceeds to the Company were $1,365,000. The Company used these proceeds for
general corporate and working capital purposes, in its discretion.
The August Debenture bears interest at a rate of 5%. Cornell is entitled to
convert, at its option, all or part of the principal amount owing under the
August 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 Except as
otherwise set forth in the August Debenture, Cornell's right to convert
principal amounts owing under the August Debenture into shares of the Company's
common stock is limited as follows:
(i) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the August Debenture in any
consecutive 30-day period when the price of the Company's stock
is $0.03 per share or less at the time of conversion;
(ii) Cornell may convert any amount of the principal amount plus
accrued interest of the August Debenture in any consecutive
30-day period when the price of the Company's stock is greater
than $0.03 per share at the time of conversion; and
(iii) Upon the occurrence of an Event of Default (as defined in the
Debenture), Cornell may, in its sole discretion, accelerate
full repayment of all debentures outstanding and accrued
interest thereon or may, notwithstanding any limitations
contained in the August Debenture and/or the Purchase
Agreement, convert all debentures outstanding and accrued
interest thereon in to shares of the Company's Common Stock
pursuant to the August Debenture.
Under the terms of the August Debenture, except upon an event of default as
defined in the August Debenture, Cornell may not convert the August 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 and its
affiliates to exceed 4.99% of the outstanding shares of the common stock
following such conversion.
Pursuant to the August Debenture, interest is to be paid at the time of maturity
or conversion. The Company may, in its option, pay accrued interest in cash or
in shares of its 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 August Debenture, the Company has the right to redeem, by
giving 3 days' written notice to Cornell, a portion or all of the August
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
the Company redeems only a portion of the outstanding principal amount of the
57
August Debenture, Cornell may convert all or any portion of the unpaid principal
or interest of the August Debenture not being redeemed by the Company.
Additionally, if after the earlier to occur of (x) fifteen (15) months following
the date of the purchase of the August Debenture or (y) twelve (12) months
following the date on which the initial registration statement is declared
effective, all or any portion of the August Debenture remains outstanding, then
the Company, at the request of Cornell, shall redeem such amount outstanding at
the rate of five hundred thousand dollars ($500,000) per each 30-day period.
Finally, upon the occurrence of an event of default as defined in the August
Debenture, Cornell can convert all outstanding principal and accrued interest
under this August Debenture irrespective of any of the limitations set forth in
the August 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 August Debenture, Cornell agreed that it could not
convert any amount of principal or interest of the August Debenture in
accordance with the terms and conditions of the Lockdown Agreement by and
between the Company and Cornell dated, July 20, 2006, until the Company has
effectuated an increase in its authorized capital. The Company and Cornell also
agreed that in the event that the Company had not effectuated such increase in
its authorized capital by October 30, 2006, which was subsequently extended to
December 31, 2006, such failure would constitute an event of default on parallel
with those set forth in the Purchase Agreement and subject to the same
consequences as those listed in the Purchase Agreement.
In connection with the Purchase Agreement, the Company also agreed to grant to
Cornell warrants (the "Warrants") to purchase up to an additional 15,000,000
shares of the Company's common stock. The Warrants have an exercise price of
$0.06 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.
The Company determined that the features on the August Debenture and the
associated warrants fell under derivative accounting treatment. As of December
31, 2006 the carrying value of the August Debenture was $358,262. The carrying
value will be accreted each quarter over the life of the Cornell August
Debenture until the carrying value equals the face value of $1,500,000. The fair
value of the derivative liability relating to the August Debenture, excluding
the warrants, as of December 31, 2006 was $922,333. The fair value of the
warrants was $53,968 as of December 31, 2006.
Additionally, the Company and Cornell entered into an amended and restated
investor registration rights agreement (the "Registration Rights Agreement"),
which superseded the Cornell registration rights agreement between the Company
and Cornell entered into in December 2005, in connection with the Cornell
Debenture. Pursuant to the Registration Rights Agreement, the Company agreed to
file, no later than October 15, 2006, a registration statement to register the
resale of shares of the Company's common stock issuable to Cornell upon
conversion of the Debenture and exercise of the Warrants, as well as the
convertible debenture (the "December Debenture") and warrants (the "December
Warrants") issued in the December 2005 Transaction, discussed above. The Company
agreed to register the resale of up to 231,900,000 shares, consisting of
206,900,000 shares underlying the Debenture and the December Debenture, and
25,000,000 shares underlying the Warrants and the December Warrants. The Company
agreed to keep such registration statement effective until all of the shares
issuable upon conversion of the Debenture and December Debenture have been sold.
In the event that the Company issues more than 206,900,000 shares of its common
stock upon conversion of the August Debenture and the December Debenture, it
will file additional registration statements as necessary. The agreement was
subsequently amended to extend the filing date of the registration to December
31, 2006, and then again to extend the filing date to June 1, 2007.
58
The Company and Cornell also entered into an amended and restated security
agreement (the "Security Agreement"), pursuant to which the Company granted a
second position security interest in all of its 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 the Company's obligation under the August Debenture, the December
Debenture, and the related agreements.
The Company and Cornell also entered into an escrow agreement (the "Escrow
Agreement") relating to the holding and disbursement of payment of the purchase
price of the Debenture and cash payments made by the Company in payment of the
obligations owing under the Debenture. The Company and the Investor appointed
David Gonzalez as the Escrow Agent under the Escrow Agreement.
The Company had previously entered into financing transactions with Cornell
Capital Partners, LP ("Cornell"). In April 2003, the Company had entered into an
equity line of credit agreement with Cornell, pursuant to which the Company 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. In May 2004, the Company entered into a
standby equity distribution agreement, but the agreement was terminated before
any funds were drawn or any shares were issued. Between June 2003 and January
2005, Cornell loaned to the Company an aggregate of $5,595,000 pursuant to
promissory notes issued to Cornell. These notes were paid in full by May 2005.
In December 2005, the Company issued the prior Cornell Debenture to Cornell,
with substantially similar terms to that issued on August 23, 2006. The Company
also issued the December Warrants to purchase up to 10,000,000 shares of the
Company's common stock.
In May 2005, the Company sold convertible debentures in the aggregate amount of
$3,750,000, to Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate"). 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 debenture
transactions and the Highgate debenture transaction is David Gonzalez, an
officer of Cornell.
As of April 16, 2007, no amount of the August Debenture had been converted and
no shares of the Company's common stock had been issued to the Investor. The
Company sold the August Debenture without registration under the Securities Act
of 1933, as amended (the "1933 Act") in reliance on Section 4(2) of the 1933
Act, and the rules and regulations promulgated thereunder. Upon future
conversions, if any, of the August Debenture into shares of the Company's common
stock, the Company intends to issue the shares without registration under the
1933 Act in reliance on Section 4(2) of the 1933 Act, and the rules and
regulations promulgated thereunder. As noted above, the Company anticipates that
any resales by Cornell of the shares issued upon conversion of the August
Debenture will be made pursuant to a registration statement to be filed by the
Company.
The Company did not use any of the proceeds of the sale of the August Debenture
to Cornell to repay the Debenture sold to Highgate or the prior Cornell
Debenture
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
59
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.
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.
60
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.
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, 2006. 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 beginning
with our Form 10-K for the fiscal year ending on December 31, 2007, 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, 2008. 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
61
collusion of two or more people, or by management override of the control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. In addition, the design of any control system is based in part upon
assumptions about the likelihood of future events.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
PERSONS, AND CORPORATE GOVERNANCE; 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 40 President, Chief Executive Officer, Chief
Financial Officer, Secretary and Director of
CirTran Corporation; President of CirTran
Corporation (Utah).
Served since July 2000.
Trevor Saliba 33 Director since June 2001.
Chief Marketing Officer,
Served since January 2002.
Shaher Hawatmeh 41 Chief Operating Officer
Served since June 2004
Charles Ho 52 President, CirTran-Asia
Served since June 2004
Richard T. Ferrone 58 Chief Financial Officer
Served since May 2006
Fadi Nora 45 Director since February 2007
Iehab J. Hawatmeh, MBA
Chairman, President and 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
62
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.
Trevor M. Saliba, MS
Chief Marketing Officer
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 was discharged in March of 2005. The
bankruptcy was unrelated to Mr. Saliba's involvement in CirTran.
Shaher Hawatmeh
Chief Operating Officer
Mr. Shaher Hawatmeh joined the Company in 1993 as its Controller shortly after
its founding. Today, Mr. Hawatmeh directly oversees all daily manufacturing
production, customer service, budgeting and forecasting for the Company.
Following the companies acquisition of Pro Cable Manufacturing in 1996, Mr.
Hawatmeh directly managed the entire Company, supervising all operations for
approximately two years and successfully oversaw the integration of this new
division into the Company. Prior to joining CirTran, Mr. Hawatmeh worked for the
Utah State Tax Commission. Mr. Hawatmeh earned his Master's of Business
Administration with an emphasis in Finance from the University of Phoenix and
his Bachelor's of Science in Business Administration and a Minor in Accounting.
Iehab and Shaher Hawatmeh are brothers.
Charles Ho
President, CirTran-Asia
Mr. Ho, who became the President of our CirTran-Asia division on June 15, 2004,
served for six years as the chairman of Meicer Semiconductor Co., Ltd., one of
the leading semiconductor manufacturers located in China, and was a co-founder
of two of the leading design and manufacturing firms of DVD and CD players: Lead
Data Co., Ltd., and Media Group. Mr. Ho has served as CEO for Uking System Inc.
since 1986 and is still holds that position. Mr. Ho has a Master of Business
Administration Degree from the University of South Australia and Bachelor of
Science degree in Industrial Design from National Taipei University of
Technology.
Richard T. Ferrone
Chief Financial Officer
Prior to joining the Company, Mr. Ferrone had headed his own accounting firm,
Ferrone and Associates, which he established in Salt Lake City in 1994.
Previously, he was vice president and CFO for then-publicly-held GCI Industries,
63
Inc./Golf Card International for seven years, and served as CFO of Huntsman,
Christensen Real Estate and Development Co. Mr. Ferrone had also served as vice
president and chief financial officer for BSD Medical Corporation after he
started his career with a regional CPA firm in Salt Lake City. Mr. Ferrone has a
B.S. in Accounting from the University of Utah, where he also studied for a
Master of Professional Accountancy with a tax emphasis.
Fadi Nora
Director
Mr. Nora has been affiliated with ANAHOP, Inc., of Anaheim, Calif., a private
firm as a director and a major consultant for several projects and investments
opportunities such as the investment in CirTran, NFE records, Focus Media Group,
and several other projects. Prior to that, Mr. Nora worked with Prudential
Insurance services and its affiliated securities brokerage firm Pru-Bach, as
District Sales Manager. Mr. Nora received a B.S. in Business Administration from
St. Joseph University, Beirut, Lebanon, in 1982, and an MBA - Masters of
Management from the Azusa Pacific University School of Business in 1997. He also
received a degree in financial planning from U.C.L.A., and has brokerage
licenses in securities, which expired in 2002, real estate, finance, and
insurance.
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.
As of the date of this Report, we did not have a nominating committee. Because
of the size of our Board of Directors and their involvement in the operation of
the Company, the Board feels that it is in the best interest of the Company for
the Board to fill the role of a nominating committee. We will continue to review
the possible role of a nominating committee, and will take such actions with
respect to a nominating committee as we deem to be in the best interest of the
Company.
As of the date of this report, there have been no changes to the procedures by
which security holders may recommend nominees to our Board of Directors.
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 and Richard Ferrone filed untimely Forms 5. As of the date of
this report, Trevor Saliba and Shaher Hawatmeh had not filed 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 2007, and that we will file the code of ethics as an exhibit to our
second quarterly report.
64
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
Compensation Discussion and Analysis
The following is a discussion of the Company's program for compensation of its
named executive officers and directors. As of the date of this Report, the
Company did not have a compensation committee, and as such, the Company's Board
of Directors were responsible for determining the Company's compensation
program.
Compensation Program Objectives
The Company's compensation program is designed to encompass several factors in
determining the compensation of the Company's named executive officers. The
following are the main objectives of the compensation program for the Company's
named executive officers:
- Retain qualified officers.
- Provide overall corporate direction for the officers and also to
provide direction that is specific to officer's respective areas
of authority. The level of compensation amongst the officer group,
in relation to one another, is also considered in order to
maintain a high level of satisfaction within the leadership group.
We consider the relationship that the officers maintain to be one
of the most important elements of the leadership group.
- Provide a performance incentive for the officers.
The Company's compensation program is designed to reward the officers in the
following areas:
- achievement of specific goals;
- professional education and development;
- creativity in the form of innovative ideas and analysis for new
programs and projects;
- new program implementation;
- attainment of company goals, budgets, and objectives;
- results oriented determination and organization;
- positive and supportive direction for company personnel; and
- community involvement.
As of the date of this Report, there were four principal elements of named
executive officer compensation. The Board of Directors determines the portion of
compensation allocated to each element for each individual named executive
65
officer. The discussions of compensation practices and policies are of
historical practices and policies. Our Board of Directors is expected to
continue these policies and practices, but will reevaluate the practices and
policies as it considers advisable.
The elements of the compensation program include:
- Base salary;
- Performance bonus and commissions;
- Stock options and stock awards
- Employee benefits in the form of:
- health and dental insurance;
- life insurance;
- paid parking and auto reimbursement; and
- Other de minimis benefits.
Base salary
Base salary is intended to provide competitive compensation for job performance
and to attract and retain qualified named executive officers. The base salary
level is determined by considering several factors inherent in the market place
such as: the size of the company; the prevailing salary levels for the
particular office or position; prevailing salary levels in a given geographic
locale; and the qualifications and experience of the named executive officer.
Performance bonus and commissions
Bonuses are in large part based on company performance. An EBITDA formula and
sales growth are the determining factors used to calculate the performance bonus
for the Chief Executive Officer and Chief Operating Officer.
The Marketing Officer receives a performance bonus based on the EBITDA formula
and also a commission based on a percentage of sales revenue.
The Chief Financial Officer receives a performance bonus based on performance,
as determined by the Board of Directors, at minimum amount that has been
established as part of an employment contract.
Policy decisions to waive or modify performance goals have not been a
significant factor to date in that there have not been contractual changes made
other than the normal renewal or updating of contracts as would be expected as
part of an annual review.
Stock options and stock awards
Stock ownership is provided to enable named executive officers and directors to
participate in the success of the Company. The direct or potential ownership of
stock will also provide the incentive to expand the involvement of the named
executive officer to include, and therefore be mindful of, the perspective of
stockholders of the Company.
Employee benefits
Several of the employee benefits for the named executive officers are selected
to provide security for the named executive officers. Most notably, insurance
coverage for health, life, and liability are intended to provide a level of
protection to that will enable the named executive officers to function without
66
having the distraction of having to manage undue risk. The health insurance also
provides access to preventative medical care which will help the named executive
officers function at a high energy level, to manage job related stress, and
contribute to the overall well being of the named executive officers, all of
which contribute to an enhanced job performance.
Other de minimis benefits
Other de minimis employee benefits such as cell phones, parking, and auto usage
reimbursements are directly related to job functions but contain a personal use
element which is considered to be a goodwill gesture that contributes to
enhanced job performance.
As discussed above, the Board of Directors determines the portion of
compensation allocated to each element for each individual named executive
officer. As a general rule, salary is competitively based while giving
consideration to employee retention, qualifications, performance, and general
market conditions. Typically, stock options are based on the current market
value of the option and how that will contribute to the overall compensation of
the named executive officer. Consideration is also given to the fact that the
option has the potential for an appreciated future value. As such, the future
value may be the most significant factor of the option, but it is also more
difficult to quantify as a benefit to the named executive officer.
Accordingly, in determining the compensation program for the Company, as well as
setting the compensation for each named executive officer, the Board of
Directors attempts to attract the interest of the named executive officer within
in the constraints of a compensation package that is fair and equitable to all
parties involved.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus Stock Option Non-Equity Change in All Other Total
Principal Awards Grants Incentive Pension Compensation
Position Plan Value and
Compensation Nonqualified
Or Deferred
Commission Compensation
(C) Earnings
$ $ $
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
-------------------------------------------------------------------------------------------------------------
Iehab 2006 225,000 57,807 -0- -0- -0- -0- -0- 282,807
Hawatmeh,
President
and Chief
Executive
Officer
-------------------------------------------------------------------------------------------------------------
Richard 2006 73,845 21,000 -0- -0- -0- -0- -0- 94,845
Ferrone
Chief
Financial
Officer
-------------------------------------------------------------------------------------------------------------
Trevor 2006 120,000 18,755 -0- -0- -0- -0- -0- 138,755
Saliba,
Chief
Marketing
Officer
-------------------------------------------------------------------------------------------------------------
Shaher 2006 150,000 7,790 -0- -0- -0- -0- -0- 157,790
Hawatmeh,
Chief
Operating
Officer
-------------------------------------------------------------------------------------------------------------
Charles Ho 2006 -0- 407,397(C) -0- -0- -0- -0- -0- 407,397
President
CirTran
Asia
-------------------------------------------------------------------------------------------------------------
67
(1) For each of the individuals listed in the table above, "All Other
Compensation" would include perquisites including cellular phones,
automobile reimbursement, parking reimbursement, life insurance, and
health and dental insurance. However, the aggregate value of all such
perquisite compensation is less than $10,000 for each of the
individuals named in the table above. Additionally, the Company
believes that each of the elements of perquisite compensation listed
are integrally and directly related to the performance of the executive
duties of the individuals listed above, although certain of the
elements (including cellular phone use and automobile reimbursement)
may have a personal benefit component as well.
Narrative Disclosure to Summary Compensation Table
--------------------------------------------------
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. On January
1, 2007 an Amendment to the Employment Agreement became effective. The Amended
Agreement, is for a term of five years and renews automatically on a year-to
year basis, provides for a base salary of $295,000, plus a quarterly bonus of 5%
of our earnings before interest, taxes, depreciation, and amortization, In
addition, an annual bonus payable as soon as practicable after completion of the
audit of the Company's annual financial statements equal to 0.5% of the
Company's gross sales for the most recent fiscal prior year which exceed 120% of
the Company's gross sales for the fiscal year previous thereto plus an
additional bonus of 1% of the net purchase price of any acquisitions that are
generated by the executive, as well as any other bonus our board of directors
may approve. The agreement provides for a grant of options to purchase 5,000,000
shares of the Company's common stock in accordance with the terms of the
Company's Stock Option Plan with terms and an exercise price of the fair market
value of the Company's common stock on the date of grant. The agreement provides
for benefits including health insurance coverage, car allowance, and life
insurance.
In May 2006, we entered into a three-year employment contract with Richard
Ferrone to serve as the Chief Financial Officer of the Company to perform those
duties delegated by the Board of Directors and the President of the Company and
all other duties consistent with such description. The term of his employment
started on May 15, 2006, and will continue for three years thereafter, unless
sooner terminated by either party as provided in the agreement. Thereafter, the
agreement will be automatically renewed on a year-to-year basis after the
expiration of the initial or any subsequent term of the Agreement unless
terminated by either party as provided in the agreement. Mr. Ferrone will
receive, commencing on May 15, 2006, a base salary of $120,000 per year. The
base salary shall be reviewed by the Board annually and may be increased as
determined by the Board. The Board's determination of salary will be based
primarily on Mr. Ferrone's ability to meet, and to cause the Company to meet,
68
annually established goals. He is also entitled to a bonus of $42,000 per year,
payable in quarterly increments. In addition, he may be granted options to
purchase shares of the Company's common stock as determined from time to time by
the Board or the Committee established pursuant to the Company's Stock Option
Plan. On February 1, 2007 an Amendment to the Employment Agreement became
effective. The Amended Agreement, is for a term of three years and renews
automatically on a year-to year basis, provides for a base salary of $140,000.
The agreement provides for a grant of options to purchase 3,000,000 shares of
the Company's common stock in accordance with the terms of the Company's Stock
Option Plan with terms and an exercise price of the fair market value of the
Company's common stock on the date of grant. The agreement provides for benefits
including health insurance coverage, and life insurance
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 January
1, 2007 an amendment to the Employment Agreement became effective. 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 $200,000, plus (i) a monthly
bonus of 1% of gross sales generated by the executive and 0.5% of the Company's
gross sales generated from employees reporting to the executive, (ii) a bonus of
1% of the net purchase price of any acquisitions that are generated by the
executieve, payable in the form of the common stock of the Company and (iii) a
bonus of 5% of all gross investments make into the Company that are directly
generated and arranged by the executive. The agreement provides for a grant of
options to purchase 4,000,000 shares of the Company's common stock in accordance
with the terms of the Company's Stock Option Plan with terms and an exercise
price of the fair market value of the Company's common stock on the date of
grant. The agreement provides for benefits including health insurance coverage,
car allowance, and life insurance.
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,
69
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 January 1, 2007 an amendment to the Employment Agreement became
effective. 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 $210,000,
plus a quarterly bonus of 2.5% of our earnings before interest, taxes,
depreciation, and amortization, plus an annual bonus of 0.1% of gross sales
which exceed 120% of gross sales for the previous year and a bonus of 5% of all
gross investments make into the Company that are directly generated and arranged
by the executive. The agreement provides for a grant of options to purchase
4,000,000 shares of the Company's common stock in accordance with the terms of
the Company's Stock Option Plan with terms and an exercise price of the fair
market value of the Company's common stock on the date of grant. The agreement
provides for benefits including health insurance coverage, car allowance and
life insurance.
On June 15, 2004, our subsidiary, CirTran-Asia, entered into an employment
agreement with Charles Ho. The agreement, which is for a term of three years and
renews automatically on a year-to year basis, provides that for each additional
product that Mr. Ho procures pursuant to the agreement between CirTran-Asia and
Michael Casey Enterprises, LTD., Mr. Ho shall be entitled to receive such
compensation as provided for in that agreement in the form of options to
purchase shares of CirTran common stock. Under the Agreement, CirTran-Asia will
not provide 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.
OUTSTANDING EQUITY AWARDS AT FISCAL 2006 YEAR-END
-----------------------------------------------------------------------------------------------------------------------------
| Option Awards | Stock Awards |
-----------------------------------------------------------------------------------------------------------------------------
Name Number of Number of Equity Option Option Number Market Equity Equity
Securities Securities Incentive Exercise Expiration of Value of Incentive Incentive
Underlying Underlying Plan Price Date Shares Shares Plan Plan
Unexercised Unexercised Awards: ($) or Units or Units Awards: Awards:
Options Options Number of of Stock of Stock Number Market
(#) (#) Securities That That of or
Exercisable Unexercisable Underlying Have Not Have Not Unearned Payout
Unexercised Vested Vested Shares, Value of
Unearned (#) ($) Units, Unearned
Options or Other Shares,
(#) Rights Units,
That or Other
Have Not Rights
Vested That
(#) Have Not
Vested
($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
------------- ----------- ------------- ------------ --------- ---------- ---------- ---------- ---------- ----------
Iehab -0- -0- -0- N/A N/A -0- -0- -0- -0-
Hawatmeh,
CEO
------------- ----------- ------------- ------------ --------- ---------- ---------- ---------- ---------- ----------
Richard -0- -0- -0- N/A N/A -0- -0- -0- -0-
Ferrone, CFO
------------- ----------- ------------- ------------ --------- ---------- ---------- ---------- ---------- ----------
Trevor -0- -0- -0- N/A N/A -0- -0- -0- -0-
Saliba, CMO
------------- ----------- ------------- ------------ --------- ---------- ---------- ---------- ---------- ----------
Shaher -0- -0- -0- N/A N/A -0- -0- -0- -0-
Hawatmeh,
COO
------------- ----------- ------------- ------------ --------- ---------- ---------- ---------- ---------- ----------
Charles Ho, -0- -0- -0- N/A N/A -0- -0- -0- -0-
President
CirTran Asia
------------- ----------- ------------- ------------ --------- ---------- ---------- ---------- ---------- ----------
70
(1) Two Officers of the company exercised shares of stock that had been
awarded from to them from the 2004 Stock Option Program. Trevor Saliba,
Chief Marketing Officer, exercised a total of 3,000,000 shares, and
Shaher Hawatmeh, Chief Operating Officer, exercised a total of
2,000,000 shares during 2006.
DIRECTOR COMPENSATION
For Fiscal Year Ended 2006
--------------- ------------ ----------- ------------- ------------- ------------ ------------- ------------
Name Fees Stock Option Non-Equity Change in All Other Total
Earned or Awards Awards Incentive Pension Compensation ($)
Paid in ($) ($) Plan Value and ($)
Cash Compensation Nonqualified
($) ($) Deferred
Compensation
Earnings
($)
(a) (b) (c) (d) (e) (f) (g) (h)
--------------- ------------ ----------- ------------- ------------- ------------ ------------- ------------
Iehab -0- -0- -0- -0- -0- -0- -0-
Hawatmeh
(Note 1)
--------------- ------------ ----------- ------------- ------------- ------------ ------------- ------------
Trevor Saliba -0- -0- -0- -0- -0- -0- -0-
(Note 1)
--------------- ------------ ----------- ------------- ------------- ------------ ------------- ------------
Raed Hawatmeh -0- -0- -0- -0- -0- -0- -0-
(Note 2)
--------------- ------------ ----------- ------------- ------------- ------------ ------------- ------------
(1) Iehab Hawatmeh and Trevor Saliba also served as executive officers of
the Company during the fiscal year ended December 31, 2006. They
received compensation for their services as executive officers, set
forth above in the Summary Compensation Table. They did not receive any
additional compensation for their services as directors of the Company.
(2) Mr. Raed Hawatmeh resigned as a director of the Company on May 10,
2006. During his term of service in 2006, he did not receive any
compensation for his services as director of the Company.
The Company does not have standing audit, nominating, or compensation
committees. Those functions are performed by the board of directors.
Please note: On February 1, 2007, Fadi Nora was appointed to the
Company's Board of Directors.
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, we 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:
71
----------------------------------------------------------------------------------------------------------------------
Product Initial Options for Each Multiple of Options for Each Options Issued
Units Initial Units Units Above Initial Multiple of Units Through January 29,
Sold(1) Units 2007
----------------------------------------------------------------------------------------------------------------------
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. All of
these options expired of their terms in January 2006.
As of January 29, 2007, 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 1,500,000 options were issued with
an exercise price of $0.06 per share, and all 1,500,000 options expired in
January 2006 pursuant to their terms.
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. During
2006, Mr. Ho received approximately $328,000 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.
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
72
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.
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.
73
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, 2006, 40,000,000 options to purchase shares of common stock
and no stock purchase rights have been granted under the 2004 Plan. Therefore,
the 2004 Plan had been fully distributed.
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 16, 2007.
------------------------------ ------------------------------ ------------------------- ----------------------------
Number of securities
Number of securities to be Weighted average remaining available for
issued upon exercise of exercise price of future issuance under
outstanding options, outstanding options, equity compensation plans
Plan Category warrants, and rights warrants, and rights
------------------------------ ------------------------------ ------------------------- ----------------------------
Equity compensation plans
approved by shareholders
_______0__________ ________0________ ________0________
------------------------------ ------------------------------ ------------------------- ----------------------------
Equity compensation plans 2002 Plan: 500 options 2002 Plan: $0.0001/share 2002 Plan: 0 options
not approved by shareholders
2003 Plan: 3,750,000 options 2003 Plan: $0.014/share 2003 Plan: 0 options
2004 Plan: 5,000,000 options 2004 Plan: $0.027/share 2004 Plan: 0 options
------------------------------ ------------------------------ ------------------------- ----------------------------
Total 10,750,500 (1) $0.026/share 0
------------------------------ ------------------------------ ------------------------- ----------------------------
(1) 2,000,000 options were effectively granted to Mr. Nasiff under the
terms of an employment agreement. The options are to be issued from a
plan which has not been adopted, but are included in the table total as
being outstanding.
ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number and percentage of the 687,350,529
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of January 1, 2007, 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
74
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 11.01%
115 S. Valley Street Shareholder
Burbank, CA 91505
--------------------------------------------------------------------------------
Iehab J. Hawatmeh (4) Director, 65,000,000 9.39%
4125 South 6000 West Officer
West Valley City, Utah 84128 and 5%
Shareholder
--------------------------------------------------------------------------------
Raed Hawatmeh (3) Former Director 24,000,000 3.46%
10989 Bluffside Drive
Studio City, CA 91604
--------------------------------------------------------------------------------
Trevor Saliba (2) Director 11,300,000 1.63%
13848 Valleyheart Drive
Sherman Oaks, CA 91423
--------------------------------------------------------------------------------
Charles Ho Officer of 0 0.00%
4125 South 6000 West Subsidiary of
West Valley City, Utah 84128 Company
--------------------------------------------------------------------------------
Shaher Hawatmeh (5) Chief Operating 5,000,000 0.72%
4125 South 6000 West Officer
West Valley City, Utah 84128
--------------------------------------------------------------------------------
Richard T. Ferrone (6) Chief Financial 3,000,000 0.44%
4125 South 6000 West Officer
West Valley City, Utah 84128
--------------------------------------------------------------------------------
Fadi Nora (7) Director 20,000,000 2.90%
4125 South 6000 West
West Valley City, Utah 84128
--------------------------------------------------------------------------------
All Officers and Directors 104,300,000 14.79%
as a Group (5 persons)
--------------------------------------------------------------------------------
_______________
75
(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 4,000,000 shares each that can be
exercised anytime at exercise prices of $0.02 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. Raed
Hawatmeh resigned from the Company's Board of Directors on May 10,
2006.
(4) Includes options to purchase up to 5,000,000 shares each that can be
exercised anytime at exercise prices of $0.02 per share.
(5) Includes options to purchase up to 4,000,000 shares each that can be
exercised anytime at exercise prices of $0.02 per share.
(6) Includes options to purchase up to 3,000,000 shares each that can be
exercised anytime at exercise prices of $0.02 per share.
(7) Includes options to purchase up to 2,000,000 shares each that can be
exercised anytime at exercise prices of $0.02 per share. Mr. Nora also
has warrants to purchase an additional 10,000,000 shares of common
stock, with exercise prices ranging from $0.15 to $0.25 per share,
which are subject to a lock down agreement (discussed in the "Recent
Developments" section) and, as such, were not exercisable as of the
date of this report. Accordingly, such warrants were excluded from Mr.
Nora's information in the table above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
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.
76
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,500,000 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.05 per share, for the aggregate
amount of $1,500,000.
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company to request funds from Abacas to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. There are no required monthly payments. During the
years ended December 31, 2004 and 2003, the Company was advanced $3,128,281 and
$350,000, respectively, and made cash payments of $3,025,149 and $875,000,
respectively.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable.
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 April 16, 2007, no further loans had been made to the Company from Abacas.
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%.
77
In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a
public company, Circuit Technology, Inc., while still a private entity, redeemed
680,145 shares (as presently constituted) of common stock held by Raed Hawatmeh,
who was a director of Circuit Technology, Inc. at that time, in exchange for
$80,000 of expenses paid on behalf of the director. No other stated or unstated
rights, privileges, or agreements existed in conjunction with this redemption.
This transaction was consistent with other transactions where shares were
offered for cash.
In 1999, Circuit entered into an agreement with Cogent Capital Corp., or
"Cogent," a financial consulting firm, whereby Cogent agreed to assist and
provide consulting services to Circuit in connection with a possible merger or
acquisition. Pursuant to the terms of this agreement, we issued 800,000
(pre-forward split) restricted shares (12,000,000 post-forward split shares) of
our common stock to Cogent in July 2000 in connection with our acquisition of
the assets and certain liabilities of Circuit. The principal of Cogent was
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
Also, as of December 31, 2004 the Company owed I&R Properties, LLC, the previous
owner of our principal office and manufacturing facility for unpaid accrued rent
and accrued interest. The Company settled with owed I&R Properties, LLC., on
accrued rent and interest of $400,000 by issuing 10,000,000 shares of
unregistered common stock in March 2005.
During June 2006 the President of the Company loaned the Company a net amount of
$110,837 which was recorded as a note payable to a Shareholder. In August 2006,
the Company made a payment to the President which repaid the entire balance
$110,837 of the loan.
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.
As of the date of this Report, the Company's common stock traded on the OTC
Bulletin Board (the "Bulletin Board"). The Bulletin Board does not impose on the
Company standards relating to director independence or the makeup of committees
with independent directors, or provide definitions of independence.
Nevertheless, the Company has undertaken to appoint one individual to its Board
of Directors, Mr. Fadi Nora, who is independent under the NASDAQ Marketplace
Rules and those standards applicable to companies trading on NASDAQ.
Specifically, Mr. Nora
- has not been any time during the past three years, employed by the
Company or by any parent or subsidiary of the Company;
- has not accepted or had a family member who accepted any
compensation from the Company in excess of $60,000 during any
period of twelve consecutive months within the three years
preceding the determination of independence.
- is not a family member of an individual who is, or at any time
during the past three years was, employed by the Company as an
executive officer;
- is not, or does not have a Family Member who is, a partner in, or
a controlling shareholder or an executive officer of, any
organization to which the Company made, or from which the company
78
received, payments for property or services in the current or any
of the past three fiscal years that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000.
- is not, or does not have a family member who is, employed as an
executive officer of another entity where at any time during the
past three years any of the executive officers of the Company
serve on the compensation committee of such other entity; or
- is not, or does not have a family member who is, a current partner
of the Company's outside auditor, or was a partner or employee of
the Company's outside auditor who worked on the Company's audit at
any time during any of the past three years.
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).
79
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 exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission).
80
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) (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).
10.19 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).
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
81
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).
82
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 IandR
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).
10.55 Securities Purchase Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of December 30, 2005
(previously filed as an exhibit to Current Report on Form 8-K
filed with the Commission on January 6, 2006, and incorporated
herein by reference).
10.56 Form of 5% Convertible Debenture, due July 30, 2008, issued by
CirTran Corporation (previously filed as an exhibit to Current
Report on Form 8-K filed with the Commission on January 6,
2006, and incorporated herein by reference).
10.57 Investor Registration Rights Agreement between CirTran
Corporation and Cornell Capital Partners, LP, dated as of
December 30, 2005 (previously filed as an exhibit to Current
Report on Form 8-K filed with the Commission on January 6,
2006, and incorporated herein by reference).
83
10.58 Security Agreement between CirTran Corporation and Cornell
Capital Partners, LP, dated as of December 30, 2005
(previously filed as an exhibit to Current Report on Form 8-K
filed with the Commission on January 6, 2006, and incorporated
herein by reference).
10.59 Escrow Agreement between CirTran Corporation, Cornell Capital
Partners, LP, and David Gonzalez dated as of December 30, 2005
(previously filed as an exhibit to Current Report on Form 8-K
filed with the Commission on January 6, 2006, and incorporated
herein by reference).
10.60 Form of Warrant issued to Cornell Capital Partners, LP, dated
as of December 30, 2005 (previously filed as an exhibit to
Current Report on Form 8-K filed with the Commission on
January 6, 2006, and incorporated herein by reference).
10.61 Settlement Agreement and Mutual Release between CirTran
Corporation and Howard Salamon d/b/a/ Salamon Brothers, dated
as of February 10, 2006
10.62 Settlement Agreement by and among Sunborne XII, LLC, CirTran
Corporation, and others named therein, dated as of January 26,
2006
10.63 Employment Agreement with Richard Ferrone (previously filed as
an exhibit to a Current Report on Form 8-K filed with the
Commission on May 15, 2006, and incorporated here in by
reference).
10.64 Marketing and Distribution Agree between CirTran Corporation
and Harrington Business Development, Inc., dated as of October
24, 2005 (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB filed with the Commission on
May 19, 2006, and incorporated here in by reference).
10.65 Amendment to Marketing and Distribution Agree between CirTran
Corporation and Harrington Business Development, Inc., dated
as of March 31, 2006 (previously filed as an exhibit to the
Company's Quarterly Report on Form 10-QSB filed with the
Commission on May 19, 2006, and incorporated here in by
reference).
10.66 Amendment No. 1 to Investor Registration Rights Agreement,
between CirTran Corporation and Highgate House Funds, Ltd.,
dated as of June 15, 2006.
10.67 Amendment No. 1 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated as of June 15, 2006.
10.68 Assignment and Exclusive Services Agreement, dated as of April
1, 2006, by and among Diverse Talent Group, Inc., Christopher
Nassif, and Diverse Media Group Corp. (a wholly owned
subsidiary of Cirtran Corporation).
10.69 Employment Agreement between Christopher Nassif and Diverse
Media Group Corp., dated as of April 1, 2006 (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on June 2, 2006, and incorporated
here in by reference).
10.70 Loan Agreement dated as of May 24, 2006, by and among Diverse
Talent Group, Inc., Christopher Nassif, and Diverse Media
Group Corp (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Commission on June
2, 2006, and incorporated here in by reference).
10.71 Promissory Note, dated May 24, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with
the Commission on June 2, 2006, and incorporated here in by
reference).
10.72 Security Agreement, dated as of May 24, 2006, by and between
Diverse Talent Group, Inc., and Diverse Media Group Corp.
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 2006,
and incorporated here in by reference).
10.73 Fraudulent Transaction Guarantee, dated as of May 24, 2006
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 2006,
and incorporated here in by reference).
84
10.74 Securities Purchase Agreement between CirTran Corporation and
ANAHOP, Inc., dated as of May 24, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with
the Commission on May 30, 2006, and incorporated here in by
reference).
10.75 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on May 30, 2006, and incorporated
here in by reference).
10.76 Warrant for 5,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on May 30, 2006, and incorporated here in
by reference).
10.77 Warrant for 5,000,000 shares of CirTran Common Stock,
exercisable at $0.25, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on May 30, 2006, and incorporated here in
by reference).
10.78 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.50, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on May 30, 2006, and incorporated
here in by reference).
10.79 Asset Purchase Agreement, dated as of June 6, 2006, by and
between Advanced Beauty Solutions, LLC, and CirTran
Corporation (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Commission on June
13, 2006, and incorporated here in by reference).
10.80 Securities Purchase Agreement between CirTran Corporation and
ANAHOP, Inc., dated as of June 30, 2006 (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on July 6, 2006, and incorporated here in
by reference).
10.81 Warrant for 20,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on July 6, 2006, and incorporated
here in by reference).
10.82 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on July 6, 2006, and incorporated here in
by reference).
10.83 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.25, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on July 6, 2006, and incorporated here in
by reference).
10.84 Warrant for 23,000,000 shares of CirTran Common Stock,
exercisable at $0.50, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on July 6, 2006, and incorporated
here in by reference).
10.85 Marketing and Distribution Agreement, dated as of April 24,
2006, by and between Media Syndication Global, LLC, and
CirTran Corporation (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission
on July 10, 2006, and incorporated here in by reference).
10.86 Lockdown Agreement by and between CirTran Corporation and
Cornell Capital Partners, LP, dated as of July 20, 2006.*
10.87 Lockdown Agreement by and among CirTran Corporation and
ANAHOP, Inc., Albert Hagar, and Fadi Nora, dated as of July
20, 2006.*
10.88 Talent Agreement between CirTran Corporation and Holyfield
Management, Inc., dated as of March 8, 2006.*
10.89 Amendment No. 2 to Investor Registration Rights Agreement,
between CirTran Corporation and Highgate House Funds, Ltd.,
dated as of August 10, 2006 (filed as an exhibit to
Registration Statement on Form SB-2 (File No. 333-128549) and
incorporated herein by reference).
85
10.90 Amendment No. 2 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated as of August 10, 2006 (filed as an exhibit to
Registration Statement on Form SB-2 (File No. 333-128549) and
incorporated herein by reference).
10.91 Amended Lock Down Agreement by and among the Company and
ANAHOP, Inc., Albert Hagar, and Fadi Nora, dated as of
November 15, 2006 (filed as an exhibit to Registration
Statement on Form SB-2 (File No. 333-128549) and incorporated
herein by reference).
10.92 Amended Lock Down Agreement by and between the Company and
Cornell Capital Partners, L.P., dated as of October 30, 2006
(filed as an exhibit to Registration Statement on Form SB-2
(File No. 333-128549) and incorporated herein by reference).
10.93 Amendment to Debenture and Registration Rights Agreement
between the Company and Cornell Capital Partners, L.P., dated
as of October 30, 2006 (filed as an exhibit to Registration
Statement on Form SB-2 (File No. 333-128549) and incorporated
herein by reference).
10.94 Amendment Number 2 to Amended and Restated Investor
Registration Rights Agreement, between CirTran Corporation and
Cornell Capital Partners, LP, dated January 12, 2007
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on January 19,
2007, and incorporated here in by reference).
10.95 Amendment Number 4 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated January 12, 2007(previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission
on January 19, 2007, and incorporated here in by reference).
10.96 Licencing and Marketing Agreement with Arrowhead Industries,
Inc. dated February 13, 2007.
10.97 Amendment to Employment Agreement for Iehab Hawatmeh, dated
January 1, 2007
10.98 Amendment to Employment Agreement for Shaher Hawatmeh, dated
January 1, 2007
10.99 Amendment to Employment Agreement for Trevor Siliba, dated
January 1, 2007
10.100 Amendment to Employment Agreement for Richard Ferrone dated
February 7, 2007
21 Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by Hansen Barnett
and 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 2006 and 2005
were $107,539 and $96,174, respectively.
86
(2) AUDIT-RELATED FEES
The aggregate fees billed for assurance and related services by Hansen Barnett
and Maxwell, that are reasonably related to the performance of the audit or
review of the registrant's financial statements for fiscal year 2006 and 2005
were $0 and $0, respectively.
(3) TAX FEES
The aggregate fees billed for each of the fiscal years ended December 31, 2006
and 2005, for professional services rendered by Hansen Barnett and Maxwell for
tax compliance, tax advice, and tax planning, for those fiscal years were $5,535
and $4,300, 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, 2006
and 2005, for products and services provided by Hansen Barnett and Maxwell other
than those services reported above, for those fiscal years were $0 and $0,
respectively.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
Not applicable.
(6) If greater than 50 percent, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees.
Not applicable.
87
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 16, 2007 By: /s/ Iehab J. Hawatmeh, President
----------------------------------------
(Principal Executive Officer)
Date: April 16, 2007 By: /s/ Richard Ferrone
----------------------------------------
Chief Financial 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 16, 2007
Iehab J. Hawatmeh
/s/ Iehab Hawatmeh President , and Director
-------------------------
Date: April 16, 2007
Richard Ferrone
/s/ Richard Ferrone Chief Financial Officer
-------------------------
Date: April 16, 2007
Fadi Nora
/s/ Fadi Nora Director
-------------------------
Date: April 16, 2007
Trevor Saliba,
/s/ Trevor Saliba Director
-------------------------
88
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, 2006
and 2005 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 2006 and 2005 F-4
Consolidated Statement of Stockholders' Equity
(Deficit) for the Years Ended December 31, 2005
and 2006 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006 and 2005 F-6
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL, P.C.
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, 2006 and 2005, 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, 2006 and 2005, 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 raising
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.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted statement of Financial Accounting Standards No. 123 (R), Share Based
Payment, effective January 1, 2006.
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
April 16, 2007
F-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 2005
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 146,050 $ 1,427,865
Trade accounts receivable, net
of allowance for doubtful accounts
of $14,181 and $158,374, respectively 982,096 3,358,981
Inventory, Net of reserve of $866,354
and $751,296, respectively 1,960,013 2,271,604
Prepaid Deposits 80,925 142,188
Line of Credit 241,744 -
Other 213,212 252,941
--------------------------------------------------------------------------------
Total Current Assets 3,624,040 7,453,579
Investment in Securities, at Cost 300,000 300,000
Deferred Offering Costs, Net 296,103 322,896
Long Term Receivable 1,665,000 -
Property and Equipment, Net 2,678,454 2,686,737
Intellectual Property, Net 2,451,408 30,685
Other Assets, Net 114,733 108,000
--------------------------------------------------------------------------------
Total Assets $ 11,129,738 $ 10,901,897
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 1,135,527 $ 1,239,519
Accrued liabilities 607,649 1,222,018
Deferred revenue 191,396 119,945
Derivative liability 3,362,626 4,910,303
Convertible Debenture 2,746,047 996,252
Current maturities of long-term notes
payable 444,436 12,610
Notes payable to stockholders - 95,806
--------------------------------------------------------------------------------
Total Current Liabilities 8,487,681 8,596,453
Long-Term Notes Payable, Less Current
Maturities 1,023,110 1,037,390
--------------------------------------------------------------------------------
Total Liabilities 9,510,791 9,633,843
================================================================================
Commitments and Contingencies
Stockholders' Equity
Common stock, par value $0.001;
authorized 750,000,000 shares;
issued and outstanding shares:
656,170,424 and 583,368,569 656,165 583,364
Additional paid-in capital 23,210,461 20,012,000
Subscription receivable (66,000) -
Accumulated deficit (22,181,679) (19,327,310)
--------------------------------------------------------------------------------
Total Stockholders' Equity 1,618,947 1,268,054
--------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 11,129,738 $ 10,901,897
================================================================================
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, 2006 2005
--------------------------------------------------------------------------------
Net Sales $ 8,739,208 $ 12,992,512
Cost of Sales (5,274,684) (6,706,135)
Writedown of carrying value of inventories (115,058) (38,089)
--------------------------------------------------------------------------------
Gross Profit 3,349,466 6,248,288
--------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative expenses 5,951,001 5,923,075
Non-cash employee compensation expense 65,629 135,000
--------------------------------------------------------------------------------
Total Operating Expenses 6,016,630 6,058,075
--------------------------------------------------------------------------------
Income (Loss) From Operations (2,667,164) 190,213
--------------------------------------------------------------------------------
Other Income (Expense)
Interest (3,032,229) (1,225,252)
Gain on forgiveness of debt 6,930 337,761
Gain on derivative valuation 2,838,094 169,570
--------------------------------------------------------------------------------
Total Other Expense, Net (187,205) (717,921)
--------------------------------------------------------------------------------
Net Loss $ (2,854,369) $ (527,708)
================================================================================
Basic and diluted loss per common share $ - $ -
--------------------------------------------------------------------------------
Basic and diluted weighted-average
common shares outstanding 630,467,984 554,085,007
--------------------------------------------------------------------------------
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, 2005 AND 2006
Common Stock Additional
Number Paid-in Subscription Accumulated
of Shares Amount Capital Receivable Deficit Total
------------------------------------------------------------------------------------------------------------------------
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 and
accrued interest 51,250,000 51,250 2,004,694 - - 2,055,944
Shares issued for notes payable
and accrued interest 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
Shares issued for
settlement expense 4,000,000 4,000 460,187 - - 464,187
Shares issued for conversion of
debentures and accrued interest 37,373,283 37,372 1,973,105 - - 2,010,477
Options granted to employees,
consultants and attorneys - - 104,545 - - 104,545
Exercise of stock options by
consultants and attorneys 3,500,000 3,500 (3,150) - - 350
Exercise of stock options for
employee receivable 2,605,263 2,605 63,395 (66,000) - -
Shares and warrants issued
in private placement 21,428,572 21,429 495,274 - - 516,703
Exercise of stock options
by directors and employees 3,894,737 3,895 105,105 - - 109,000
Net loss - - - - (2,854,369) (2,854,369)
------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2006 656,170,424 $ 656,165 $ 23,210,461 $ (66,000) $ (22,181,679) $ 1,618,947
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2006 2005
--------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (2,854,369) $ (527,708)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 526,428 324,955
Accretion expense 2,467,394 826,124
Provision for doubtful accounts (144,193) 117,231
Provision for obsolete inventory 115,058 38,089
Gain on forgiveness of debt (6,930) (337,761)
Non-cash compensation expense 65,616 135,000
Deferred offering costs expensed - 68,000
Amortization of loan discount and
loan costs - 108,719
Intrinsic value of options issued
to employees - 67,168
Loan costs and interest withheld
from loan proceeds 161,793 12,000
Stock and warrants issued for
settlement expense - 654,153
Options issued to attorneys and
consultants for services 59,851 217,330
Change in valuation of derivative (2,838,094) (169,568)
Accrued Interest Expense - 111,986
Changes in assets and liabilities:
Trade accounts receivable 106,078 (2,128,289)
Other receivables - (99,879)
Prepaid Deposits 142,188 -
Inventories 572,533 (855,940)
Prepaid expenses and other assets (182,929) (277,987)
Accounts payable (85,018) 291,143
Accrued liabilities 284,638 (446,455)
Deferred revenue (119,945) 119,945
Intangibles (112,500) -
--------------------------------------------------------------------------------
Total adjustments 1,011,968 (1,224,036)
--------------------------------------------------------------------------------
Net cash used in operating activities (1,842,401) (1,751,744)
--------------------------------------------------------------------------------
Cash flows from investing activities
Cash acquired with PFE acquisition (304,725) 39,331
Intangibles purchased with cash (587,643) -
ABS assets acquired with cash (1,125,000) -
Cash issued for long term receivble (241,744) -
Purchase of property and equipment - (295,346)
--------------------------------------------------------------------------------
Net cash used in investing activities (2,259,112) (256,015)
--------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes payable to stockholders 855,000 123,220
Payments on notes payable to stockholders (1,033,300) -
Proceeds from convertible debentures 1,500,000 -
Proceeds from stock issued in private
placement 1,500,000 -
Proceeds from notes payable, net of cash
paid for offering costs - 3,102,067
Principal payments on notes payable (17,453) -
Proceeds from notes payable to related parties - 95,586
Proceeds from exercise of options and
warrants to purchase common stock - 33,000
Exercise of options issued to attorneys
and consultants for services 15,451 650
--------------------------------------------------------------------------------
Net cash provided by financing activities 2,819,698 3,354,523
--------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (1,281,815) 1,346,764
Cash and cash equivalents at beginning
of year 1,427,865 81,101
--------------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 146,050 $ 1,427,865
--------------------------------------------------------------------------------
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 Year Ended December 31, 2006 2005
--------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 17,785 $ 173,300
Cash paid during the period for income taxes - -
Noncash investing and financing activities
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
Deposit applied to purchase of property and
equipment - 100,000
Issuance of stock and options for settlement
of litigation 464,187 411,402
Reclassification of accounts receivable to
notes receivable from
ABS settlement 1,665,000 -
Stock options exercised for settlement of
accrued interest and accrued compensation 54,000 -
Stock issued for settlement of notes payable
and accrued interest 2,010,477 233,500
Loan costs included in notes payable - 50,850
ABS assets acquired in exchange for
guaranteed payment and reduction of claim 1,185,000 -
Options exercised for stock through
subscription receivable 66,000 -
Warrants issued with derivative liability
features 983,297 -
Options granted and exercised in partial
settlement of payable 18,974 -
Debt and warrants issued with embedded
derivative liability feautures 1,317,597 -
Exchange of accrued liabilities for note
payable 82,494 -
Stock options exercised for settlement
of notes payable to stockholders - 46,000
Loan fees incurred as part of convertible
debenture - 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
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 March 2005, the Company acquired a 100% ownership interest in PFE Properties,
LLC ("PFE") (see Note 5). PFE remains a separate LLC due to liability issues
after the acquisition. The Company has continued to make intercompany lease
payments under the 2003 lease, which have been eliminated in consolidation.
In December 2005, the Company incorporated CirTran Products, Inc.("CTP"), a Utah
corporation, as a wholly owned subsidiary. CTP was formed to offer products for
sale at wholesale and retail. The new division is run from the Company's Los
Angeles Office. During 2006 CTP was wholesaling the True Ceramic Pro Flat Iron,
under the terms of an exclusive marketing agreement with two direct marketing
companies. The product is being produced in China and is shipped directly to the
customer.
In March 2006, the Company formed Diverse Media Group Corporation ("DMG"), a
wholly owned subsidiary to provide services to the direct response and
entertainment industries. On May 26, 2006, DMG entered into an assignment and
exclusive services agreement with Diverse Talent Group, Inc., a California
corporation, and Christopher Nassif ("DT"). The Services Agreement has a 5 year
term and was made effective as of April 1, 2006. Pursuant to the Services
Agreement, DMG and DT entered into an exclusive operating relationship whereby
DMG agreed to outsource its talent agency operations to DT and to provide
financing to DT to assist in DT 's growth. Under the Services Agreement, DMG and
DT created a relationship whereby DT Group would operate exclusively under the
DMG business structure. As compensation for services provided, DMG agreed to pay
to DT a percentage of the agency fees for the talent contracts entered into
between DT and its clients. The percentage ranges from 62.5% to 85%, depending
on the type of talent contract and the amount of gross compensation paid under
the talent contract. During 2006, all talent contracts qualified under the 85%
of gross profit.
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., Diverse Media
Group, 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 associated with 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.
The Company has also recorded revenue using a "Bill and Hold" method of revenue
recognition. The Securities & Exchange Commission ("SEC") in SAB 104 imposes
several requirements to be met in order to recognize revenue prior to shipment
of product.
F-8
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
The Commission's criteria are the following:
(i) The risks of ownership must have passed to the buyer
(ii) The customer must have made a fixed commitment to purchase the
goods, preferably in written documentation;
(iii) The buyer, not the seller, must request that the transaction
be on a bill and hold basis. The buyer must have a substantial
business purpose for ordering the goods on a bill and hold
basis
(iv) There must be a fixed schedule for delivery of the goods. The
date for delivery must be reasonable and must be consistent
with the buyer's business purpose (e.g., storage periods are
customary in the industry);
(v) The seller must not have retained any specific performance
obligations such that the earning process is not complete;
(vi) The ordered goods must have been segregated from the seller's
inventory and not be subject to being used to fill other
orders; and
(vii) The equipment [product] must be complete and ready for
shipment
In effect, the Company secures a contractual agreement from the customer to
purchase a specific quantity of goods; however, shipment of the product is
scheduled for release over a specified period of time. The result is that the
Company maintains the customer's inventory, on site, until all releases have
been issued.
Agency fees are recognized when they are earned. This occurs only after the
talent, represented by the Company, has received payment for the services from
the buyer. The buyer remits funds to a trust checking account after all payroll
tax liabilities have been deducted from the gross amount due the talent. The
talent is paid the net amount, less the Company commission, (which is
approximately 10% of the gross amount due the talent) from the trust account.
The remainder of funds in the trust account, typically 10%, is then distributed
to the Company and recognized as revenue.
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. Accounts receivables are written off when deemed uncollectible.
Recoveries of accounts receivables previously written off are recorded when
received.
Inventories - Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead. Overhead costs are based on
indirect costs allocated to 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.
F-9
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
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 are
amortized over their useful lives. The Company holds title to all molds and
dies. At December 31, 2006 and 2005 the Company held $100,000 and $100,000,
respectively, in deposits. Capitalized costs associated with molds and dies
included in property and equipment at December 31, 2006 and 2005 was $1,022,200
and $761,200.
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, 2006 and
2005 was $526,428 and $324,955, respectively.
Patents - Legal fees and other direct costs incurred in obtaining patents in the
United States and other countries are capitalized. Patent costs are amortized
over the estimated useful life of the patent.
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, 2006, the Company does not consider any of its long-lived assets to
be impaired.
Long-lived asset costs are amortized over the estimated useful life of the
asset, which is typically 5 - 7 years. Amortization expense was $213,420 and
$5,114 for the years ended December 31, 2006 and 2005, respectively.
Financial Instruments with Derivative Features - The Company does not hold or
issue derivative instruments for trading purposes. However, the Company has
financial instruments that are considered derivatives or contain embedded
features subject to derivative accounting. Embedded derivatives are valued
separate from the host instrument and are recognized as derivative liabilities
in the Company's balance sheet. The Company measures these instruments 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. 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, 2006 and 2005 were $16,560
and $33,111, respectively.
Stock-Based Compensation - Effective January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123R, Share Based
Payment ("SFAS 123R") for its stock-based compensation plan. The Company
previously accounted for this plan under the recognition and measurement
F-10
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
principles of Accounting Standards No. 25, Accounting for Stock Issued to
Employees, ("APB 25") and related interpretations and disclosure requirements
established by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123") as amended by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure.
Under APB 25, no compensation expense was recorded in earnings for the Company's
stock-based options granted under its compensation plans, since the intrinsic
value of the options was zero. The pro forma effects on net income and earnings
per share for the options and awards granted under the plans were instead
disclosed in a note to the consolidated financial statements. Under SFAS 123R,
all stock-based compensation is measured at the grant date, based on the fair
value of the option or award, and is recognized as an expense in earnings over
the requisite service period, which is typically through the date the options
vest.
The Company adopted SFAS 123R using the modified prospective method. Under this
method, all stock-based options and awards granted prior to January 1, 2006 that
remained outstanding as of that date, compensation cost was recognized for the
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS 123 for pro
forma and disclosure purposes. No such options were outstanding as of January 1,
2006. There were 5,500,000 options granted from the 2004 Plan during the year
ended December 31, 2006, that resulted in $65,616 in compensation costs which
would have previously been presented in a pro forma disclosure, as discussed
above.
The Company utilized the Black-Scholes model for calculating the fair value pro
forma disclosures under SFAS 123 and will continue to use this model, which is
an acceptable valuation approach under SFAS 123R.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair-value recognition provisions of SFAS 123
to all of its stock-based compensation awards for periods prior to adoption of
SFAS 123R:
Year Ended
December 31,
2005
--------------------------------------------------------------------------
Net loss, as reported $ (527,708)
Add: Stock-based employee compensation expense
included in net loss 364,330
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (211,247)
--------------------------------------------------------------------------
Pro forma net loss $ (374,625)
--------------------------------------------------------------------------
Basic and diluted loss per common share as reported $ -
--------------------------------------------------------------------------
Basic and diluted loss per common share pro forma $ -
--------------------------------------------------------------------------
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 the tax
F-11
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
bases of assets, liabilities, 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.
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, 2006 and 2005, this allowance was $14,181 and $158,374, respectively.
During the year ended December 31, 2006, sales to two customers accounted for
16% and 15% of net sales, respectively. Sales from both of these customers were
part of the contract manufacturing segment. Account receivables from one
customer equaled 56% of consolidated accounts receivable at December 31, 2006,
which created a concentration of credit risk.
During the year ended December 31, 2005, sales to two customers accounted for
27% and 10% 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
At December 31, 2006, the Company had approximately $15,700 of funds in excess
of FDIC insured limits.
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.
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 440,178,571 and 228,673,577
in potentially issuable common shares at December 31, 2006 and 2005,
respectively. The potentially issuable common shares at December 31, 2006 and
2005 were excluded from the calculation of diluted loss per share because the
effects are anti-dilutive.
Reclassifications - Certain reclassifications have been made to the financial
statements to conform to the current year presentation.
F-12
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Standards - In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS 123R which is an amendment to SFAS 123. This new
standard eliminates the ability to account for share-based compensation
transactions using 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 implemented SFAS
No. 123R in the first quarter of 2006. The adoption of SFAS No. 123R did not
have a material impact on the Company's consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs ("SFAS 151").
SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). The Company adopted the
provisions of SFAS 151 on January 1, 2006. The adoption of SFAS 151 did not have
a material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets
("SFAS 153"). SFAS 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 adopted the provisions of SFAS 153 on January 1,
2006. The adoption of SFAS 153 did not have a material impact on the Company's
consolidated financial statements.
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
154"). SFAS 154 changes the requirements for the accounting for and reporting of
a change in accounting principle. The Company adopted the provisions of SFAS 154
on January 1, 2006. The adoption of SFAS 154 did not have a material impact on
the Company's consolidated financial statements.
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
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.
F-13
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In June of 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of SFAS No. 109 ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS 109, Accounting for
Income Taxes. This FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
adoption of this statement is not expected to have a material effect on the
Company's financial position or results of operations.
On September 15, 2006 the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). The new standard applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value.
SFAS 157 is effective for fiscal years beginning after November 15, 2006. The
adoption of this statement is not expected to have a material effect on the
Company's financial position or results of operations since the Company is
currently using the fair value method of reporting under SFAS 133.
In September 2006 the SEC issued Staff Accounting Bulletin ("SAB") 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. The Company will be required
to apply this pronouncement to accounting changes and corrections of errors made
in fiscal years beginning after November 15, 2006. The adoption of this
statement is not expected to have a material effect on the Company's financial
position or results of operations.
In December 2006 the FASB issued FASB Staff Position (FSP) EITF 00-19-2,
Accounting for Registration Payment Arrangements. This FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting for Contingencies. The guidance in this FSP amends
FASB Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements. This FSP further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other applicable generally accepted accounting principles
(GAAP) without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement.
The Company will be required to apply this statement effective in fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
effects of the adoption of this statement. It 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 $2,854,369 and $527,708 for the years
ended December 31, 2006 and 2005, respectively. As of December 31, 2006 and
F-14
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
2005, the Company had an accumulated deficit of $22,181,679 and $19,327,310,
respectively. In addition, the Company used, rather than provided, cash in its
operations in the amounts of $1,842,401 and $1,751,744 for the years ended
December 31, 2006 and 2005, 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 paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The Company has several new programs in development. These
programs represent a new direction for the Company into consumer products
contract manufacturing and marketing. These new programs have the potential to
carry higher profit margins than electronic manufacturing and as a result, the
Company is investing substantial resources into developing these activities. 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.
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 years ended December
31, 2006 or 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 $140,223 and $163,473 for
the years ended December 31, 2006 and 2005, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
2006 2005
---------------------------------------------------------------
Raw materials $ 873,265 $ 924,101
Work-in process 463,023 144,993
Finished goods 623,725 1,202,510
---------------------------------------------------------------
$ 1,960,013 $ 2,271,604
---------------------------------------------------------------
F-15
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
During 2006 and 2005, write downs of $115,058 and $38,090, 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
==============
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
F-16
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Estimated
Service Lives
2006 2005 in Years
-------------------------------------------------------------- -------------
Land $ 360,000 $ 360,000 N/A
Building 1,410,439 1,410,439 39
Production equipment 3,855,770 3,584,140 5-10
Leasehold improvements 997,714 997,714 7-10
Office equipment 218,651 185,556 5-10
Other 31,660 47,789 3- 7
--------------------------------------------------------------
Total Property and Equipment 6,874,234 6,585,638
Less accumulated depreciation 4,195,780 3,898,901
--------------------------------------------------------------
Property and Equipment, Net $ 2,678,454 $ 2,686,737
--------------------------------------------------------------
NOTE 7 - INTELLECTUAL PROPERTY
Intellectual property and estimated service lives consist of the following:
Estimated
Service Lives
2006 2005 in Years
-------------------------------------------------------------- -------------
Infomercial Development Costs $ 112,500 $ - 7
Patents 35,799 35,799 7
ABS Informerical 1,186,382 - 5
Trademark 1,220,068 - 7
Copywrite 115,193 - 7
-------------------------------------------------------------
Total Intellectual Property $ 2,669,942 $ 35,799
Less accumulated amortization 218,534 5,114
-------------------------------------------------------------
Intellectual Property, Net $ 2,451,408 $ 30,685
-------------------------------------------------------------
The estimated amortization expenses for the next five years are in the table
below:
F-17
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Year Ending December 31,
-------------------------------------------------------
2007 $ 416,612
2008 416,612
2009 416,612
2010 416,612
2011 416,612
-------------------------------------------------------
Total $ 2,083,060
-------------------------------------------------------
On June 6, 2006, the Company and Advance Beauty Solutions ("ABS") signed an
agreement (the "Asset Purchase Agreement"), subject to the ABS Bankruptcy Court
approving the Asset Purchase Agreement and granting the Sale Motion, approving
the settlement and compromise of certain disputed claims against ABS. Pursuant
to the settlement of ABS's bankruptcy proceedings and the Asset Purchase
Agreement, the Company has an allowed claim against the ABS's estate in the
amount of $2,350,000, of which $750,000 is to 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.
Under the Asset Purchase Agreement, the Company agreed to 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; the assumption of any assumed liabilities; and the
obligation to pay ABS a royalty equal to $3.00 per TrueCeramic Pro
flat iron unit sold by ABS (the "Royalty Obligation").
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders -- During June 2006, the Company received from a
stockholder, an interest-free, demand loan, the amount of $110,837, which was
recorded as a note payable to the stockholder. In August 2006, the Company made
a payment to the stockholder, which repaid the entire balance ($110,837) of the
loan.
At December 31, 2005, the Company owed $95,806 on an interest-free, demand loan,
to one of its stockholders. In 2006, the Company repaid the outstanding balance
of the note.
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 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-18
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation - In January 2006, the Company settled a lawsuit
related to an alleged breach of facilities sublease agreement involving
facilities located in Colorado. The lawsuit had been previously settled in 2002,
and subsequent proceedings by the plaintiff in December 2005, arising from the
Company's default of its obligations under the 2002 settlement resulted in the
plaintiff's filing of a confession of judgment against the Company. Following
negotiations with the plaintiff, the Company settled the remaining claim for
$200,000 cash. This amount was recorded as an accrued liability at December 31,
2005, and payment, in full, was made in January 2006.
As of December 31, 2005, the Company was in default of its obligations under the
settlement agreement pertaining to the sublease involving facilities located in
Colorado. 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. The second settlement was recorded as an accrued liability
at December 31, 2005, and payment, in full, was made in January 2006.
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 Cornell
Capital. The case had been previously dismissed in a New York court.
On February 24, 2006 the Company entered into a settlement agreement with the
investment firm. 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 five years. The value of the shares and warrants of $464,186
was accrued in 2005 as an accrued liability.
Litigation - During the years ended December 31, 2005 and 2006, the Company
determined that the statute of limitations had expired for various vendors.
Amounts of $174,990 and $6,930, respectively, 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 $32,472. 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 May 2005, in connection with the Company's issuance of
a convertible debenture to Highgate (See Note 11), the Company granted to the
Highgate registration rights, pursuant to which the Company agreed to file,
within 120 days of the closing of the purchase of the debenture, a registration
statement to register the resale of shares of the Company's common stock
issuable upon conversion of the 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,
the registration statement was declared effective on August 11, 2006.
F-19
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In December 2005, in connection with the Company's issuance of a convertible
debenture to Cornell (See Note 11), the Company granted to the Cornell
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. On January 12, 2007 the Company entered into an
agreement which extended the filing deadline of the registration statement until
June 1, 2007.
In August 2006, in connection with the Company's issuance of a convertible
debenture to Cornell (See Note 11), the Company granted to the Cornell
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
74,291,304 shares and 15,000,000 warrants, and to keep such registration
statement effective until all of the shares issuable upon conversion of the
debenture have been sold. On January 12, 2007 the Company entered into an
agreement which extended the filing deadline of the registration statement until
June 1, 2007.
On July 20, 2006, the Company entered into a lockdown agreement with Cornell
(the "Cornell Agreement") and related to the first Cornell Debenture. Pursuant
to the Cornell Agreement, Cornell agreed that it would not convert any of the
principal or interest on the Cornell Debenture or exercise any of the Warrants
granted to Cornell until the Company had taken the steps necessary to increase
its authorized capital. As such, the Company was able to lock down 106,900,000
shares underlying the Cornell Debenture and 25,000,000 shares underlying the
Cornell Warrants.
On May 24, 2006, the Company closed a private placement of shares of its common
stock and warrants in which it issued 14,285,715 shares of the Company's common
stock to ANAHOP, and issued warrants to purchase up to an additional 30,000,000
shares of common stock to designees of ANAHOP for $1,000,000. With respect to
the shares underlying the warrants, the Company granted piggyback registration
rights as follows: (A) once all of the warrants with an exercise price of $0.15
have been exercised, the Company agreed to include in its next registration
statement the resales of the shares issued upon exercise of the $0.15 warrants;
(B) once all of the warrants with an exercise price of $0.25 have been
exercised, the Company agreed to include in its next registration statement the
resales of the shares issued upon exercise of the $0.25 warrants; and (C) once
all of the warrants with an exercise price of $0.50 have been exercised, the
Company agreed to include in its next registration statement the resales of the
shares issued upon exercise of the $0.50 warrants. The Company did not grant any
registration rights with respect to the shares. The shares and the warrants 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. The Company
used the proceeds for working capital and general business purposes, including
the purchase of the assets of ABS (see Note 7).
On June 30, 2006, the Company agreed to sell 28,571,428 shares of its common
stock to ANAHOP for $2,000,000 if all tranches of the sale close. The Company
also issued warrants to purchase up to an additional 63,000,000 shares of its
common stock to designees of ANAHOP. The Company granted piggyback registration
F-20
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
rights as follows: (A) once all of the warrants with an exercise price of $0.15
have been exercised, the Company agreed to include in its next registration
statement the resales of the shares issued upon exercise of the $0.15 warrants;
(B) once all of the warrants with an exercise price of $0.25 have been
exercised, the Company agreed to include in its next registration statement the
resales of the shares issued upon exercise of the $0.25 warrants; and (C) once
all of the warrants with an exercise price of $0.50 have been exercised, the
Company agreed to include in its next registration the resales of the shares
issued upon exercise of the $0.50 warrants. The Company did not grant any
registration rights with respect to the Shares sold in the June private
placement. During the 2006, ANAHOP paid $500,000, of first tranche payments in
exchange for 7,172,857 shares of stock in the Company.
The Shares sold in the June 2006 private placement 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. The Company intends to use the
proceeds from the Private Offering for working capital and general business
purposes.
On July 20, 2006, the Company entered into a lockdown agreement with ANAHOP,
(the "ANAHOP Agreement"), Albert Hagar, and Fadi Nora, and related to the
private placement transactions discussed above. Albert Hagar and Fadi Nora were
the designees to whom ANAHOP assigned the 30,000,000 warrants. Pursuant to the
ANAHOP Agreement, Hagar and Nora agreed that they would not exercise any of the
warrants they received in connection with the either private offerings until the
Company had taken the steps necessary to increase its authorized capital.
Additionally, ANAHOP agreed that it would not make the second tranche payment to
purchase the second tranche shares until the Company had taken the steps
necessary to increase its authorized capital. As such, under the ANAHOP
Agreement, the Company was able to lock down 21,428,571 shares, and 93,000,000
shares underlying the warrants issued to Hagar and Nora in the private
placements.
Accrued Payroll Tax Liabilities - The Utah State Tax Commission 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, was $98,316, consisting of $69,741 in payroll taxes and
$28,576 in penalties and interest. In January 2006, the Company paid the $98,316
balance due. In addition the State of Utah has a lien against the Company for
payment of penalties and interest related a predecessor company. The Company
does not consider this to be a claim that is likely to result in a liability
against the Company and is currently working with legal counsel to resolve the
matter.
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.
In connection with this agreement the Company issued options to purchase
1,500,000 shares common stock to the Developers for the sale, shipment and
payment of over 200,000 units of a fitness product. The options were to be
exercisable at $0.06 per share, vested on the grant date (See Note 16). The
options were never exercised and accordingly, they expired in June 2006. The
term of the options agreement was for a 24 month period which started in June
2004 and terminated in June 2006.
F-21
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 2006 and 2005:
2006 2005
--------------------------------------------------------------------------------
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 $ 1,038,501 $ 1,050,000
Court Estate Note Payable (See Note 12) 429,045
--------------------------------------------------------------------------------
Total Notes Payable $ 1,467,546 $ 1,050,000
Less current maturities (444,436) (12,610)
--------------------------------------------------------------------------------
Long-Term Portion of Notes Payable $ 1,023,110 $ 1,037,390
--------------------------------------------------------------------------------
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 were required through January 2006. Starting
in February 2006, principal and interest payments have been 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 the notes payable:
Year Ending December 31,
----------------------------------------------------
2007 15,392
2008 1,023,110
----------------------------------------------------
Total $ 1,038,502
----------------------------------------------------
Court Estate Note Payable - Under an Asset Purchase Agreement (See Note 7),
which is a part of the ABS Bankruptcy Agreement, there is an obligation to pay
ABS a royalty (See Note 14).
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, 2006 was $163,884.
F-22
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
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 9, the Company granted Highgate registration rights related
to the issuance of the debenture.
The Company determined that certain conversion features of the Debenture fell
under derivative accounting treatment. As of December 31, 2006 the carrying
value of the Debenture was $1,807,191. The carrying value will be accreted each
quarter over the life of the Debenture until the carrying value equals the face
value of $2,850,000. The fair value of the derivative liability as of December
31, 2006 was $1,256,510.
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
Company were $1,228,567. The proceeds were used for general corporate and
working capital purposes, at the Company's discretion.
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, per the conversion terms of the convertible debenture.
In September 2006, Highgate converted $150,000 of its convertible debenture into
8,051,530 shares of the Company's common stock at a conversion rate of $0.01863
per share, per the conversion terms of the convertible debenture.
F-23
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In November 2006, Highgate converted $100,000 of accrued interest of its
convertible debenture into 5,128,205 shares of the Company's common stock at a
conversion rate of $0.019 per share, per the conversion terms of the convertible
debenture.
Cornell - On December 30, 2005, the Company entered into an agreement with
Cornell to issue 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, subordinate 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. The balance of accrued interest owed at December 31, 2006 was
$74,589.
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 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 9, the Company granted Cornell registration rights related
to the issuance of the Cornell Debenture and warrants.
The Company determined that the conversion features on the Cornell Debenture and
the associated warrants fell under derivative accounting treatment. As of
December 31, 2006 the carrying value of the Cornell Debenture was $580,594. The
carrying value will be accreted each quarter over the life of the Cornell
Debenture until the carrying value equals the face value of $1,500,000. The fair
value of the derivative liability conversion as of December 31, 2006 was
$782,991.
F-24
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Cornell Debenture, Cornell agreed that it could not
convert any amount of principal or interest of the Cornell Debenture in
accordance with the terms and conditions of the Lockdown Agreement by and
between the Company and Cornell, until the Company has effectuated an increase
in its authorized capital. The Company and Cornell also agreed that in the event
that the Company had not effectuated such increase in its authorized capital by
October 30, 2006, which was subsequently extended to December 31, 2006, and then
to June 1, 2007, such failure would constitute an event of default on parallel
with those set forth in the purchase agreement and subject to the same
consequences as those listed above.
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 were used for
general corporate and working capital purposes, at the Company's discretion.
As of April 16, 2007, Cornell had not converted any of the Cornell Debenture
into shares of the Company's common stock.
Cornell - On August 23, 2006, the Company entered into another agreement with
Cornell, relating to the issuance by the Company of a 5% Secured Convertible
Debenture, due April 23, 2009, in the aggregate principal amount of $1,500,000
(the "August Debenture").
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, 2006 was $26,712.
The Company also paid a commitment fee of $120,000 and a structuring fee of
$15,000 to Cornell. As such, of the total purchase amount of $1,500,000, the net
proceeds to the Company were $1,365,000. The Company used these proceeds for
general corporate and working capital purposes, in its discretion. The Company
did not use any of the proceeds of the sale of the August Debenture to repay any
of the Highgate Debenture or the prior Cornell Debenture.
Cornell is entitled to convert, at its option, all or part of the principal
amount owing under the August 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 Company's common stock for the twenty trading days
immediately preceding the conversion date.
Cornell's right to convert principal amounts owing under the August Debenture
into shares of the Company's common stock is limited as follows:
(i) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the August Debenture in any
consecutive 30-day period when the price of the Company's
stock is $0.03 per share or less at the time of conversion;
(ii) Cornell may convert any amount of the principal amount plus
accrued interest of the August Debenture in any consecutive
30-day period when the price of the Company's stock is greater
than $0.03 per share at the time of conversion; and
F-25
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
(iii) Upon the occurrence of an Event of Default (as defined in the
Debenture), Cornell may, in its sole discretion, accelerate
full repayment of all debentures outstanding and accrued
interest thereon or may, notwithstanding any limitations
contained in the August Debenture and/or the Purchase
Agreement, convert all debentures outstanding and accrued
interest thereon in to shares of the Company's Common Stock
pursuant to the August Debenture.
Except in the event of default, Cornell may not convert the August Debenture for
a number of shares of common stock that would cause the aggregate number of
shares of Common Stock beneficially owned by Cornell and its affiliates to
exceed 4.99% of the outstanding shares of the common stock following such
conversion.
In connection with the August Purchase Agreement, the Company also agreed to
grant to Cornell warrants (the "Warrants") to purchase up to an additional
15,000,000 shares of the Company's common stock. The Warrants have an exercise
price of $0.06 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.
In connection with the issuance of the August Debenture, the Company granted
Cornell registration rights related to the issuance of the August Debenture and
warrants (See Note 9).
The Company determined that the conversion features on the August Debenture and
the associated warrants fell under derivative accounting treatment. As of
December 31, 2006 the carrying value of the August Debenture was $358,262. The
carrying value will be accreted each quarter over the life of the Cornell August
Debenture until the carrying value equals the face value of $1,500,000. The fair
value of the derivative liability relating to the August Debenture, excluding
the warrants, as of December 31, 2006 was $922,333.
In connection with the Cornell Debenture, Cornell agreed that it could not
convert any amount of principal or interest of the Cornell Debenture in
accordance with the terms and conditions of the Lockdown Agreement by and
between the Company and Cornell, until the Company has effectuated an increase
in its authorized capital. The Company and Cornell also agreed that in the event
that the Company had not effectuated such increase in its authorized capital by
October 30, 2006, which was subsequently extended to December 31, 2006, then was
subsequently extended to June 1, 2007, such failure would constitute an event of
default on parallel with those set forth in the Purchase Agreement and subject
to the same consequences as those listed in the Purchase Agreement.
In connection with the issuance of the August Debenture, fees of $135,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the August Debenture. As such, of the total August Debenture of $1,500,000, the
net proceeds to the Company were $1,365,000. The proceeds were used for general
corporate and working capital purposes, at the Company's discretion.
As of April 16, 2007, Cornell had not converted any of the August Debenture into
shares of the Company's common stock.
F-26
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PRIVATE PLACEMENT OF COMMON STOCK
On May 24, 2006, the Company closed a private placement of shares of the
Company's common stock and warrants (the "May Private Offering"). Pursuant to a
securities purchase agreement (the "Agreement"), the Company issued 14,285,715
shares of common stock (the "May Shares") to ANAHOP, Inc., a California
corporation ("ANAHOP"). The consideration paid for the May Shares was
$1,000,000. In addition to the Shares, the Company issued warrants (the
"Warrants") to designees of ANAHOP to purchase up to an additional 30,000,000
shares of common stock.
The Company used the proceeds from the May Private Offering, in part, to finance
the cash purchase portion of the Company's acquisition of the assets of ABS,
following approval of the Bankruptcy Court.
On June 30, 2006, the Company closed a second private placement of shares of its
common stock and warrants (the "June Private Offering"). Pursuant to a
securities purchase agreement (the "Agreement"), the Company agreed to issue
28,571,428 shares of common stock (the "June Shares") to ANAHOP. The total
consideration to be paid for the June Shares will be $2,000,000 if all tranches
of the sale close.
Pursuant to the Agreement, 3ANAHOP agreed to pay $300,000 at the time of
closing, and an additional $200,000 within 30 days of the closing. (The payments
of $300,000 and $200,000 are referred to collectively as the "First Tranche
Payment.") Upon the receipt of the First Tranche Payment, the Company agreed to
issue a certificate or certificates to the Purchaser representing 7,142,857 of
the June Shares.
The remaining $1,500,000 is to be paid by the ANAHOP as follows:
(i) No later than thirty calendar days following the date on which
any class of the Company's capital stock is first listed for
trading on either the Nasdaq Small Cap Market, the Nasdaq
Capital Market, the American Stock Exchange, or the New York
Stock Exchange, ANAHOP agreed to pay an additional $500,000 to
the Company; and
(ii) No later than sixty calendar days following the date on which
any class of the Company's capital stock is first listed for
trading on either the Nasdaq Small Cap Market, the Nasdaq
Capital Market, the American Stock Exchange, or the New York
Stock Exchange, ANAHOP agreed to pay an additional $1,000,000
to the Company. (The payments of $500,000 and $1,000,000 are
referred to collectively as the "Second Tranche Payment.")
Upon receipt by the Company of the Second Tranche Payment, the Company agreed to
issue a certificate or certificates to ANAHOP representing the remaining
21,428,571 June Shares.
Additionally, once the Company has received the Second Tranche Payment, the
Company agreed to issue warrants to designees of ANAHOP to purchase up to an
additional 63,000,000 shares.
The Company used the proceeds from the June Private Placement for general
corporate purposes and working capital.
NOTE 13 - LEASES
During 2005, the Company leased a satellite office in Los Angeles, California.
This office is used for sales and promotions. The Company entered into a
two-year sublease agreement with an unrelated party on October 24, 2005.
F-27
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
During 2006, the Company leased a satellite office in Bentonville, Arkansas.
This office is used for sales and promotions. The Company entered into a
two-year sublease agreement with an unrelated party on November 15, 2006.
The following is a schedule of future minimum lease payments under the operating
leases:
Year Ending December 31,
----------------------------------------------------
2007 $ 62,519
2008 16,171
----------------------------------------------------
Total $ 78,690
----------------------------------------------------
The building leases provide for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
$67,414 and $55,410 for the years ended December 31, 2006 and 2005,
respectively.
Additionally, the Company had a lease for a facility in China that expired in
2006. The lease was not renewed by the Company and the Company is currently
using the office space provided under the terms of an agreement with Uking.
(Uking is a sales organization in China that is owned by Mr. Charles Ho who is
also the President of CirTran Asia.).
NOTE 14 - ROYALTY OBLIGATION
Under the Asset Purchase Agreement (See Note 7), which is a part of the ABS
Bankruptcy Agreement, there is an 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 is 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 agreed to pay ABS an amount equal to $435,000 less the royalty payments
made to date. Pursuant to the court-approved settlement, payments under the
Royalty Obligation will be made in the following order:
(i) The Royalty Obligation payments will be made exclusively to
Inventory Capital Group, Inc. ("ICG") and Media Funding
Corporation ("MFC") (collectively, the "Secured Parties")
until (i) the Secured Parties have been paid in full on
account of their $1,243,208 secured claim, or (ii) the Secured
Parties have been paid $100,000 in payments under the Royalty
Obligation, whichever comes first.
(ii) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
(iii) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation
payments will be used for distribution to allowed general
unsecured claims not including those of the Company and
certain insiders with unpaid notes (the "Insider
Noteholders").
(iv) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among
the Insider Noteholders (with a total allowed aggregate claim
of $2,100,000), and the Company (with a general unsecured
claim in the amount of $1,600,000), until paid in full. The
total claims against ABS's estate that must be paid before the
Company begins to share in the Royalty Obligation payments is
$435,000.
F-28
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006, the Company had paid $5,955 in royalties.
NOTE 15 - 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,
2006 and 2005, were as follows:
2006 2005
--------------------------------------------------------------------------------
Deferred Income Tax Assets:
Inventory reserve $ 323,150 $ 280,233
Bad debt reserve 5,290 102,903
Vacation reserve 23,252 26,602
Research and development credits 27,285 27,285
Net operating loss carryforward 6,655,708 4,676,769
Depreciation 1,766 -
Intellectual property 135,172 101,095
Derivative liability 96,485 -
--------------------------------------------------------------------------------
Total Deferred Income Tax Assets 7,268,108 5,214,887
Valuation allowance (7,268,108) (5,213,178)
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, 2006 and
2005.
As of December 31, 2006, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $15,521,609. These net operating loss
carryforwards, if unused, begin to expire in 2019. Utilization of approximately
$1,193,685 of the total net operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate return limitation
rules and limitations on the carryforward of net operating losses after a change
in ownership. The realization of tax benefits relating to net operation loss
carryforwards is limited due to the settlement related to amounts previously due
to the IRS, as discussed below.
F-29
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In November 2004, the Internal Revenue Service (IRS) accepted the Company's
Amended Offer in Compromise (the "Offer") to settle delinquent payroll taxes,
interest and penalties. The acceptance of the Offer required the Company to pay
$500,000. Additionally, the Offer required 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 of $1,455,767.
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, 2006 and 2005:
2006 2005
--------------------------------------------------------------------------------
Benefit at statuatory rate (34%) $ (970,484) $ (179,421)
Non-deductible expenses 30,758 21,399
Change in valuation allowance 2,054,930 161,970
State tax benefit, net of federal tax benefit (94,194) (17,416)
Return to provision (1,021,010) 13,468
--------------------------------------------------------------------------------
Net Benefit from Income Taxes $ - $ -
--------------------------------------------------------------------------------
NOTE 16 - STOCKHOLDERS' EQUITY
Common Stock Issuances -- During the year ended December 31, 2006, the Company
issued the following shares of restricted common stock:
37,373,283 shares for payment of $900,000 principal and $100,000 of
interest on the debenture to Highgate House Funds, Ltd. (See Note 10.)
4,000,000 shares, with a fair value of $0.044 per share in settlement
of an agreement with the investment firm. (See Note 9)
21,428,572 shares were purchases by ANAHOP, Inc. in two separate
transactions. (See Note 11)
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 8.)
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 9.)
On March 31, 2005, the Company acquired a 100% interest in PFE for 20,000,000
shares of the Company's restricted common stock. (See Note 10)
F-30
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Non-Employee Options - During the year ended December 31, 2006, 3,500,000
previously issued options were exercised by counsel for proceeds of $350. During
the year ended December 31, 2006, the Company granted options to purchase
1,500,000 shares of common stock to attorneys, as discussed in Note 17.
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 as discussed in Note
17. During 2005, 5,000,000 of these options and 1,500,000 previously issued
options were exercised by counsel for proceeds of $650.
Employee Options - During the year ended December 31, 2006, 6,500,000 options
were exercised for compensation expense of $34,526, settlement of loan to a
shareholder of $54,000, and an employee receivable of $66,000.
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.
NOTE 17 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for options and warrants issued
to, directors, officers employees, and non-employees, at their fair value in
accordance with Statement of Financial Accounting Standards No. 123R,
"Accounting for Stock-Based Compensation" ("SFAS 123R").
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 thereunder. 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.
Employee Options - During the year ended December 31, 2006, the Company granted
options to purchase 4,000,000 shares of common stock to employees. The options
were valued at $29,590.
The Company also granted options to purchase 2,500,000 shares of common stock to
Christopher Nassif under the terms of an employment agreement. The options had
an exercise price of $0.05 per share and expire five years after the date of the
options. Twenty percent of the options vested at the signing of the agreement on
May 25, 2006, and 20% each of the next four years on the anniversary of the
signing, subject to Mr. Nassif's continued employment. None of these options
were exercised in 2006.
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.
Non-Employee Options - During year ended December 31, 2006, the Company granted
options to purchase 1,500,000 shares of common stock to legal counsel with and
F-31
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
exercise price of $0.0001 per share. The options were five year options and
vested on the date granted. Legal expense of $59,851 was recorded for the fair
value of options issued.
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.
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 9 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, 2006. All the options to the developers expired as per the
terms of the option grant in June 2006.
A total of 9,250,000 employee options and 1,500,500 non-employee options were
outstanding as of December 31, 2006.
A summary of the stock option activity for the years ended December 31, 2005 and
2006, is as follows:
Weighted Average
Shares Exercise Price
------------- ----------------
Outstanding at December 31, 2004 14,250,500 $ 0.02
Granted 27,500,000 $ 0.02
Exercised (25,000,000) $ 0.01
-------------
Outstanding at December 31, 2005 16,750,500 $ 0.02
Granted 5,500,000 $ 0.03
Exercised (10,000,000) $ 0.02
Expired (1,500,000) $ 0.06
-------------
Outstanding at December 31, 2006 10,750,500 $ 0.03
=============
Excercisable at December 31, 2006 8,750,500 $ 0.02
=============
As of December 31, 2006, there was approximately $49,913 of unrecognized
compensation cost related to stock options that will be recognized over a
weighted average of 2.2 years. The aggregate intrinsic value of options expected
to vest at December 31, 2006, was $94,892. The aggregate intrinsic value of
options exercisable at December 31, 2006, was $38,892. This year end intrinsic
value is based on a December 31, 2006, closing price of $0.017. The 10,000,000
options exercised during 2006 has an intrinsic value of $291,150.
F-32
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
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, 2006 and 2005:
Years Ended December 31,
----------------------------
2006 2005
------------ ------------
Expected dividend yield - -
Risk free interest rate 4.95% 4.13%
Expected volatility 243.89% 268%
Expected life 1.01 years .12 years
Weighted average fair value per share $ 0.07 $ 0.02
A summary of the stock options outstanding and exercisable at December 31, 2006
follows:
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Options Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
----------------- ----------- ----------- -------- ----------- ----------
$0.0001 1,500,500 1.89 $0.00010 1,500,500 $0.00010
$0.0200 - $0.0300 6,750,000 2.76 $0.00244 6,750,000 $0.00244
$0.0450 2,500,000 4.32 $0.04500 500,000 $0.04500
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.
In connection with the Cornell convertible debenture issued August 23, 2006 the
Company issued 15,000,000 warrants to purchase shares of the Company's common
stock. The warrants had an exercise price of $0.06 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.
F-33
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - 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 four reportable segments: electronics assembly, Ethernet technology,
contract manufacturing, and media. The electronics assembly segment manufactures
and assembles circuit boards and electronic component cables. The Ethernet
technology segment designs and manufactures Ethernet cards. The contract
manufacturing segment manufactures, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement. The
accounting policies of the segments are consistent with those described in the
summary of significant accounting policies. The Company evaluates performance of
each segment based on earnings or loss from operations. Selected segment
information is as follows:
Electronics Ethernet Contract
Assembly Technology Manufacturing Media Total
-----------------------------------------------------------------------------------------------
December 31, 2006
Sales to external customers $ 2,478,291 $ 35,072 $ 4,865,689 $ 1,360,156 $ 8,739,208
Intersegment sales 16,739 - - - 16,739
Segment income (loss) (1,325,946) (300,590) (1,184,064) (43,769) (2,854,369)
Segment assets 7,734,924 137,838 2,879,305 377,671 11,129,738
Depreciation and amortization 341,511 496 184,421 - 526,428
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 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,
----------------------------------
Sales 2006 2005
------------------------------------------------------------------------------
Total sales for reportable segments $ 8,755,947 $ 13,041,527
Elimination of intersegment sales (16,739) (49,015)
------------------------------------------------------------------------------
Consolidated net sales $ 8,739,208 $ 12,992,512
------------------------------------------------------------------------------
December 31,
----------------------------------
Total Assets 2006 2005
------------------------------------------------------------------------------
Total assets for reportable segments $ 11,129,738 $ 10,901,897
Adjustment for intersegment amounts - -
------------------------------------------------------------------------------
Consolidated total assets $ 11,129,738 $ 10,901,897
------------------------------------------------------------------------------
F-34
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - 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:
Revenues Revenue-producing assets
--------------------------------------------------------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
United States of America $ 7,685,338 $ 12,694,814 $ 176,437 $ 280,490
China - - $ 794,069 663,420
Other 1,053,870 297,695 - -
--------------------------------------------------------------------------------
$ 8,739,208 $ 12,992,509 $ 970,506 $ 943,910
--------------------------------------------------------------------------------
NOTE 20 - SUBSEQUENT EVENTS
Between the months of January 2007 and April 2007, Highgate converted $350,000
of principal on its convertible debenture into 24,980,477 shares of the
Company's common stock, and $100,000 of interest on its convertible debenture
into 6,199,628 shares of the Company's common stock at conversion rates of
$0.01300 to $0.01613 per share, per the terms of the debenture agreement.
On March 21, 2006, the Company announced that it had formed a new subsidiary,
Diverse Media Group Corporation ("DMG"), 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. On May 26, 2006, DMG entered into an assignment and exclusive services
agreement with Diverse Talent Group, Inc., a California corporation, ("DT"). The
Services Agreement has a 5 year term and was made effective as of April 1, 2006.
Pursuant to the Services Agreement, DMG and DT entered into an exclusive
operating relationship whereby DMG agreed to outsource its talent agency
operations to DT and to provide financing to DT to assist in DT's growth. Under
the Services Agreement, DMG and DT created a relationship whereby DT would
operate exclusively under the DMG business structure. The project did not
generate the type of synergy that was anticipated, and it was concluded that it
would be in the best interest of the Company to terminate the relationship with
DT.
In March 2007, the Company entered into a term sheet agreement with DT that was
effective on April 1, 2007. As a result, the following has been agreed to as a
starting point for negotiations of a settlement between the companies:
(i) The parties agree to terminate the original agreements and the
Company will assign back to DT all talent contracts and the
name "Diverse Media Group". DT will cause Diverse Media Group,
Inc., a publicly traded company, to issue 9,000,000 shares of
stock to escrow account.
(ii) Sale and registration of the shares are limited and are
subject to Diverse Media Group's first right of refusal on any
proposed stock sale.
As of the date of this report, the final terms and conditions of the settlement
had yet to be determined.
The Company anticipates that DMG will continue to develop relationships with
talent agencies in order to provide talent to produce infomercials for the
direct marketing industry and for product branding campaigns. The Company also
anticipates that DMG will continue to provide product marketing, production,
media funding and merchandising services to the direct response and
entertainment industries in concert with the original objectives of its
formation.
F-35
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