As filed with the Securities and Exchange Commission on February 14, 2003
Registration Statement No. 333-______________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CIRTRAN CORPORATION
(Name of issuer in its charter)
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Nevada 3672 68-0121636
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
4125 SOUTH 6000 WEST
WEST VALLEY CITY, UTAH 84128
(801) 963-5112
(Address and telephone number of registrant's principal executive offices
and principal place of business)
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IEHAB HAWATMEH
4125 SOUTH 6000 WEST
WEST VALLEY CITY, UTAH 84128
(801) 963-5112
(Name, Address and telephone number of agent for service)
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Copies to:
JEFFREY M. JONES, ESQ.
C. PARKINSON LLOYD, ESQ.
DURHAM JONES & PINEGAR
111 EAST BROADWAY, SUITE 900
SALT LAKE CITY, UTAH 84111
(801) 415-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the following box. [ x ]
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following boxes and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following boxes and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Aggregate Aggregate Amount of
Title of Class of Securities To be Price Offering Registration
to be Registered Registered (1) Per Share Price Fee
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Common Stock, 127,562,500 shares (2) $0.04(3) $ 5,102,500 (3) $ 470 (3)
$0.001 par value per share
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Totals 127,562,500 shares $ 5,102,500 $ 470 (4)
=================== ============== =========
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(1) All shares offered for resale by the Selling Shareholders.
(2) Consisting of (i) up to 125,000,000 shares of common stock issuable
to the Equity Line Investor under the Equity Line of Credit
Agreement; and (ii) 2,562,500 shares issued to the Equity Line
Investor and two other selling shareholders in connection with the
Equity Line of Credit Agreement.
(3) The fee was estimated pursuant to Rule 457(c) under the Act on the
basis of the average of the bid and asked price of CirTran's common
stock as reported on the OTC Bulletin Board on February 10, 2003.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
-ii-
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED ______, 2002
--------------------------------------------------------------------------------
CIRTRAN CORPORATION
A Nevada Corporation
[CirTran Corporation Logo]
127,562,500 Shares of Common Stock
$0.001 per share
This prospectus relates to the resale of up to 127,562,500 shares (the "Shares")
of common stock of CirTran Corporation, a Nevada corporation. Three of our
shareholders, Cornell Capital Partners, LP (the "Equity Line Investor"),
Westrock Advisors, Inc., and Butler Gonzales LLP (collectively with the Equity
Line Investor, the "Selling Shareholders") are offering all of the Shares
covered by this prospectus. The Selling Shareholders will receive all of the
proceeds from the sale of the Shares and we will receive none of those proceeds.
The Equity Line Investor is an underwriter of the Shares.
-------------------------
Investment in the Shares involves a high degree of risk. You should
consider carefully the risk factors beginning on page 4 of this prospectus
before purchasing any of the Shares offered by this prospectus.
-------------------------
CirTran Corporation common stock is quoted on the OTC Bulletin Board
and trades under the symbol "CIRT". The last reported sale price of our common
stock on the OTC Bulletin Board on February 10, 2003, was $0.04 per share.
Nevertheless, the Selling Shareholder does not have to sell the Shares in
transactions reported on the OTC Bulletin Board, and may offer its Shares
through any type of public or private transactions.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
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______________________, 2003
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CirTran has not registered the Shares for sale by the Selling
Shareholders under the securities laws of any state. Brokers or dealers
effecting transactions in the Shares should confirm that the Shares have been
registered under the securities laws of the state or states in which sales of
the Shares occur as of the time of such sales, or that there is an available
exemption from the registration requirements of the securities laws of such
states.
This prospectus is not an offer to sell any securities other than the
Shares. This prospectus is not an offer to sell securities in any circumstances
in which such an offer is unlawful.
CirTran has not authorized anyone, including any salesperson or
broker, to give oral or written information about this offering, CirTran, or the
Shares that is different from the information included or incorporated by
reference in this prospectus. You should not assume that the information in this
prospectus, or any supplement to this prospectus, is accurate at any date other
than the date indicated on the cover page of this prospectus or any supplement
to it. In this prospectus, references to "CirTran," "the Company," "we," "us,"
and "our," refer to CirTran Corporation and its subsidiaries.
TABLE OF CONTENTS
Summary about CirTran Corporation and this offering.............................................2
Risk factors....................................................................................4
Use of proceeds................................................................................10
Determination of offering price................................................................10
Description of business........................................................................10
Property.......................................................................................15
Management's discussion and analysis or plan of operation......................................17
Forward-looking statements.....................................................................23
Selling Shareholders...........................................................................23
Plan of distribution...........................................................................25
Regulation M...................................................................................26
Legal Proceedings..............................................................................26
Directors, executive officers, promoters and control persons...................................30
Commission's position on indemnification for Securities Act liabilities........................31
Security ownership of certain beneficial owners and management.................................32
Description of common stock....................................................................33
Certain relationships and related transactions.................................................34
Market for common equity and related stockholder matters.......................................35
Executive compensation.........................................................................37
Changes in and disagreements with accountants on accounting and financial disclosure...........39
Index to financial statements .................................................................40
Experts........................................................................................41
Legal matters..................................................................................41
Summary about CirTran Corporation and this offering
CirTran Corporation
CirTran Corporation is a Nevada corporation engaged in providing a
mixture of high and medium size volume turnkey manufacturing services for
electronics original equipment manufacturers ("OEMs") in the communications,
networking, peripherals, gaming, consumer products, telecommunications,
automotive, medical, and semiconductor industries. These services include
providing design and new product introduction services, just-in-time delivery on
low-volume to medium-volume turnkey and consignment projects, and other
value-added manufacturing services. Our manufacturing processes include the
following: surface mount technology, ball-grid array assembly and
pin-through-hole technology, which are all methods of attaching electronic
components to circuit
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boards; manufacturing and test engineering support and design for
manufacturability; and in-circuit and functional test and full-system mechanical
assembly. We also design and manufacture Ethernet cards that are used to connect
computers through fiber optic networks and market these cards through an
international network of distributors, value-added resellers and system
integrators.
We incorporated in Nevada in 1987 under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until the year 2000, when we effected a reverse split in our
common stock, reducing our issued and outstanding shares to 116,004. In July
2000, we issued 10,000,000 shares of common stock to acquire, through our
wholly-owned subsidiary, CirTran Corporation (Utah), substantially all of the
assets and certain liabilities of Circuit Technology, Inc., a Utah corporation.
The shares we issued to Circuit Technology in connection with the acquisition
represented approximately 98.6% of our issued and outstanding common stock
immediately following the acquisition.
Effective August 6, 2001, we effected a 1:15 forward split and stock
distribution which increased the number of our issued and outstanding shares of
common stock from 10,420,067 to 156,301,005. We also increased our authorized
capital from 500,000,000 to 750,000,000 shares of common stock.
Our address is 4125 South 6000 West, West Valley City, Utah 84128,
and our phone number is (801) 963-5112.
This offering
On November 5, 2002, we entered into an Equity Line of Credit
Agreement (the "Equity Line Agreement") with Cornell Capital Partners, LP, a
private investor (the "Equity Line Investor"). Under the Equity Line Agreement,
we have the right to draw up to $5,000,000 from the Equity Line Investor against
an equity line of credit (the "Equity Line"), and to put to the Equity Line
Investor shares of our common stock in lieu of repayment of the draws. The
number of shares to be issued is determined by dividing the amount of the draw
by the lowest closing bid price of our common stock over the five trading days
after the advance notice is tendered. The Equity Line Investor is required under
the Equity Line Agreement to tender the funds requested by us within two trading
days after the five-trading-day period used to determine the market price.
In connection with the Equity Line Agreement, we granted registration
rights to the Equity Line Investor, in connection with which we filed this
prospectus and the registration statement of which it is a part. We are required
to use our best efforts to have this registration statement and prospectus
declared effective by the SEC, and we are unable to draw on the Equity Line
until this registration statement has been declared effective.
Additionally, in connection with the Equity Line Agreement, we issued
2,375,000 shares of common stock to the Equity Line Investor; 125,000 shares of
common stock to Westrock Advisors, Inc., ("Westrock"), who acted as a finder in
connection with the Equity Line Agreement; and 62,500 shares to Butler Gonzales,
LLP ("Butler Gonzales"), as partial payment of legal fees in connection with the
Equity Line Agreement.
The Equity Line Investor, Westrock, and Butler Gonzales are the
Selling Shareholders who will be selling the shares covered by this prospectus
and the registration statement of which it is a part.
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Risk Factors
In addition to the other information in this prospectus, the
following risk factors should be considered carefully in evaluating our business
before purchasing any of our shares of common stock. A purchase of our common
stock is speculative and involves significant and substantial risks. Any person
who is not in a position to lose the entire amount of his investment should
forego purchasing our common stock.
Risks Related to Our Operations
We have a history of operating losses and we expect to continue to generate
losses, which could have a material adverse impact on our ability to operate
profitably.
Our expenses are currently greater than our revenues. We have had a
history of losses and our accumulated deficit was $13,080,492 at December 31,
2001, and $14,380,329 at September 30, 2002. Our net loss from operations for
the nine-month period ending September 30, 2002 was $1,299,837, and our net loss
from operations for the year ending December 31, 2001 was $2,933,084. Though our
gross profit margin has improved over the last two years, our level of sales has
declined during the same period. Our ability to operate profitably depends on
our ability to increase our sales and achieve sufficient gross profit margins
for sustained growth. We can give no assurance that we will be able to increase
our sales sufficiently to enable us to operate profitably, which could have a
material adverse impact on our business.
Our current liabilities exceed our current assets by a significant amount, and
we may not continue as a going concern.
Our financial statements indicate a trend of an increasingly larger
excess of current liabilities over current assets. Our current liabilities
exceeded our current assets by the following amounts as of the dates indicated:
$3,323,654 as of December 31, 1999; $5,664,395 as of December 31, 2000;
$7,832,259 as of December 31, 2001; and $5,448,391 at September 30, 2002. This
trend raises substantial doubt about our ability to continue as a going concern.
Unless we obtain additional financing through operations, investment capital or
otherwise, there is significant doubt we will be able to meet our obligations as
they come due and will be unable to execute our long-term business plans.
The "going concern" paragraph in the reports of our independent public
accountants for the years ended December 31, 2001, 2000, and 1999 raises doubts
about our ability to continue as a going concern.
The independent public accountants' reports for our financial
statements for the years ended December 31, 2001, 2000, and 1999 include an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. This may have an adverse effect on our ability to obtain
financing for our operations and to further develop and market our products.
Our volume of sales has decreased significantly over the last two years, and
there is no guarantee that we will be able to increase sales. This decrease in
sales volume could have a material adverse impact on our ability to operate our
business profitably.
Our sales volume is on a downward trend, as indicated by the
following levels of net sales for the periods indicated: $9,860,489 for the year
ending December 31, 1999; $6,373,096 for the year ending December 31, 2000;
$1,870,848 for the year ended December 31, 2001; and $1,981,103 for the
nine-month period ended September 30, 2002, compared to $1,545,020 during the
same period in 2001. On an annualized basis, this trend indicates a 73% decrease
in sales from 1999 through the third quarter of 2002. Even though our gross
profit has improved substantially during the same period, unless we are
successful in increasing both sales and net profit margins, there is significant
doubt that we will be able to continue as a going concern.
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We need to raise additional capital but, due to our current financial situation,
we may not be able to do so. If we are unable to raise sufficient capital to
finance our operations, we may not be able to continue as a going concern.
As of December 31, 2001, our monthly operating costs and interest
expenses averaged approximately $205,000 per month. As of September 30, 2002,
this amount had decreased to approximately $145,000 per month. Nevertheless, as
income from operations is not sufficient to meet these expenses, we must depend
on other sources of capital to fund our operations. We have operated without a
line of credit since February 2000, and it is unlikely that we will be able, in
our current financial condition, to obtain additional debt financing; and if we
did acquire more debt, we would have to devote additional cash flow to pay the
debt and secure the debt with assets. Therefore, we likely will have to rely on
equity financing to meet our anticipated capital needs. We recently entered into
a private equity line of credit to provide financing, but the funds available
may not be sufficient to sustain our operations beyond June 30, 2005. There can
be no assurances that we will be successful in obtaining additional capital. If
we issue additional shares in connection with debt or equity financing, this
will serve to dilute the value of our common stock and existing shareholders'
positions. If we are unsuccessful in obtaining additional funding to finance our
operations, there is serious doubt that we will be able to continue as a going
concern.
We have significant short-term debt which we are not currently able to fully
service.
As of September 30, 2002, we have significant short-term debt,
including approximately $1.30 million in accounts payable, $1.55 million in
demand notes due certain of our shareholders, and $3.23 million in accrued
liabilities, over half of which consist of delinquent federal and state payroll
taxes (see "Legal Proceedings"). We are currently not able to fully service this
debt. We are attempting to negotiate forbearance agreements with many of our
creditors and to restructure our short-term debt. There can be no assurance that
we will be successful in these efforts.
We are involved in several legal proceedings that may give rise to significant
liabilities.
We have accrued delinquent payroll tax liabilities in excess of $2.22
million and have not yet come to a final resolution of a payment schedule with
respect to most of this amount. Though we are attempting to negotiate
settlements to all of the various claims against us, 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.
We are dependent on the continued services of our President, and the untimely
death or disability of Iehab Hawatmeh could have a serious adverse effect upon
our company.
We view the continued services of our president, Iehab Hawatmeh, as
critical to the success of our company. Though we have an employment agreement
with Mr. Hawatmeh (see "Executive Compensation"), and a key-man life insurance
policy, the untimely death or disability of Mr. Hawatmeh could have a serious
adverse affect on our operations.
We have a limited product offering, and some of our key technologies are still
in the product development stage, which could have a material adverse impact on
our ability to generate revenues from operations.
We are a full-service contract electronics manufacturer servicing
OEMs in the following industries: communications, networking, peripherals,
gaming, law enforcement, consumer products, telecommunications, automotive,
medical and semi-conductor. We conduct our operations through two main
divisions: circuit board manufacturing and assembly, and Ethernet card design
and manufacture. Presently, there are a limited number of commercially available
applications or products incorporating our technologies. For us to be ultimately
successful, sales from these product offerings must be substantially greater. An
additional element of our business strategy is to achieve revenues through
appropriate strategic alliances, co-development arrangements, and license
arrangements
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with third parties. There can be no assurance that these collaboration and
license agreements will generate material revenues for our business in the
future.
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly
rapid turnaround time for their original equipment manufacturer (OEM) customers.
We do not obtain firm, long-term purchase commitments from our customers and
have experienced a demand for reduced lead-times in customer orders. Our
customers may cancel their orders, change production quantities or delay design
and production for several factors. Cancellations, reductions or delays by a
customer or group of customers could adversely affect our results of operations.
Additional factors that affect the electronics industry and that could have a
material adverse effect on our business include the inability of our customers
to adapt to rapidly changing technology and evolving industry standards and the
inability of our customers to develop and market their products. If our
customers' products become obsolete or fail to gain commercial acceptance, our
results of operations may be materially and adversely affected.
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
The majority of our revenue is generated from our contract
manufacturing services. Our customers include electronics, telecommunications,
networking, automotive, gaming and medical device OEMs that contract with us for
the manufacture of specified quantities of products at a particular price and
during a relatively short period of time. As a result, the mix and number of our
clients varies significantly from time to time. Responding to the fluctuations
and variations in the mix and number of our clients can cause significant time
delays in the operation of our business and the realization of revenues from our
clients. These delays could have a material adverse impact on our business.
Our industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able, especially given our lack of financial resources,
to effectively respond to the technological requirements of a changing market,
including the need for substantial additional capital expenditures that may be
required as a result of these changes. The electronics manufacturing services
industry is characterized by rapidly changing technology and continuing process
development. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. In addition, our industry could in the future encounter
competition from new or revised technologies that render existing technology
less competitive or obsolete.
There may be shortages of required components which could cause us to curtail
our manufacturing or incur higher than expected costs.
Component shortages or price fluctuations in such components could
have an adverse effect on our results of operations. We purchase the components
we use in producing circuit board assemblies and other electronic manufacturing
services and we may be required to bear the risk of component price
fluctuations. In addition, shortages of electronic components have occurred in
the past and may occur in the future. These shortages and price fluctuations
could potentially have an adverse effect on our results of operations.
Risks Related to the Offering
Holders of CirTran common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of common
stock in connection with the Equity Line.
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Introduction
The following table describes the number of shares of common stock
that would be issuable, assuming that the full amounts of the Equity Line had
been put to the Equity Line Investor (irrespective of the availability of
registered shares), and further assuming that the applicable conversion or
exercise prices at the time of such conversion or exercise were the following
amounts:
Shares
Hypothetical Conversion issuable upon puts
Price aggregating $5,000,000
$0.02 250,000,000
$0.03 166,666,667
$0.04 125,000,000
$0.05 100,000,000
$0.10 50,000,000
$0.15 33,333,333
$0.25 20,000,000
$0.50 10,000,000
Given the formulas for calculating the shares to be issued under the
Equity Line, there effectively is no limitation on the number of shares of
common stock which may be issued in connection with a put under the Equity Line,
except for the number of shares registered under this prospectus and the
registration statement of which it is a part. If the market price of the common
stock decreases, the number of shares of common stock issuable in connection
with the Equity Line will increase and, accordingly, the aggregate amount of
draws under the Equity Line will decrease. Accordingly, despite our right to
draw up to $5,000,000 under the Equity Line Agreement, we may run out of shares
registered under this prospectus and the registration statement of which it is a
part to issue to the Equity Line Investor in connection with our draws. The
following table demonstrates the correlation between share price decline and
decreases in aggregate draw amounts available, given the maximum 125,000,000
shares of Class A common stock registered under this prospectus and the
registration statement of which it is a part:
Shares issuable upon puts, up to a Maximum draws available, up to
Hypothetical Conversion Price maximum of 125,000,000 $5,000,000
$0.02 125,000,000 $2,500,000
$0.03 125,000,000 $3,750,000
$0.04 125,000,000 $5,000,000
$0.05 100,000,000 $5,000,000
$0.10 50,000,000 $5,000,000
$0.15 33,333,333 $5,000,000
$0.25 20,000,000 $5,000,000
$0.50 10,000,000 $5,000,000
Our issuances of shares under the Equity Line likely will result in overall
dilution to market value and relative
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voting power of previously issued common stock, which could result in
substantial dilution to the value of shares held by shareholders prior to sales
under this prospectus.
The issuance of common stock in connection with the draws under the
Equity Line may result in substantial dilution to the equity interests of
holders of CirTran common stock other than the Equity Line Investor.
Specifically, the issuance of a significant amount of additional common stock
will result in a decrease of the relative voting control of our common stock
issued and outstanding prior to the issuance of common stock in connection with
the Equity Line. Furthermore, public resales of our common stock by the Equity
Line Investor following the issuance of common stock in connection with the
Equity Line likely will depress the prevailing market price of our common stock.
Even prior to the time of actual conversions, exercises and public resales, the
market "overhang" resulting from the mere existence of our obligation to honor
such conversions or exercises could depress the market price of our common
stock.
Existing shareholders likely will experience increased dilution with decreases
in market value of common stock in relation to our issuances of shares under the
Equity Line, which could have a material adverse impact on the value of their
shares.
The formula for determining the number of shares of common stock to
be issued under the Equity Line is based, in part, on the market price of the
common stock and is equal to the lowest closing bid price of our common stock
over the five trading days after the put notice is tendered by us to the Equity
Line Investor. As a result, the lower the market price of our common stock at
and around the time we put shares under the Equity Line, the more shares of our
common stock the Equity Line Investor receives. Any increase in the number of
shares of our common stock issued upon puts of shares as a result of decreases
in the prevailing market price would compound the risks of dilution described in
the preceding paragraph.
There is an increased potential for short sales of our common stock due to the
sales of shares put to the Equity Line Investor in connection with the Equity
Line, which could materially effect the market price of our stock.
Downward pressure on the market price of our common stock that likely
will result from sales of our common stock by the Equity Line Investor issued in
connection with a put under the Equity Line could encourage short sales of
common stock by the Equity Line Investor. Significant amounts of such short
selling could place further downward pressure on the market price of our common
stock.
The restrictions on the extent of puts may have little if any effect on the
adverse impact of our issuance of shares under the Equity Line, and as such, the
Equity Line Investor may sell a large number of shares, resulting in substantial
dilution to the value of shares held by our existing shareholders.
We are prohibited from putting shares to the Equity Line Investor
under the Equity Line if such put would result in that investor holding more
than 9.9% of the then outstanding common stock. These restrictions, however, do
not prevent the Equity Line Investor from selling shares of common stock
received in connection with a put, and then receiving additional shares of
common stock in connection with a subsequent put. In this way, the Equity Line
Investor could sell more than 9.9% of the outstanding common stock in a
relatively short time frame while never holding more than 9.9% at one time.
The trading market for our common stock is limited, and investors who purchase
shares from the Equity Line Investor may have difficulty selling their shares.
The public trading market for our common stock is limited. On July
15, 2002, our common stock was listed on the OTC Bulletin Board. Nevertheless,
an established public trading market for our common stock may never develop or,
if developed, it may not be able to be sustained. The OTCBB is an unorganized,
inter-dealer, over-the-counter market that provides significantly less liquidity
than other markets. Purchasers of our common stock therefore may have difficulty
selling their shares should they desire to do so.
-8-
The selling shareholders may sell common stock at any price or time, which could
result in a decrease in the market price of our common stock and a resulting
decrease in the value of shares held by existing shareholders..
Upon effectiveness of this registration statement, the Equity Line
Investor may offer and sell the shares of common stock received in connection
with puts under the Equity Line Agreement at a price and time determined by the
Equity Line Investor. The other Selling Shareholders similarly may sell the
shares they received in connection with the Equity Line Agreement at prices and
times determined by them. The timing of sales and the price at which the shares
are sold by the Selling Shareholders could have an adverse effect upon the
public market for our common stock. There is no underwriter involved in the
offering of the shares held by or to be received by the Equity Line Investor,
and there can be no guarantee that the disposition of those shares will be
completed in a manner that is not disruptive to the market for our common stock.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Securities in the OTC market are generally more difficult to trade
than those on the Nasdaq National Market, the Nasdaq SmallCap Market or the
major stock exchanges. In addition, accurate price quotations are also more
difficult to obtain. The trading market for our common stock is subject to
special regulations governing the sale of penny stock.
A "penny stock," is defined by regulations of the Securities and
Exchange Commission as an equity security with a market price of less than $5.00
per share. However, an equity security with a market price under $5.00 will not
be considered a penny stock if it fits within any of the following exceptions:
o the equity security is listed on Nasdaq or a national securities
exchange;
o the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
o the issuer of the equity security has been in continuous
operation for more than three years, and has net tangible assets
of at least $2,000,000.
If you buy or sell a penny stock, these regulations require that you
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock would be
subject to Rule 15g-9 of the Exchange Act, which relates to non-Nasdaq and
non-exchange listed securities. Under this rule, broker-dealers who recommend
our securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if their market price is at least
$5.00 per share.
Penny stock regulations will tend to reduce market liquidity of our
common stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
The price of our common stock is volatile, and an investor may not be able to
resell our shares at or above the
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purchase price.
In recent years, the stock market in general, and the OTC Bulletin
Board and the securities of technology companies in particular, has experienced
extreme price and trading volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect our
stock price, regardless of operating results.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the
only ones facing CirTran. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations. If any of the foregoing risks actually occur, our business,
financial condition, or results of operations could be materially adversely
affected. In such case, the trading price of our common stock could decline.
Use of Proceeds
All of the shares of common stock issued in connection with the
Equity Line, if and when sold, are being offered and sold by the Selling
Shareholders or their pledgees, donnees, transferees, or other successors in
interest. We will not receive any proceeds from those sales.
Determination of Offering Price
The Selling Shareholders may sell our common stock at prices then
prevailing or related to the then current market price, or at negotiated prices.
The offering price may have no relationship to any established criteria or
value, such as book value or earnings per share. Additionally, because we have
not generated any profits for several years, the price of our common stock is
not based on past earnings, nor is the price of the shares of our common stock
indicative of current market value for the assets we own. No valuation or
appraisal has been prepared for our business or possible business expansion.
DESCRIPTION OF BUSINESS
We are a full-service contract electronics manufacturer servicing
OEMs in the following industries: communications, networking, peripherals,
gaming, law enforcement, consumer products, telecommunications, automotive,
medical and semi-conductor. We conduct our operations through two main
divisions: circuit board manufacturing and assembly and Ethernet card design and
manufacture.
Industry Background
The contract electronics manufacturing industry specializes in
providing the program management, technical and administrative support and
manufacturing expertise required to take an electronic product from the early
design and prototype stages through volume production and distribution. The goal
is to provide a quality product, delivered on time and at the lowest cost, to
the OEM. This full range of services gives the OEM an opportunity to avoid large
capital investments in plant, inventory, equipment and staffing and to
concentrate instead on innovation, design and marketing. By using our contract
electronics manufacturing services, our customers have the ability to improve
the return on their investment with greater flexibility in responding to market
demands and exploiting new market opportunities. Many OEMs now consider contract
manufacturers an integral part of their business and manufacturing strategy.
Accordingly, the contract electronics manufacturing industry has experienced
significant growth as OEMs have established long-term working arrangements with
contract manufacturers such as us.
We believe two important trends have developed in the contract
electronics manufacturing industry. First, we believe OEMs increasingly require
contract manufacturers to provide complete turnkey manufacturing and
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material handling services, rather than working on a consignment basis where the
OEM supplies all materials and the contract manufacturer supplies only labor.
Turnkey contracts involve design, manufacturing and engineering support, the
procurement of all materials, and sophisticated in-circuit and functional
testing and distribution. The manufacturing partnership between OEMs and
contract manufacturers involves an increased use of "just-in-time" inventory
management techniques that minimize the OEM's investment in component
inventories, personnel and related facilities, thereby reducing costs.
We believe a second trend in the industry has been the increasing
shift from pin-through-hole, or PTH, to surface mount technology, or SMT,
interconnection technologies. Surface mount and pin-through-hole printed circuit
board assemblies are printed circuit boards on which various electronic
components, such as integrated circuits, capacitors, microprocessors and
resistors are mounted. These assemblies are key functional elements of many
types of electronic products. PTH technology involves the attachment of
electronic components to printed circuit boards with leads or pins that are
inserted into pre-drilled holes in the boards. The pins are then soldered to the
electronic circuits. The drive for increasingly greater functional density has
resulted in the emergence of SMT, which eliminates the need for holes and allows
components to be placed on both sides of a printed circuit, contributing to size
reductions of up to 50%. SMT requires expensive, highly automated assembly
equipment and significantly more operational expertise than PTH technology. We
believe the shift to SMT from PTH technology has increased the use of contract
manufacturers by OEMs seeking to avoid the significant capital investment
required for development and maintenance of SMT expertise.
Electronics Assembly and Manufacture
Approximately 80% of our revenues are generated by our electronics
assembly activities, which consist primarily of the placement and attachment of
electronic and mechanical components on printed circuit boards and flexible
(i.e., bendable) cables. We also assemble higher-level sub-systems and systems
incorporating printed circuit boards and complex electromechanical components
that convert electrical energy to mechanical energy, in some cases manufacturing
and packaging products for shipment directly to our customers' distributors. In
addition, we provide other manufacturing services, including refurbishment and
remanufacturing. We manufacture on a turnkey basis, directly procuring any of
the components necessary for production where the OEM customer does not supply
all of the components that are required for assembly. We also provide design and
new product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more 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.
We intend to continue to offer our customers the most advanced
manufacturing process technologies, including SMT, ball-grid array, or BGA,
assembly, PTH technology, manufacturing and test engineering support and design
for manufacturability, and in-circuit and functional test and full-system
mechanical assembly. We believe we have developed substantial SMT expertise,
including advanced, vision-based component placement equipment, which are
machines that use integrated cameras controlled by computer software for precise
placement of components on circuit boards. We believe that the cost of SMT
assembly facilities and the technical capability required to operate a
high-yield SMT operation are significant competitive factors in the market for
electronic assembly. We also have the capability to manufacture cables,
harnesses and plastic injection molding systems.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation, 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
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entire product catalogue.
Additionally, we have established 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 provide that Racore will
either develop custom products or adapt existing Racore products to become part
of the OEM customer's product line. In a typical contract, Racore will provide 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. One
recent example of Racore's custom-designed technology resulted in development of
Ethernet cards according to the specifications of a Federal law enforcement
agency and a subsequent $225,000 order in late June 2001 for these cards. Racore
believes that these particular cards will have application in any industry where
security from hackers is a major concern and that this new product could
potentially generate significant new sales for Racore
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and
reliance upon, the use of manufacturing specialists by many electronics OEMs. It
is estimated by the IPC--Association Connecting Electronics Industries that the
United States electronics manufacturing services industry market increased from
$22.5 billion in 1998 to $34 billion in 2000. We believe the trend towards
outsourcing manufacturing will continue. OEMs utilize manufacturing specialists
for many reasons including the following:
o To Reduce Time to Market. Due to intense competitive
pressures in the electronics industry, OEMs are faced with
increasingly shorter product life-cycles and, therefore,
have a growing need to reduce the time required to bring a
product to market. We believe OEMs can reduce their time to
market by using a manufacturing specialist's manufacturing
expertise and infrastructure.
o To Reduce Investment. The investment required for internal
manufacturing has increased significantly as electronic
products have become more technologically advanced and are
shipped in greater unit volumes. We believe use of
manufacturing specialists allows OEMs to gain access to
advanced manufacturing capabilities while substantially
reducing their overall resource requirements.
o To Focus Resources. Because the electronics industry is
experiencing greater levels of competition and more rapid
technological change, many OEMs are focusing their
resources on activities and technologies which add the
greatest value to their operations. By offering
comprehensive electronics assembly and related
manufacturing services, we believe manufacturing
specialists allow OEMs to focus on their own core
competencies such as product development and marketing.
o To Access Leading Manufacturing Technology. Electronic
products and electronics manufacturing technology have
become increasingly sophisticated and complex, making it
difficult for OEMs to maintain the necessary technological
expertise to manufacture products internally. We believe
OEMs are motivated to work with a manufacturing specialist
to gain access to the specialist's expertise in
interconnect, test and process technologies.
o To Improve Inventory Management and Purchasing Power.
Electronics industry OEMs are faced with increasing
difficulties in planning, procuring and managing their
inventories efficiently due to frequent design changes,
short product life-cycles, large required investments in
electronic components, component price fluctuations and the
need to achieve economies of scale in materials
procurement. OEMs can reduce production costs by using a
manufacturing specialist's volume
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procurement capabilities. In addition, a manufacturing
specialist's expertise in inventory management can provide
better control over inventory levels and increase the OEM's
return on assets.
An important element of our strategy is to establish partnerships
with major and emerging OEM leaders in diverse segments across the electronics
industry. Due to the costs inherent in supporting customer relationships, we
focus our efforts on customers with which the opportunity exists to develop
long-term business partnerships. Our goal is to provide our customers with total
manufacturing solutions for both new and more mature products, as well as across
product generations.
Another element of our strategy is to provide a complete range of
manufacturing management and value-added services, including materials
management, board design, concurrent engineering, assembly of complex printed
circuit boards and other electronic assemblies, test engineering, software
manufacturing, accessory packaging and post-manufacturing services. We believe
that as manufacturing technologies become more complex and as product life
cycles shorten, OEMs will increasingly contract for manufacturing on a turnkey
basis as they seek to reduce their time to market and capital asset and
inventory costs. We believe that the ability to manage and support large turnkey
projects is a critical success factor and a significant barrier to entry for the
market it serves. In addition, we believe that due to the difficulty and long
lead-time required to change manufacturers, turnkey projects generally increase
an OEM's dependence on its manufacturing specialist, which can result in a more
stable customer base.
Suppliers; Raw Materials
Our sources of components used in 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.
Manufacturers who supply us include Siemens, Muriata-Erie, Texas Instruments,
Fairchild, Harris and Motorola. Distributors from whom CirTran obtains materials
include Avnet, Future Electronics, Arrow Electronics, Digi-key and Force
Electronics. Shortages of various components used by CirTran in its assembly and
manufacturing processes have been known to occur, but we endeavor to hedge
against such shortages by using a variety of sources and, as much as possible,
projecting our customer's needs.
Research and Development
During 2001 and 2000, we and our predecessor corporation, Circuit
Technology Inc., spent approximately $159,271 and $217,395, 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 $148,287 and $248,049,
respectively. None of Racore's expenses were paid for by their customers. We
remain committed, particularly in the case of Racore, to continuing to develop
and enhance our product line as part of our overall business strategy.
Sales and Marketing
Historically, we have had substantial recurring sales from existing
customers, but we are now actively seeking out new customers to generate
increased sales. We treat sales and marketing as an integrated process involving
direct salespersons and project managers, as well as senior executives. We also
use independent sales representatives in certain geographic areas.
During the sale process, a customer provides us with specifications
for the product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
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In 2001, 97% of our net sales were derived from pre-existing
customers, whereas during the year ended December 31, 2000, over 80% of our net
sales were derived from customers that were also customers during 1999.
Historically, a small number of customers accounted for a significant portion of
our net sales. In 2001, however, no single customer accounted for more than 10%
of our total sales, and our three largest customers accounted for approximately
25% of our total sales. During the year ended December 31, 2000, our largest
customer, Osicom Technology and its successor, Entrada Networks, Inc., accounted
for 30% of consolidated net sales. We are currently involved in settlement
negotiations regarding a breach of contract proceeding with Osicom Technology
and its successor, Entrada Networks, which late in 2000 cancelled a significant
portion of a large outstanding order with us.
During 2001, we operated without a line of credit and many of our
vendors stopped credit sales of components used by us in the manufacture of
products, thus hampering our ability to attract and retain turnkey customer
business. In addition, financial constraints experienced in 2001 mandated a
reduction in our general work force, including our sales department, which
experienced a 50% reduction in size. These factors, as well as general economic
conditions during the second half of 2001 resulted in a significant decrease in
sales during the fiscal year.
In September and October 2001, we issued several press releases relating to
- Our "partnership with an offshore Malaysian entity . . . expects
to commence bidding for multi-million dollar contracts through
this entity in the very near future" in our September 19, 2001
press release;
- InterMotive Products and the "two contracts for new products and
the vehicle orders that are "projected to blossom into a million
dollar contract manufacturing opportunity" for CirTran in our
October 10, 2001 press release; and
- The "implementation of . . . [new] software . . . bring CirTran
the potential for multi-million dollar revenue relationships" in
our October 16, 2001 press release.
We entered into the partnership with the Malaysian entity outlined in
the September 19, 2001, press release, to enable us to submit more competitive
bids for larger production contracts. The Company also implemented the software
referenced in the October 16, 2001, press release to enable us to bid more
competitively for larger contracts. Through December 31, 2001, in connection
with the relationship with the Malaysian entity, we bid on large-scale contracts
ranging from approximately $6.7 million to $17 million, and through September
30, 2002, we bid on large-scale contracts ranging from approximately $5 million
to $7 million. Although we feel that our relationship with the Malaysian entity
will enable us to continue to bid competitively for the larger contracts, to
date we have been unsuccessful at being selected as a supplier on any of the
larger bids we submitted.
Nevertheless, management feels that the Company's continued
involvement these relationships enables the Company to continue to bid
competitively for these larger bids.
With respect to the contracts with Intermotive, Inc. ("Intermotive"),
referenced in the October 10, 2001, press release, through September 30, 2002,
we had entered into purchase orders with Intermotive ranging from approximately
$5,000 to $55,000. The Company's relationship with Intermotive remains
productive, and management believes that this relationship should continue to
produce revenue for the Company, although there can be no guarantee that
Intermotive will continue to order from us or that any future orders will be
substantial.
In the last quarter of 2001 and into 2002, we also took steps to
increase our sales volume by adding three new sales representatives, hiring a
sales manager, implementing software to access databases containing potential
new customers and sales opportunities, and continuing our efforts to improve our
competitive position by installing additional surface-mount technology equipment
that had previously been at our Colorado location and by seeking ISO
(International Organization for Standardization) 9002 certification, which we
are hopeful of obtaining by the
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end of 2002. This certification would allow us to ensure to prospective
customers that we comply with internationally-recognized quality production
standards.
Material Contracts and Relationships
We generally use form agreements with standard industry terms as the
basis for our contracts with our customers. The form agreements typically
specify the general terms of our economic arrangement with the customer (number
of units to be manufactured, price per unit and delivery schedule) and contain
additional provisions that are generally accepted in the industry regarding
payment terms, risk of loss and other matters. We also use a form agreement with
our independent marketing representatives that features standard terms typically
found in such agreements.
Competition
The electronic manufacturing services industry is large and diverse
and is serviced by many companies, including several that have achieved
significant market share. Because of our market's size and diversity, we do not
typically compete for contracts with a discreet group of competitors. We compete
with different companies depending on the type of service or geographic area.
Certain of our competitors may have greater manufacturing, financial, research
and development and marketing resources. We also face competition from current
and prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted
markets is manufacturing technology, quality, responsiveness, the provision of
value-added services and price. To remain competitive, we must continue to
provide technologically advanced manufacturing services, maintain quality
levels, offer flexible delivery schedules, deliver finished products on a
reliable basis and compete favorably on the basis of price.
Regulation
We are subject to typical federal, state and local regulations and
laws governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee 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. We believe we are in substantial compliance with all
relevant regulations applicable to our business and operations.
Employees
We employ 55 persons, 3 in administrative positions, 3 in engineering
and design, 44 in clerical and manufacturing, and 3 in sales.
Property
We lease approximately 40,000 square feet of office and manufacturing
space in West Valley City, Utah, at a monthly lease rate of $16,000. The lease
is renewable in November of 2006 for two additional ten-year periods. This
facility serves as our principal offices and manufacturing facility and is
leased from I&R Properties, LLC, a company owned and controlled by individuals
who are officers, directors and principal stockholders. We believe our lease for
the facility is on commercially reasonable terms.
Corporate Background
We were incorporated in Nevada in 1987, under the name Vermillion
Ventures, Inc., for the purpose of acquiring other operating corporate entities.
On March 15, 1998, Vermillion issued 129,000,000 shares of common
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stock to acquire all of the outstanding stock of BMC Incorporated. This entity
was unsuccessful in its bingo satellite business and was dissolved. In May 2000,
Vermillion effected a 3,000-to-1 reverse split of its common stock, reducing the
number of issued and outstanding shares to 116,004.
On July 1, 2000, we issued a total of 10,000,000 shares of our common
stock (representing approximately 98.6% of our total issued and outstanding
common stock following such issuance) to acquire, through our wholly-owned
subsidiary, CirTran Corporation (Utah), substantially all of the assets and
certain liabilities of Circuit Technology, Inc., or Circuit. Of these shares,
800,000 were issued to Cogent Capital Corporation, a Utah corporation that
provided financial and other consulting services to us in connection with the
above-described acquisition. See "Certain Relationships and Related
Transactions."
Our core business was commenced by Circuit in 1993 by our president,
Iehab Hawatmeh. Circuit enjoyed increasing sales and growth in the subsequent
five years, going from $2.0 million in sales in 1994 to $15.4 million in 1998,
leading to the purchase of two additional SMT assembly lines in 1998 and the
acquisition of Racore Computer Products, Inc. in 1997. During that period,
Circuit hired additional management personnel to assist in managing its growth,
and Circuit executed plans to expand its operations by acquiring a second
manufacturing facility in Colorado. Circuit subsequently determined in early
1999, however, that certain large contracts that accounted for significant
portions of our total revenues provided insufficient profit margins to sustain
the growth and resulting increased overhead. Furthermore, internal accounting
controls then in place failed to apprise management on a timely basis of our
deteriorating financial position. During the last several years, we have
experienced significant losses (1999, $3,768,905; 2000, $4,179,654; 2001,
$2,933,084; Nine Month Period Ending September 30, 2002, $2,151,704) and
increasing levels of debt. Our management has been addressing this situation by,
among other things, re-directing our sales and manufacturing efforts to smaller
contracts with higher profit margins and negotiating debt forbearance
arrangements with many of our creditors.
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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, consumer products,
telecommunications, automotive, medical, and semiconductor industries. Our
services include pre-manufacturing, manufacturing and post-manufacturing
services. Through our subsidiary, Racore Technology Corporation, we design and
manufacture Ethernet technology products. Our goal is to offer customers the
significant competitive advantages that can be obtained from manufacture
outsourcing, such as access to advanced manufacturing technologies, shortened
product time-to-market, reduced cost of production, more effective asset
utilization, improved inventory management, and increased purchasing power.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by
the Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. These principles require us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Estimated amounts may differ under
different assumptions or conditions, and actual results could differ from the
estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the
customer or independent sales representative at the time of shipment. Returns
for defective items are repaired and sent back to the customer. Historically,
expenses experienced with such returns have not been significant and have been
recognized as incurred.
Inventories
Inventories are stated at the lower of average cost or market value.
Costs include labor, material and overhead costs. Overhead costs are based on
indirect costs allocated among cost of sales, work-in-process inventory and
finished goods inventory. Overhead costs are subject to management's discretion
regarding which inventory and cost of sale accounts are subject to overhead
allocation. Determining overhead costs also requires estimation based on
management's allocation of indirect costs.
When there is evidence that the inventory's value is less than
original cost, the inventory will be lowered to market value. We evaluate market
value on current resale amounts and whether there is technological obsolescence.
Currently, some of our inventory is over one year old but still considered the
industry standard and will continue to be used in the production process.
The Company typically orders inventory on a customer-by-customer
basis. In doing so the Company enters into binding agreements that the customer
will purchase any excess inventory after all orders are complete. Approximately
78% of the total inventory is secured by these agreements.
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Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out
more funds than were in our accounts under existing lines of credit with those
banks. Subsequent to May 2000, when Abacas purchase our line of credit
obligation, the Company no longer had lines of credit with banks, and those
loans were no longer available or made to us.
Under our cash management system, checks issued but not presented to
banks frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba
Private Annuity Trust and the Saliba Living Trust are regarded as related party
transactions under FAS 57. Disclosure concerning these transactions is set out
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Certain Relationships and Related Transactions."
Results of Operations
Comparison of Years Ended December 31, 2001 and 2000
Sales and Cost of Sales
Net Sales decreased 70.6% to $1,870,848 for the year ended December
31, 2001 as compared to $6,373,096 for the year ended December 31, 2000. The
decrease is partially due to the loss of a major customer, Entrada Networks,
Inc., successor in interest to Osicom Technologies, which generated
approximately 30% of our total revenues in 2000. Additional factors include the
following: operating without a line of credit; the unwillingness of many of our
vendors to continue credit sales of components used by us in the manufacture of
products, thus hampering our ability to attract and retain turnkey customer
business; financial constraints which mandated a reduction in our general work
force, including our sales department, which experienced a 50% reduction in
size; and general economic conditions during the second half of 2001
Cost of sales for the year ended December 31, 2001 was $2,340,273, as
compared to $6,792,393 incurred during the prior year. Those costs as a
percentage of net sales were 125% during 2001 as compared to 106.6% during 2000.
We believe the increase in our already high cost of sales was primarily
attributable to significant write- offs for obsolete inventory resulting from
inadequate inventory control. These costs were offset, to some extent, through
our sale, or use in the production process, of inventory totaling $205,287,
which had been fully allowed against in previous periods. The effect of this is
to reduce cost of sales as a percentage of sales.
Lack of adequate inventory management and control has negatively
affected our gross margins. We traditionally tracked inventory by customer
rather than by like-inventory item, and, as a result, we often purchased new
inventory to produce products for a new customer, when we likely may have had
the necessary inventory on hand under a different customer name. This practice
has led to a reserve for obsolescence and excess inventory, which for the year
2001 was $340,579, as compared to $545,866 in 2000, and has increased cost of
sales. We have changed our method of managing and controlling our inventory so
that we can identify inventory by a general part number, rather than a customer
number, and we have instituted monthly reviews to better update and control our
inventory. We believe these improvements have lead to better inventory control
and will contribute to decreased cost of sales. If we are successful in
decreasing our cost of sales, and if we are able to maintain and increase our
levels of sales, we believe we will be successful in generating sufficient gross
profit to cover our selling, general and administrative expenses.
The following charts present (i) comparisons of sales, cost of sales
and gross profit generated by our two
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main areas of operations, i.e., electronics assembly and Ethernet technology,
during 2000 and 2001; 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
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Electronics Assembly 2000 $ 4,686,045 $ 4,972,689 $ (286,644)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
2001 1,352,085 1,718,687 (366,602)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Ethernet Technology 2000 1,687,051 1,819,704 (132,653)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
2001 518,763 621,586 (102,823)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Year Total Sales Pre-existing New Customers
Customers
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Electronics Assembly 2000 $ 4,686,045 $ 4,317,668 $ (368,357)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
2001 1,352,085 1,311,522 40,563
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Ethernet Technology 2000 1,687,051 787,649 899,402
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
2001 518,763 462,844 55,919
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Inventory
We use just-in-time manufacturing, which is a production technique
that minimizes work-in-process inventory and manufacturing cycle time, while
enabling us to deliver products to customers in the quantities and time frame
required. This manufacturing technique requires us to maintain an inventory of
component parts to meet customer orders. Inventory at December 31, 2001 was
1,773,888, as compared to $1,755,786 at December 31, 2000. This marginal
increase was due to the net effect of an increase in raw materials in
anticipation of orders to be processed in the first quarter of 2002 and
decreases in work-in-process and finished goods.
Selling, General and Administrative Expenses
During the year ended December 31, 2001, selling, general and
administrative expenses were $1,690,837 versus $2,710,275 for 2000, a 37.6%
decrease which was primarily attributable to an almost 50% reduction in the size
of our workforce.
Interest Expense
Interest expense for 2001 was $773,034 as compared to $1,015,027 for
2000, a decrease of 24%. This decrease is primarily attributable to a decrease
in deliquent payroll tax liabilities, the penalties on which were previously
recorded as part of interest expense. As of December 31, 2000 and 2001, the
amount of our liability for delinquent state and federal payroll taxes and
estimated penalties and interest thereon was $1,309,990 and $1,982,445,
respectively.
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Other income declined from $945 in 2000 to $212 in 2001.
As a result of the above factors, our overall net loss decreased
29.8% to $2,933,084 for the year ended December 31, 2001, as compared to
$4,179,654 for the year ended December 31, 2000.
Three and nine months ended September 30, 2002, compared with three and nine
months ended September 30, 2001
Sales and Cost of Sales
Net sales for the three-month period ended September 30, 2002,
decreased 22.4% to $367,755, as compared to net sales of $474,055 during the
same three-month period in 2001. The Company believes that this decrease is a
result of the current downturn in the economy in general. The Company has not
lost any major customers, but orders from those customers are down compared to
the comparable period. Net sales for the nine-month period ended September 30,
2002 increased 28.2% to $1,981,103, from $1,545,020 during the same period in
2001. This increase resulted from increased sales to existing customers
including Tempo Research, General Cable, Merit Optical, and Silicon Graphics, as
well as an increase in slaes to new costomers including Sarcom, Digicon, and
GTSI.
Cost of sales during the three-month period ended September 30, 2002,
was $358,869, as compared to $499,772 during the same period in 2001. Cost of
sales during the nine-month period ended September 30, 2002 was $1,735,380, as
compared to $1,794,854 during the same nine-month period in 2001. Our gross
profit percentage for the three-month period ended September 30, 2002 was 2.4%,
as compared to (5.4)% during the same three-month period in 2001. Our gross
profit percentage for the nine-month period ended September 30, 2002 was 12.4%,
as compared to (16.2)% during the same nine-month period in 2001. The gross
profit for the three and nine-month periods ended September 30, 2002 has
increased as a result of the Company's effort to solicit higher margin business.
During 2002, the Company has gradually shifted its business strategy
from transactions involving high volume, low margin sales to transaction more
likely to result in lower volume and higher margins. Although this transition
started slowly, the Company has begun to realize the benefits of the new
strategy.
Selling, General and Administrative Expenses
During the three-month period ended September 30, 2002, selling,
general and administrative expenses were $516,650, as compared to $393,368 for
the same period in 2001, representing a 23.9% increase. This increase results,
in part, from the Company's increase in the size of its sales staff, an increase
in the commission structure for the sales staff, and the Company's efforts to
market its products more aggressively during a period of economic downturn.
During the nine-month period ended September 30, 2002, selling, general and
administrative expenses were $1,400,240, as compared to $1,238,036, a 13.1%
increase. Due to an increase in sales and a decrease in selling, general and
administrative expenses, the amount of such expenses as a percentage of sales
decreased 80.1% for the nine months ended September 30, 2001 to 70.7% for the
nine months ended September 30, 2002.
Interest Expense
Interest expense for the three-month period ended September 30, 2002
was $41,865, compared to $124,452 for the same period in 2001, a reduction of
$82,587, or 66.4%. Interest expense for the nine-month period ended September
30, 2002 was $282,609, compared to $667,959 during the same period in 2001, a
reduction of $385,350, or 57.7%. These decreases are primarily attributable to
conversion of a significant amount of debt to equity in January 2002 and to a
decrease in delinquent payroll tax penalties, which were previously recorded as
part of interest expense. As of September 30, 2002, the amount of our liability
for delinquent state and federal payroll taxes and estimated penalties and
interest thereon was $2,219,709. See "Part II - Item 1 - Legal Proceedings."
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As a result of the above factors, our overall net loss decreased
39.6% to $1,299,837 for the nine-month period ended September 30, 2002, from
$2,151,704 for the same period in 2001. Our net loss for the three-month period
ended September 30, 2002 increased by 5.7% to $574,532, as compared to a net
loss of $543,512 for the same period in 2001.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a
history of losses. Our net loss from operations for the nine-month period ending
September 30, 2002 was $1,299,837, and our net loss from operations for the year
ending December 31, 2001 was $2,933,084. Our accumulated deficit was $14,380,329
at September 30, 2002 and was $13,080,492 at December 31, 2001. Our current
liabilities exceeded our current assets by $5,448,391 at September 30, 2002 and
by $7,832,259 as of December 31, 2001. We recorded negative cash flows from
operations for the nine-month period ending September 30, 2002 and the year
ended December 31, 2001 of $914,037 and $288,724, respectively.
Cash
On September 30, 2002, we had $882 cash on hand, as compared to $499
at December 31, 2001. The amount of checks written in excess of cash in bank
decreased from $159,964 at December 31, 2001 to $123,268 at September 30, 2002.
Net cash used in operating activities was $914,037 for the period
ended September 30, 2002, compared to $133,478 for the nine months ended
September 30, 2001. During the nine months ended September 30, 2002, net cash
used by operations was primarily attributable to our net loss of $1,299,837,
decreases in accounts payable of $547,727, and payments of $152,500 made in
settlement of litigation, offset by a decrease in trade accounts receivable of
$244,442 and non-cash charges of $368,376 for depreciation and amortization.
Net cash used in investing activities during the nine months ended
September 30, 2002 and 2001, consisted of equipment purchases of $2,822 and
$1,844, respectively. Net cash provided by financing activities during the
nine-month period ended September 30, 2002, was $917,242. Cash proceeds of
$500,000 from the issuance of restricted common stock, $285,000 from the
issuance of stock upon exercise of stock options, and $655,000 from long-term
notes payable were offset by principal payments of $348,402 on long-term notes
payable, $140,125 on notes payable to stockholders and a $36,696 decrease in the
dollar amount of checks written in excess of cash in bank.
Noncash investing and financing activities during the period ended
September 30, 2002 consisted of reclassifying $345,263 from notes payable to
accounts payable (see below under "Accounts Payable"), the cancellation of
$1,250,000 in notes payable to stockholders in exchange for issuance of
restricted common stock, the cancellation of $1,499,090 in notes payable in
exchange for the issuance of restricted common stock (see below under "Liquidity
and Financing Arrangements"), and the allocation of $120,000 to be paid for
legal fees which Abacas Ventures, Inc. ("Abacas"), agreed to deduct as an offset
of the amount the Company owes Abacas. See "Liquidity and Financing
Arrangements," below.
Accounts Receivable
By September 30, 2002, accounts receivable had decreased to $158,807
(net of an allowance for doubtful accounts of $32,317), as compared to accounts
receivable of $369,250 at December 31, 2002 (net of an allowance for doubtful
accounts of $66,316). This significant decrease in accounts receivable is
reflective of our increased collection efforts.
Accounts Payable
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Accounts payable were $1,297,281 at September 30, 2002, as compared
to $2,141,290 at December 31, 2001. This decrease is primarily attributable to
payments to vendors from $500,000 in cash provided by the issuance of restricted
common stock in January 2002 and the conversion of $345,263 of accounts payable
to notes payable to Abacas Ventures, Inc., offset by increases in trade payables
incurred in conjunction with our increased sales.
Liquidity and Financing Arrangements
We sustained losses from operations of $1,179,517 and $1,682,870 for
the nine months ended September 30, 2002 and 2001, respectively and losses from
operations of $532,764 and $614,085 for the quarters ended September 30, 2002
and 2001, respectively. We had accumulated deficits of $14,380,329 and
$13,080,492 at September 30, 2002 and December 31, 2001, respectively, and total
stockholders' deficits of $4,658,124 and $6,942,377, respectively, as of such
dates. As of December 31, 2001, our monthly operating costs and interest
expenses averaged approximately $205,000 per month. As of September 30, 2002,
this amount had decreased to approximately $145,000 per month.
Since February 2000, we have operated without a line of credit.
Abacas, an entity whose shareholders include the Saliba Private Annuity Trust,
one of our major shareholders, and a related entity, the Saliba Living Trust,
purchased our line of credit of $2,792,609, and this amount was converted into a
note payable to Abacas bearing an interest rate of 10%. As of December 31, 2001,
a total of $2,405,507, plus $380,927 in accrued interest, was owed to Abacas
pursuant to this note payable. In January 2002, we entered into agreements with
the Saliba Private Annuity Trust and the Saliba Living Trust to exchange
19,987,853 shares of our common stock for $1,499,090 in principal amount of this
debt and to issue an additional 6,666,665 shares to these trusts for $500,000
cash. We used the cash proceeds of the sale as working capital.
In January 2002, in addition to the above-described transactions with
the Saliba trusts, we also issued 16,666,666 shares of restricted common stock
at a price of $0.075 per share in exchange for the cancellation of $1,250,000 of
notes payable to two other stockholders.
During the nine-months ended September 30, 2002, Abacas completed
negotiations with several of our vendors, whereby Abacas purchased various past
due amounts for goods and services provided by vendors, as well as capital
leases. The total of these obligations was $345,263. In addition, Abacas agreed
to deduct as an offset of the amount owed to Abacas $120,000, constituting the
amounts paid by the Company as legal fees incurred by the Company as part of its
negotiations with the Company's vendors. We recorded this transaction as a
$345,263 non-cash increase to the note payable owed to Abacas, pursuant to the
terms of the Abacas agreement. In addition, as partial payment of the amount
owed to Abacas, we agreed to pay $120,000 in legal fees of Abacas that were
incurred as part of its negotiations with our vendors, which amount was recorded
as a non-cash payment to the note payable owed to Abacas.
Additionally, we entered into a bridge loan agreement with Abacas.
This agreement allows us to request funds from Abacas to finance the build-up of
inventory relating to specific sales. The advances bear interest at 24% and are
payable on demand. The principal balance cannot exceed $600,000 at any point in
time. Management believes that this bridge loan/purchase order financing
arrangement is as fair to the Company as could have been made with unaffiliated
third parties. During the nine months ended September 30, 2002, we were advanced
$655,000 and made cash payments of $156,258 for an outstanding balance on the
bridge loan of $498,742. The total principal amount owed to Abacas between the
note payable and the bridge loan was $1,547,397 as of September 30, 2002.
The Company intends to continue to work with Abacas to explore
various options to reduce the Company's obligations to Abacas, including the
issuance of shares or cash payments. The Company enjoys a good working
relationship with Abacas and will work to continue to develop this relationship.
Despite our efforts to make our debt-load more serviceable,
significant amounts of additional cash will be
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needed to reduce our debt and fund our losses until such time as we are able to
become profitable. As at December 31, 2001, we were in default of notes payable
whose principal amount, not including the amount owing to Abacas, exceeded
$666,000. In addition, the principal amount of notes that either mature in 2002
or are payable on demand exceed $1,157,656. The total amount per month that we
have committed to paying pursuant to various settlements for outstanding debt,
litigation and delinquent payroll taxes is currently approximately $38,000, all
of which is against accrued liabilities and notes payable. None of these
settlements, however, have resulted in the forgiveness of any amounts owed, but
have simply resulted in a restructuring in the terms of the various debts.
Management believes that each of the related party transactions were
as fair to the Company as could have been made with unaffiliated third parties.
In conjunction with our efforts to improve our results of operations,
discussed above, on November 5, 2002, we entered into an Equity Line of Credit
Agreement (the "Equity Line Agreement") with Cornell Capital Partners, LP, a
private investor ("Cornell"). Under the Equity Line Agreement, we have the right
to draw up to $5,000,000 from Cornell against an equity line of credit (the
"Equity Line"), and to put to Cornell shares of our common stock in lieu of
repayment of the draw. The number of shares to be issued is determined by
dividing the amount of the draw by the lowest closing bid price of our common
stock over the five trading days after the advance notice is tendered. Cornell
is required under the Equity Line Agreement to tender the funds requested by us
within two trading days after the five-trading-day period used to determine the
market price.
Our issuances of shares of our common stock pursuant to the Equity
Line Agreement will serve to dilute the value of our common stock and existing
shareholders' positions.
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.
Forward-looking statements
All statements made in this prospectus, other than statements of
historical fact, which address activities, actions, goals, prospects, or new
developments that we expect or anticipate will or may occur in the future,
including such things as expansion and growth of operations and other such
matters, are forward-looking statements. Any one or a combination of factors
could materially affect our operations and financial condition. These factors
include competitive pressures, success or failure of marketing programs, changes
in pricing and availability of parts inventory, creditor actions, and conditions
in the capital markets. Forward-looking statements made by us are based on
knowledge of our business and the environment in which we currently operate.
Because of the factors listed above, as well as other factors beyond our
control, actual results may differ from those in the forward-looking statements.
Selling shareholders
Three of the Company's investors are the Selling Shareholders in
connection with this prospectus and the registration statement of which it is a
part. None of the Selling Shareholders is affiliated in any way with CirTran or
any of our affiliates other than in connection with the Equity Line Agreement,
and neither the Selling Shareholders nor any of their affiliates have any
relationship of any type with us and our affiliates other than the presently
established Equity Line Agreement relationships between the Selling
Shareholders, on the one hand, and CirTran, on the other hand. This prospectus,
and the registration statement of which it is a part, cover the shares to be
issued to the Selling Shareholders in connection with the Equity Line Agreement.
The following table provides information about the actual and
potential ownership of shares of our common stock by the Selling Shareholders in
connection with the Equity Line as of February 10, 2003, and the number of our
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shares registered for sale in this prospectus. The number of shares of common
stock issuable to the Equity Line Investor under the Equity Line Agreement
varies according to the market price at and immediately preceding the put date.
Solely for purposes of estimating the number of shares of common stock that
would be issuable to the Equity Line Investor as set forth in the table below,
we have assumed a hypothetical put by us on February 10, 2003, of the full
amount of $5,000,000 under the Equity Line at a per share price of approximately
$0.04. The actual per share price and the number of shares issuable upon actual
puts by us could differ substantially. This prospectus and the registration
statement of which it is a part covers the resale of up to 127,562,500 shares of
our common stock.
Under the terms and conditions of the Equity Line Agreement, the
Equity Line Investor is prohibited from having shares put to it under the Equity
Line to the extent such put by us would result in that person beneficially
owning more than 9.9% of the then outstanding shares of our common stock
following such put. This restriction does not prevent the Equity Line Investor
from receiving and selling put shares and thereafter receiving additional put
shares. In this way, the Equity Line Investor could sell more than 9.9% of our
outstanding common stock in a relatively short time frame while never
beneficially owning more than 9.9% of the outstanding CirTran common stock at
any one time. For purposes of calculating the number of shares of common stock
issuable to the Equity Line Investor assuming a put of the full amount under the
Equity Line, as set forth below, the effect of such 9.9% limitation has been
disregarded. The number of shares issuable to the Equity Line Investor as
described in the table below therefore may exceed the actual number of shares
such Selling Shareholder may be entitled to beneficially own under the Equity
Line. The following information is not determinative of the Selling
Shareholder's beneficial ownership of our common stock pursuant to Rule 13d-3 or
any other provision under the Securities Exchange Act of 1934, as amended.
Shares of Percentage of Number of
Common Stock Common Stock Shares of Percentage of
Issuable to Issuable to Selling Common Number of Common
Selling Shareholder Stock Shares of Stock
Shareholder Under Equity Registered Common Stock Beneficially
Under Equity Line (1) Hereunder Owned After Owned After
Name of Selling Shareholder Line (2) Offering the Offering
---------------------------------- --------------- ------------------- ------------- ------------------ -----------------
Cornell Capital Partners, LP 127,375,000 (3) 33.86% 127,375,000 127,375,000 (4) 33.86% (4)
Butler Gonzales LLP 62,500 0.02% 62,500 62,500 (5) 0.02% (5)
Westrock Advisors, Inc. 125,000 0.05% 125,000 125,000 (5) 0.05% (5)
---------------------
(1) As noted above, the Selling Shareholder is prohibited by
the terms of the Equity Line Agreement from having shares
put to it under the Equity Line to the extent that such put
of shares by us would result in that person beneficially
owning more than 9.9% of the then outstanding shares of our
common stock following such put. The percentages set forth
are not determinative of the Selling Shareholder's
beneficial ownership of our common stock pursuant to Rule
13d-3 or any other provision under the Securities Exchange
Act of 1934, as amended.
(2) The registration statement of which this prospectus is a
part covers up to 125,000,000 shares of Class A common
stock issuable under the Equity Line. Because the specific
circumstances of the issuances under the Equity Line are
unascertainable at this time, the precise total number of
shares of our common stock offered by the Selling
Shareholder cannot be fixed at this time, but cannot exceed
125,000,000 unless we file additional registration
statements registering the resale of the additional shares.
The amount set forth below represents the number of shares
of our common stock that have been issued and that would be
issuable, and hence offered in part hereby, assuming a put
of the full amount under the Equity Line as of February 10,
2003. The actual number of shares of our common stock
offered hereby may differ according to the actual number of
shares issued upon such conversions.
(3) Includes:
125,000,000 shares of common stock issuable upon a
hypothetical put of the full
$5,000,000 available under the Equity
Line as of February 10, 2003. This
prospectus registers only up to
125,000,000 shares of Class A common
stock issuable under the Equity Line.
Accordingly, we may not issue shares
in excess of 125,000,000 unless we
file additional registration
statements registering the resale of
the additional shares.
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2,375,000 additional shares issued to the Equity
Line Investor in connection with the
Equity Line Agreement.
(4) Assumes a hypothetical draw of the full $5,000,000
available under the Equity Line as of February 10, 2003,
and a put of 125,000,000 shares of our common stock,
together with the sale by the Equity Line Investor of the
full 2,375,000 additional shares issued in connection with
the Equity Line Agreement. There is no assurance that the
Equity Line Investor will sell any or all of the shares
offered hereby. However, the Equity Line Investor is
contractually prohibited from holding shares, and we are
contractually prohibited from putting shares to the Equity
Lin e Investor that would cause it to hold shares, in
excess of 9.9% of the then-issued and shares of our common
stock. This number and percentage may change based on the
Equity Line Investor's decision to sell or hold the Shares.
(5) There is no assurance that the Selling Shareholders will
sell any or all of the shares offered hereby.
Plan of Distribution
Once the registration statement of which this prospectus is part
becomes effective with the Commission, the Shares covered by this prospectus may
be offered and sold from time to time by the Selling Shareholders or their
pledgees, donees, transferees or successors in interest. Such sales may be made
on the OTC Bulletin Board, in the over-the-counter market or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The Shares may be sold by any means
permitted under law, including one or more of the following:
o a block trade in which a broker-dealer engaged by a Selling
Shareholder will attempt to sell the Shares as agent, but may
position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account under this prospectus;
o an over-the-counter distribution in accordance with the rules of
the OTC Bulletin Board;
o ordinary brokerage transactions in which the broker solicits
purchasers; and
o privately negotiated transactions.
In effecting sales, broker-dealers engaged by the Selling Shareholders may
arrange for other broker-dealers to participate in the resales.
In connection with distributions of the Shares or otherwise, a
Selling Shareholder may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares covered by this prospectus in the course of hedging the positions
they assume with the Selling Shareholder. A Selling Shareholder may also sell
the Shares short and redeliver the Shares to close out such short positions. A
Selling Shareholder may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares,
which the broker-dealer may resell or otherwise transfer under this prospectus.
A Selling Shareholder may also loan or pledge the Shares registered hereunder to
a broker-dealer and the broker-dealer may sell the shares so loaned or upon a
default the broker-dealer may effect sales of the pledged shares pursuant to
this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Shareholder in amounts to
be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers are deemed to be "underwriters" within the meaning
of the Securities Act, in connection with such sales and any such commission,
discount or concession may be deemed to be underwriting discounts or commissions
under the Securities Act. The Selling Shareholder is an underwriter with respect
to its resales of the Shares.
We have advised the Selling Shareholders that the anti-manipulation
rules under the Securities Exchange
-25-
Act of 1934 may apply to sales of shares in the market and to the activities of
the Selling Shareholders and their affiliates. In addition, we will make copies
of this prospectus available to the Selling Shareholders and have informed them
of the need for delivery of copies of this prospectus to purchasers at or prior
to the time of any sale of the Shares offered hereby.
All costs, expenses and fees in connection with the registration of
the Shares will be borne by us. Commissions and discounts, if any, attributable
to the sales of the Shares will be borne by the appropriate Selling Shareholder.
A Selling Shareholder may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the Shares against certain
liabilities, including liabilities arising under the Securities Act of 1933. We
will not receive any proceeds from the sale of the Shares.
We have agreed with the Selling Shareholders to keep the registration
statement of which this prospectus constitutes a part effective for a period of
2 years from the date of the last advance under the Equity Line Agreement.
Trading of any unsold shares after the expiration of such period will be subject
to compliance with all applicable securities laws, including Rule 144.
The Selling Shareholders are not obligated to sell any or all of the
Shares covered by this prospectus.
In order to comply with the securities laws of certain states, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, the sale and issuance of Shares may be subject
to the notice filing requirements of certain states.
Regulation M
We have informed the Selling Shareholders that Regulation M
promulgated under the Securities Exchange Act of 1934 may be applicable to them
with respect to any purchase or sale of our common stock. In general, Rule 102
under Regulation M prohibits any person connected with a distribution of our
common stock from directly or indirectly bidding for, or purchasing for any
account in which it has a beneficial interest, any of the Shares or any right to
purchase the Shares, for a period of one business day before and after
completion of its participation in the distribution.
During any distribution period, Regulation M prohibits the Selling
Shareholders and any other persons engaged in the distribution from engaging in
any stabilizing bid or purchasing our common stock except for the purpose of
preventing or retarding a decline in the open market price of the common stock.
None of these persons may effect any stabilizing transaction to facilitate any
offering at the market. As the Selling Shareholders will be offering and selling
our common stock at the market, Regulation M will prohibit them from effecting
any stabilizing transaction in contravention of Regulation M with respect to the
Shares.
Legal Proceedings
As of September 30, 2002, we had accrued liabilities in the amount of
$2,219,709 for delinquent payroll taxes, including interest estimated at
$281,689 and penalties estimated at $264,249. Of this amount, approximately
$301,980 was due the State of Utah. Assuming no reduction in penalties and
interest, these payments would be required through December 2008. During the
first quarter of 2002, we negotiated a monthly payment schedule of $4,000 to the
State of Utah, which did not provide for the forgiveness of any taxes, penalties
or interest. These monthly payments were not made during the third quarter.
Approximately $1,906,790 is owed to the Internal Revenue Service ("IRS"). During
the first quarter of 2002, we negotiated a payment schedule with respect to this
amount, pursuant to which monthly payments of $25,000 were required. Assuming no
reduction in penalties and interest, these payments would be required through
January 2009. In addition, we committed to keeping current on deposits of
federal withholding amounts. The required monthly payments were made during each
of the three months during the second quarter. None of the monthly payments were
made during the third quarter, and the Company is renegotiating the payment
schedule with the IRS. In addition, we failed to pay several of our current
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withholding obligations. Approximately $10,939 is owed to the State of Colorado.
We (as successor to Circuit Technology, Inc.) were a defendant in an
action in El Paso County, Colorado District Court, brought by Sunborne XII, LLC,
a Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Our liability in this action was
originally estimated to range up to $2.5 million, and we subsequently filed a
counter suit in the same court against Sunborne in an amount exceeding $500,000
for missing equipment. Effective January 18, 2002, we entered into a settlement
agreement with Sunborne with respect to the above-described litigation. The
settlement agreement required us to pay Sunborne the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the agreement, and the balance of
$225,000, together with interest at 8% per annum, was payable by July 18, 2002.
As security for payment of the balance, we executed and delivered to Sunborne a
Confession of Judgment and also issued to Sunborne 3,000,000 shares of our
common stock, to be held in escrow as security for performance of our
obligations under the settlement agreement. We were also required, if 75% of the
balance owing under the agreement was not paid by May 18, 2002, to prepare and
file with the Securities & Exchange Commission, at our expense, a registration
statement with respect to the shares that were escrowed. The payment was not
made, nor was a registration statement filed with respect to the escrowed
shares.
Pursuant to a Termination of Sublease Agreement dated as of May 22,
2002 among the Company, Sunborne and other parties, the sublease agreement that
was the subject of our litigation with Sunborne was terminated and a payment of
approximately $109,000 was credited against the amount owed by the Company to
Sunborne under the Company's settlement agreement with them. Sunborne has filed
a claim that this amount was to be an additional rent expense rather than a
payment on the note payable. The Company disputes this claim and intends to
vigorously defend the action.
As of February 10, 2003, the Company was in default of its
obligations under the settlement agreement with Sunborne, i.e., the total
payment due thereunder had not been made, a registration statement with respect
to the escrowed shares was not filed, and the Company did not replace the
escrowed shares with registered, free-trading shares as per the terms of the
agreement. Accordingly, Sunborne has filed the Confession of Judgment and
proceeded with execution thereon. The Company is currently negotiating with
Sunborne in an attempt to settle the remaining obligation under the settlement
agreement.
We also assumed certain liabilities of Circuit Technology, Inc. in
connection with our transactions with that entity in the year 2000, and as a
result we are defendant in a number of legal actions involving nonpayment of
vendors for goods and services rendered. We have accrued these payables and have
negotiated settlements with respect to some of the liabilities, including those
detailed below, and are currently negotiating settlements with other vendors.
Advanced Component Labs adv. Circuit Technology Corporation Civil No.
990912318, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against the Company on or about December
8, 1999, under allegations that the Company owed $44,269.43 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Claims are asserted for breach of implied contract and unjust enrichment. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Initial discovery is beginning. No
trial date has been set.
Advanced Electronics has notified the Company that it believes it has
a claim against the Company in the amount of $67,691.56 for the cost of goods or
services provided to the Company for the Company's use and benefit. Negotiations
for settlement of this claim have resulted in an agreement in principal whereby
the Company will make a cash payment to this creditor and issue a promissory
note and shares of its restricted common stock in satisfaction of the creditor's
claims. The parties are presently negotiating the terms of the settlement
documents. However, until the settlement documents are executed and delivered,
there can be no assurance that the creditor's claims will be settled nor that
the terms will be favorable to the Company.
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Arrow Electronics adv. Circuit Technology Corporation, Civil No.
990409504, Third Judicial District Court Sandy Department, Salt Lake County,
State of Utah. Suit was brought against the Company on or about October 19,
1999, under allegations that the Company owes $199,647.92 for materials and
services and terms of a promissory note. The Company has answered, admitting
that it owed certain sums and denying all other claims. The Company and Arrow
have entered a settlement agreement under which the Company will pay $6,256.24
each month until the obligation and interest thereon are paid. Judgment was
entered against the Company on April 24, 2001. We are currently attempting to
negotiate a settlement of these claims.
Arrow Electronics adv. Circuit Technology Corporation, Civil No. 010406732,
Third Judicial District Court, Sandy Department, Salt Lake County, State of
Utah. Suit was brought against the Company on or about 6/28/01, under
allegations that the Company owes $41,486.26 for materials and services.
Judgment was entered against the Company on January 7, 2002. The Company is
unaware of any collection efforts.
Avnet Electronics has notified the Company that it believes it has a
claim against the Company in the amount of $180,331.02 for the cost of goods or
services provided to the Company for the Company's use and benefit. No lawsuit
has been filed. Negotiations for settlement of this claim have resulted in an
agreement in principal whereby the Company will make a cash payment to this
creditor and issue a promissory note and its restricted common stock in
satisfaction of the creditor's claims. The parties are presently negotiating the
terms of the settlement documents. However, until the settlement documents are
executed and delivered, there can be no assurance that the creditor's claims
will be settled nor that the terms will be favorable to the Company.
Contact East has notified the Company that it believes it has a claim
against the Company in the amount of $32,129.89 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
C/S Utilities has notified the Company that it believes it has a
claim against the Company in the amount of $32,472 regarding utilities services.
The Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
Dynamic Details Civil No. 010408234, Third District Court of Salt
Lake County, Sandy Department, State of Utah. Suit was brought against the
Company on or about August 23, 2001, under allegations that the Company owed
$12,317.59 for the cost of goods and services provided to the Company for the
Company's use and benefit. The Company answered the complaint in September 2001.
The Company is unaware of any further developments in this matter.
CirTran Corp. v. Entrada Networks, Inc. et al., Case No.
2:01-CV-142B, United States District Court, District of Utah. On January 19,
2001, the Company filed suit in state court seeking to recover $874,653 in
actual damages plus unspecified consequential damages and attorneys' fees. The
Company claims that Entrada, and Entrada's predecessor-in-interest, breached its
contracts to purchase goods from the Company. Entrada removed the case to
federal court in Salt Lake City, Utah, and filed a motion to dismiss the
complaint on the basis of lack of personal jurisdiction. The court denied
Entrada's motion to dismiss. Entrada asserted a claim against the Company for an
unspecified amount based on alleged defects that Entrada claims to have found in
the goods that the Company assembled. Subsequently, the Company entered into an
agreement with Entrada and Orbit Systems, Inc. ("Orbit"). Under the agreement,
Entrada agreed to purchase certain parts and equipment from Orbit. Once Entrada
has paid Orbit for the parts and equipment, Orbit will dismiss its suit against
the Company, and once Orbit has dismissed its suit against the Company, the
Company will dismiss its suit against Entrada. To the Company's knowledge,
Entrada has ordered the parts and equipment from Orbit, but as of February 10,
2002, the suits have not been dismissed.
Future Electronics Corp adv. Circuit Technology Corporation, Civil No.
000900296, Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about January 12, 2000, under
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allegations that the Company owed $646,283.96 for the cost of goods or services
provided to the Company for the Company's use and benefit. Claims were asserted
for breach of contract, fraud, negligent misrepresentation, unjust enrichment,
account stated and dishonored instruments. The Company answered the complaint,
admitting that it owed certain sums for conforming goods and services and
denying all other claims. Partial Summary Judgment was entered in the amount of
$646,783.96 as to certain claims against the Company. Negotiations for
settlement resulted in an agreement for settlement of all claims of Future
against the Company subject to performance by the Company under the agreement.
The Company also issued to Future 352,070 shares of its restricted common stock.
The Company did not perform its obligations under the settlement agreement, and
a Confession of Judgment was entered in January 2002 in the amount of
$519,052.00. No collection efforts have been made.
Infineon Technologies North America Corp. adv. Circuit Technology, Inc. et
al., Case No. CV 792634, Superior Court of the State of California, County of
Santa Clara. Judgment was entered against Circuit Technology, Inc., on March 12,
2002, in the amount of $181,342.15. As of February 10, 2003, no collection
efforts have been made.
John J. La Porta v. Circuit Technology, Inc. et al., Case No. 010900785,
Third Judicial District Court, Salt Lake Department, Salt Lake County, State of
Utah. Mr. La Porta filed suit on or about January 23, 2001, seeking to recover
the principal sum of $135,941 plus interest on a promissory note given by Racore
Technology Corp. Mr. La Porta claims that the Company is a guarantor of the
promissory note and the Company should be held liable because of Racore's
default on the note. The parties are presently negotiating settlement. The case
was subsequently dismissed without prejudice on August 7, 2002. As of February
10, 2003, the case had not been refiled.
Molex has notified the Company that it believes it has a claim
against the Company in the amount of $90,000.00 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
Orbit Systems, Inc. adv. Circuit Technology, Inc. et al, Case No.
010100050DC, Third Judicial District Court, West ValleyCity Department, Salt
Lake County, State of Utah. Orbit filed suit on January 4, 2001, seeking to
recovery $173,310 for the costs of goods that Orbit claims the Company is under
contract to purchase. The Company filed an answer denying the substantive
allegations and filed a Third-party Complaint against Osicom Technologies, Inc.,
and Entrada Networks, Inc. ("Entrada"), for contribution, indemnity and
reimbursement in the event the Company is held liable to Orbit. Discovery has
begun. Subsequently, the Company entered into an agreement with Entrada and
Orbit. Under the agreement, Entrada agreed to purchase certain parts and
equipment from Orbit. Once Entrada has paid Orbit for the parts and equipment,
Orbit will dismiss its suit against the Company, and once Orbit has dismissed
its suit against the Company, the Company will dismiss its suit against Entrada.
To the Company's knowledge, Entrada has ordered the parts and equipment from
Orbit, but as of February 10, 2002, the suits have not been dismissed.
Sager Electronics adv. Circuit Technology Corporation, Civil No.
000403535, Third Judicial District Court, Sandy Department, Salt Lake County,
State of Utah. Suit was brought against the Company on or about March 23, 2000,
under allegations that the Company owed $97,259.23 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for non payment of amount owing. The Company has answered, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Negotiations for settlement have resulted in an agreement for
settlement of all claims of Sager against the Company. The Company has arranged
certain payments and is required to pay Sager $1,972.07 each month until paid.
The Company defaulted on its obligations in December 2002. The Company is
negotiating a new settlement with Sager.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No.
00L14505, Circuit Court of Cook County Department, Law Division, State of
Illinois. Suit was brought against the Company on or about December 23, 1999,
under allegations that the Company owed $213,717.70 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for breach of contract, unjust enrichment and
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account stated. The Company has answered, admitting that it owed certain sums
for conforming goods and services and denying all other claims. Judgment was
subsequently entered against the Company in early 2002. The parties are
presently negotiating the terms of settlement documents, pursuant to which the
Company will facilitate a payment to this creditor a cash payment and issue a
promissory note and shares of its restricted common stock in satisfaction of the
creditors claims. However, until the settlement documents are executed and
delivered, there can be no assurance that the creditors claims will be settled
nor that the terms will be favorable to the Company.
Wells Fargo Equipment Finance adv. Circuit Technology Corporation,
Civil No. 901207 Third Judicial District Court, Salt Lake County, State of Utah.
Suit was brought against the Company on or about February 10, 2000, under
allegations that the Company owed $439,493.56 for a loan provided to the Company
for the Company's use and benefit. Claims are asserted for breach of contract,
breach of guarantee and replevin. The Company has answered, admitting that it
owed certain sums for conforming goods and services and denying all other
claims. Initial discovery is beginning. Judgment has been entered against the
Company and certain guarantors in the amount of $427,291.69 plus interest at the
rate of 8.61% per annum from June 27, 2000. The parties have reached a
settlement agreement under which the Company will pay approximately $12,000 per
month beginning in January 2003 to resolve this claim,
Zion's First National Bank has notified the Company that it believes
it has a claim against the Company in the amount of $240,000.00 for loans made
to the Company for the Company's use and benefit. The Company has entered into a
Fifth Forbearance and Loan Modification Agreement, requiring monthly payments of
$20,000.00. The Company subsequently renegotiated a settlement with Zions Bank
under which the Company will pay approximately $12,000 per month beginning in
January 2003.
George M. Madanat, Civil No. KC 035616, Superior Court of the State
of California for the County of Los Angeles, East District. Suit was brought
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
under the settlement agreement, and judgment was entered against the Company. As
of February 10, 2003, the Company is not aware of any collection efforts.
Abacas Ventures, Inc., ("Abacas") is a Delaware corporation which is
owned by private individuals, some of whom are also shareholders of the Company.
Abacas has acquired the claims and rights of certain creditors of the Company,
in exchange for which the Company has issued shares of its common stock to
Abacas. At December 31, 2002, the Company's obligations to Abacas was
$792,063.42.
Directors, Executive Officers, Promoters and Control Persons
Directors and Officers
The following sets forth the names, ages and positions of our directors and
officers and the officers of our operating subsidiary, CirTran Corporation
(Utah), along with their dates of service in such capacities.
Name Age Positions
Iehab J. Hawatmeh 35 President, Chief Financial Officer, Secretary
and Director of CirTran Corporation; President of
CirTran Corporation (Utah). Served since July 2000.
Raed Hawatmeh 37 Director since June 2001.
Trevor Saliba 27 Director since June 2001. Senior Vice-President,
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Sales and Marketing since January 2002.
Shaher Hawatmeh 36 Vice-President of CirTran Corporation (Utah).
Served since July 2000.
Iehab J. Hawatmeh. Mr. Hawatmeh is our President and Secretary and a member of
our Board of Directors. Mr. Hawatmeh served as the President and Chief Executive
Officer of Circuit Technology, Inc. from 1993 until we acquired it in July 2000.
In this position, he was responsible for all operational, financial, marketing
and sales activities of Circuit Technology. He now performs similar functions
for us and our operating subsidiary, CirTran Corporation (Utah). Mr. Hawatmeh
received a bachelor's degree in electrical and computer engineering from Brigham
Young University in 1989, and an MBA with an emphasis in statistical process
controls from the University of Phoenix in 1993. Mr. Hawatmeh is the brother of
Shaher Hawatmeh.
Shaher Hawatmeh. Shaher Hawatmeh served as the Vice-President and Treasurer of
Circuit Technology, Inc. from 1993 until July 2000 and now serves as
Vice-President of our operating subsidiary, CirTran Corporation (Utah). In such
capacities, he is responsible for budget development, strategic planning, asset
management and marketing. Mr. Hawatmeh is the brother of Iehab Hawatmeh.
Raed Hawatmeh. Raed Hawatmeh, who is not related to Iehab and Shaher Hawatmeh,
has served as a director since June 2001. Mr. Hawatmeh has been a self-employed
investor and venture capitalist for the past five years, specializing in
financing start-up companies in the electronics industry.
Trevor Saliba. Mr. Saliba has served as a director since June 2001 and was
appointed Senior Vice-President, Sales and Marketing in January 2002. In 1997,
Mr. Saliba founded Saliba Corporation, a San Francisco construction company, and
has served as its president since that time. Prior to 1997, Mr. Saliba was
employed as a project engineer for Tutor-Saliba Corporation.
Criminal Proceeding Involving Iehab and Shaher Hawatmeh
One of our directors and officers, Iehab Hawatmeh and an officer, Shaher
Hawatmeh, were subject to a criminal proceeding that is unrelated to our
business and operations. Messrs. Hawatmeh, along with their parents, were
charged with assault and aggravated kidnapping of their sister and daughter,
Muna Hawatmeh, in October 1999. On January 14, 2003, the court dismissed all
charges against Iehab and Shaher Hawatmeh.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
Commission's Position on Indemnification for Securities Act Liabilities
Our Bylaws provide, among other things, that our officers or
directors are not personally liable to us or to our stockholders for damages for
breach of fiduciary duty as an officer or director, except for damages for
breach of
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such duty resulting from (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law, or (b) the unlawful payment of
dividends. Our Bylaws also authorize us to indemnify our officers and directors
under certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers or
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of the
251,212,443 outstanding shares of our common stock which, according to the
information supplied to us, were beneficially owned, as of February 10, 2003, by
(i) each person who is currently a director, (ii) each executive officer, (iii)
all current directors and executive officers as a group and (iv) each person
who, to our knowledge, is the beneficial owner of more than 5% of our
outstanding common stock. None of the individuals listed below own any options
or warrants to purchase our common stock.
Except as otherwise indicated, the persons named in the table have
sole voting and dispositive power with respect to all shares beneficially owned,
subject to community property laws where applicable. Beneficial ownership is
determined according to the rules of the Securities and Exchange Commission, and
generally means that person has beneficial ownership of a security if he or she
possesses sole or shared voting or investment power over that security. Each
director, officer, or 5% or more shareholder, as the case may be, has furnished
us information with respect to beneficial ownership. Except as otherwise
indicated, we believe that the beneficial owners of the common stock listed
below, based on the information each of them has given to us, have sole
investment and voting power with respect to their shares, except where community
property laws may apply. Unless otherwise indicated below, the address of the
stockholder is our principal executive office address, 4125 South 6000 West,
West Valley City, UT 84128.
Name and Address Relationship Common Shares Percent of Class
Cogent Capital Cr. 5% Shareholder 11,547,660 (1) 4.60%
P.O. Box 1362
Draper, UT 84020
Saliba Private Annuity Trust 5% Shareholder 52,173,990 (2) 20.77%
115 S. Valley Street
Burbank, CA 91505
Roger Kokozyon 5% Shareholder 27,715,620 11.03%
4539 Haskell Avenue
Encino, CA 91436
Iehab J. Hawatmeh Director, Officer, 46,415,643 18.48%
5% Shareholder
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Raed Hawatmeh Director, 5% 28,729,530 11.44%
10989 Bluffside Dr. Shareholder
Studio City, CA 91604
Shaher Hawatmeh Officer 3,775,365 1.5%
Trevor Saliba Director 0 0%
5 Thomas Mellon Circle
Suite 108
San Francisco, CA 94134
All Officers and Directors as a 78,920,538 31.42%
Group (4 persons)
(1) Includes 37,320 shares of stock held by an affiliate of Cogent
Capital Corp. The sole shareholder of Cogent Capital Corp. is
Gregory L. Kofford.
(2) Includes 7,164,620 shares held by the Saliba Living Trust. Thomas
L. Saliba and Betty R. Saliba are the trustees of The Saliba
Living Trust and Thomas L. Saliba is the sole trustee of The
Saliba Private Annuity Trust. These persons control the voting
and investment decisions of the shares held by the respective
trusts. Mr. Thomas L. Saliba is a nephew of the grandfather of
Mr. Trevor Saliba, one of our directors and officers. Mr. Trevor
Saliba is one of five passive beneficiaries of Saliba Private
Annuity Trust and has no control over its operations or
management. Mr. Saliba disclaims beneficial control over the
shares indicated.
Description of Common Stock
Effective August 6, 2001, our authorized capital was increased from
500,000,000 to 750,000,000 shares of common stock, $0.001 par value, and we also
effected, effective the same date, a 1:15 forward split of our issued and
outstanding shares of common stock through a forward split and share
distribution. As of February 10, 2003, 251,212,443 (post forward-split) shares
of our common stock were issued and outstanding. We are not authorized to issue
preferred stock.
Each holder of our common stock is entitled to a pro rata share of
cash distributions made to shareholders, including dividend payments, and are
entitled to one vote for each share of record on all matters to be voted on by
shareholders. There is no cumulative voting with respect to the election of our
directors or any other matter. Therefore, the holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of our common stock are entitled to receive dividends when, as and if
declared by our board of directors, in its sole discretion, from funds legally
available for such use. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities
and after provision has been made for each class of stock, if any, having any
preference in relation to our common stock. Holders of our common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to our common stock.
We have never declared or paid a cash dividend on our capital stock,
nor do we expect to pay cash dividends on our common stock in the foreseeable
future. We currently intend to retain our earnings, if any, for use in our
business. Any dividends declared in the future will be at the discretion of our
board of directors and subject to any restrictions that may be imposed by our
lenders.
We have elected not to be governed by the terms and provisions of the
Nevada Private Corporations Law that are designed to delay, defer or prevent a
change in control of the Company.
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Registration Rights and Related Matters
Pursuant to an agreement dated November 3, 2000, and as part of our
debt settlement with Future Electronics Corporation ("Future"), we granted
certain registration rights to Future with respect to 5,281,050 (352,070
pre-forward split) shares of our common stock. These rights provide Future with
the opportunity, subject to certain terms and conditions, to include up to 50%
of our common stock that it holds in any registration statement filed by us.
Among other things, we have agreed to pay any costs incurred with the
registration of such stock and to keep any registration statement we file active
for a period of 180 days or until the distribution contemplated in the
registration statement has been completed. Future's registration rights are
assignable and transferable to any individual or entity that does not directly
compete with us. These registration rights are not exercisable, however, with
respect to registration statements relating solely to the sale of securities to
participants in a company stock plan or relating solely to corporate
reorganizations. In addition, the rights would not be fully exercisable if an
underwriter managing a public offering determined in good faith that market
factors required a limitation on the number of shares that Future (or its
assignee) would otherwise be entitled to have registered.
A total of 1,716,375 (post forward split) shares of our common stock
held by Future, or approximately 33% of the total number of the shares held by
it, are being included in this registration statement.
In connection with our debt settlement with Future, our three largest
shareholders, Iehab Hawatmeh, Raed Hawatmeh and Roger Kokozyon (see "Security
Ownership of Certain Beneficial Owners and Management"), entered into lock-up
agreements with Future, whereby they agreed not to sell to the public any shares
of our common stock held by them until June 27, 2002, unless previously
consented to by Future.
Certain Relationships and Related Transactions
We lease our principal offices and manufacturing facility from I&R
Properties LLC, a Utah limited liability company, at a monthly lease rate of
approximately $16,000 under a lease that has a current term expiring in November
2006. We have the option of renewing the lease for two additional 10-year terms.
I & R Properties, LLC is owned and controlled by Iehab J. Hawatmeh, an officer,
director and principal stockholder, Raed Hawatmeh, a principal stockholder and
director, and Shaher Hawatmeh, an officer of CirTran Corporation (Utah), our
operating subsidiary.
As of December 31, 2001, Iehab Hawatmeh had loaned us a total of
$1,390,125. The loans were demand loans, bore interest at 10% per annum and were
unsecured. Effective January 14, 2002, we entered into four substantially
identical agreements with existing shareholders pursuant to which we issued an
aggregate of 43,321,186 shares of restricted common stock at a price of $0.075
per share for $500,000 in cash and the cancellation of $2,749,090 principal
amount of our debt. Two of these agreements were with the Saliba Private Annuity
Trust, one of our principal shareholders, and a related entity, the Saliba
Living Trust. The Saliba trusts are also principals of Abacas Ventures, Inc.,
which entity purchased our line of credit in May 2000. (See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Liquidity and Financing
Arrangements.") Pursuant to the Saliba agreements, the trusts were issued a
total of 26,654,520 shares of common stock in exchange for $500,000 cash and the
cancellation of $1,499,090 of debt. We used the $500,000 cash from the sale of
the shares for working capital. As a result of this transaction, the percentage
of our common stock owned by the Saliba Private Annuity Trust and the Saliba
Living Trust increased from approximately 6.73% to approximately 17.76%%. Mr.
Trevor Saliba, one of our directors and officers, is a passive beneficiary of
the Saliba Private Annuity Trust. Pursuant to the other two agreements made in
January, we issued an aggregate of 16,666,666 shares of restricted common stock
at a price of $0.075 per share in exchange for the cancellation of $1,250,000 of
notes payable by two shareholders, Mr. Iehab Hawatmeh (our president, a director
and our principal shareholder) and Mr. Rajai Hawatmeh. Of these shares,
15,333,333 were issued to Iehab Hawatmeh in exchange for the cancellation of
$1,150,000 in debt. As a result of this transaction, the percentage of our
common stock owned by Mr. Hawatmeh increased from 19.9% to approximately 22.18%.
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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.
Management believed at the time of each of these transactions and
continues to believe that each of these transactions were as fair to the Company
as could have been made with unaffiliated third parties.
Market for Common Equity and Related Stockholder Matters
Our common stock traded sporadically on the Pink Sheets under the
symbol "CIRT" from July 2000 to July 2002. Effective July 15, 2002, the NASD
approved our shares of common stock for quotation on the NASD OTC Bulletin
Board. The following table sets forth, for the respective periods indicated, the
prices of our common stock as reported and summarized on the Pink Sheets. These
prices are based on inter-dealer bid and asked prices, without markup, markdown,
commissions, or adjustments and may not represent actual transactions.
Calendar Quarter Ended High Bid Low Bid
December 31, 2002 $0.11 $0.03
September 30, 2002 $0.15 $0.03
June 30, 2002 $0.07 $0.03
March 31, 2002 $0.08 $0.02
December 31, 2001 $0.10 $0.04
September 30, 2001 (1) $0.36 $0.06
June 30, 2001 $3.50 $1.50
March 31, 2001 $5.50 $3.00
December 31, 2000 $4.00 $4.00
(1) Our 15 for 1 forward stock split was made effective August 6,
2001 and our stock price decreased accordingly.
The high and low sales prices for our common stock on February 11,
2003, were $0.03 and $0.03, respectively. As of February 10, 2003, we had
approximately 557 shareholders of record holding 251,212,443 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
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and it is able to pay its debts as they become due in the usual course of
business.
During 2002, we issued equity securities that were not registered
under the Securities Act of 1933, as amended (the "1933 Act"), other than
unregistered sales in reliance on Regulation S under the Act, as follows:
In December, 2002, the Company entered into an agreement with Abacas
under which the Company issued an aggregate of 30,000,000 shares of
common stock in exchange for cancellation of an aggregate amount of
$1,500,000 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.05 per share, for the
aggregate amount of $1,500,000. The Company did not grant
registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2)
of the Securities Act of 1933, as amended (the "1933 Act"), and the
rules and regulations promulgated thereunder.
In connection with entering into the Equity Line Agreement, we issued
2,375,000 shares of common stock to the Equity Line Investor; 125,000
shares of common stock to Westrock Advisors, Inc., ("Westrock"), who
acted as a finder in connection with the Equity Line Agreement; and
62,500 shares to Butler Gonzales, LLP ("Butler Gonzales"), as partial
payment of legal fees in connection with the Equity Line Agreement.
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 resales of the shares are covered by this prospectus
and the registration statement of which it is a part.
In January, 2002, the Company entered into an agreement with Abacas
under which the Company issued an aggregate of 19,987,853 shares of
common stock in exchange for cancellation of an aggregate amount of
$1,499,090 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.075 per share, for
the aggregate amount of $1,500,000. The Company did not grant
registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2)
of the Securities Act of 1933, as amended (the "1933 Act"), and the
rules and regulations promulgated thereunder.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of
the Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales
practice requirements for broker-dealers who sell penny stocks to persons other
than established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
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Executive Compensation
The following table sets forth certain information regarding the
annual and long-term compensation for services to us in all capacities
(including Circuit Technologies, Inc.) for the prior fiscal years ended December
31, 2001, 2000, and 1999, of those persons who were either (i) the chief
executive officer during the last completed fiscal year or (ii) one of the other
four most highly compensated executive officers as of the end of the last
completed fiscal year. The individuals named below received no other
compensation of any type, other than as set out below, during the fiscal years
indicated.
-------------------------- ------- --------------- ---------------- ------------------------------------------------
Long Term Compensation
-------------------------- ------- -------------------------------- ------------------------------- ----------------
Annual Compensation Awards
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
Name and Principal Restricted All Other
Position Stock Stock Compen-
Year Salary ($) Bonus ($) Awards ($) Options (#) sation ($)
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
Iehab Hawatmeh 2001 175,000 - - - -
President, Secretary,
Treasurer, Director
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
2000 175,000 - - - -
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
1999 187,230 - - - -
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
Shaher Hawatmeh 2001 130,000 - - 500,000 -
Executive Vice President
of CirTran Corporation
(Utah)
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
2000 109,000 - - - -
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
1999 86,154 - - - -
-------------------------- ------- --------------- ---------------- --------------- --------------- ----------------
Employment Agreements
Iehab Hawatmeh entered into an employment agreement with Circuit
Technologies, Inc. ("Circuit") in 1993 that was assigned to us as part of the
reverse acquisition of Circuit in July 2000. This agreement, which is of
indefinite term, provides for a base salary for Mr. Hawatmeh, plus a bonus of 2%
of our net profits before taxes, payable quarterly, and any other bonus our
board of directors may approve. The agreement also provides that, if Mr.
Hawatmeh is terminated without cause, we are obligated to pay him, as a
severance payment, an amount equal to five times his then-current annual base
compensation, in one lump-sum payment or otherwise, as Mr. Hawatmeh may direct.
Trevor Saliba entered into an agreement with us in January 2002
pursuant to which we retained Mr. Saliba as Senior Vice-President, Sales and
Marketing. The agreement provides for remuneration to Mr. Saliba of $6,000 per
month, plus reimbursement for all pre-approved business expenses. In addition,
we agreed to pay Mr. Saliba an amount equal to 5.0% of all gross investments
made into our company that are generated and arranged by Mr. Saliba. The
agreement has an initial term of one year, renewable upon agreement of the
parties, but is terminable by either party for any reason upon 90 days written
notice to the other party. In addition, we may terminate the agreement upon 30
days written notice if Mr. Saliba fails to comply with the terms of the
agreement.
2001 Stock Plan
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On July 25, 2001, our board approved and adopted our 2001 Stock Plan,
or the 2001 Plan, subject to shareholder approval. An aggregate of 15,000,000
(post forward-split) shares of our common stock are subject to the 2001 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 2001 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 2001 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.
All of our and our affiliates' and subsidiaries' employees, officers
and directors are eligible to participate in the 2001 Plan. Under the 2001 Plan,
each or our current non-employee directors is entitled to receive an initial
option covering 375,000 (post forward-split) shares of common stock, and,
commencing in 2002, each non-employee director is entitled to receive an annual
grant of an option covering an additional 375,000 (post forward-split) shares of
common stock. No grants of options were made during 2001 to non-employee
directors or to any other directors. Our non-employee agents, consultants,
advisors and independent contractors are also eligible to participate in our
stock plan.
The 2001 Plan is administered by our board of directors, which
designates from time to time the individuals to whom awards are made under the
2001 Plan, the amount of any such award and the price and other terms and
conditions of any such award. The 2001 Plan shall continue in effect until July
25, 2006, subject to earlier termination by our board. The board may suspend or
terminate the 2001 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 2001 Plan for more than an aggregate of
7,500,000 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 2001
Plan as stock purchase rights. The board determines the persons to receive
awards, the number of shares to be awarded and the time of the award. Shares
received pursuant to a stock purchase right are subject to the terms, conditions
and restrictions determined by the board at the time the award is made, as
evidenced by a restricted stock purchase agreement. No stock purchase rights
have been granted under the 2001 Plan.
The 2001 Plan further provides that if the number of outstanding
shares of our common stock is increased or decreased or changed into or
exchanged for a different number or kind of our shares or securities or of
another corporation by reason of any recapitalization, stock split or similar
transaction, appropriate adjustment will be made by the board in the number and
kind of shares available for awards under the 2001 Plan.
The following table sets forth certain information concerning options
to purchase our common stock that were granted in 2001 to the named executive
officers pursuant to the 2001 Plan:
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Number of Securities % of Total
Underlying Options/SARs Granted
Options/SARs Granted to Employees in
Fiscal Year Exercise or Base
Name Price ($/Sh) Expiration Date
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Iehab Hawatmeh 0 - - -
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Shaher Hawatmeh 500,000 43.5% $0.07 9/28/2006
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
The following table sets forth information concerning options exercised during
2001 and the year-end number and value of unexercised options with respect to
each of the named executive officers.
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Number of Securities
Underlying Value of Unexercised
Unexrcised In the Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Iehab Hawatmeh - - -/- -
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Shaher Hawatmeh 500,000 $0 -/- -/-
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
2002 Stock Plan
In December 2002, our board approved and adopted our 2002 Stock Plan,
or the 2002 Plan, subject to shareholder approval. An aggregate of 25,000,000
(post forward-split) shares of our common stock are subject to the 2002 Plan,
which provides for grants to employees, officers, directors and consultants of
both non-qualified (or non-statutory) stock options and "incentive stock
options" (within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended). The 2002 Plan also provides for the grant of certain stock
purchase rights, which are subject to a purchase agreement between us and the
recipient. The purpose of the 2002 Plan is to enable us to attract and retain
the best available personnel for positions of substantial responsibility, to
provide additional incentive to such persons, and to promote the success of our
business.
The 2002 Plan is administered by our board of directors, which
designates from time to time the individuals to whom awards are made under the
2002 Plan, the amount of any such award and the price and other terms and
conditions of any such award. The 2002 Plan shall continue in effect until the
date which is ten years from the date of its adoption by the board of directors,
subject to earlier termination by our board. The board may suspend or terminate
the 2002 Plan at any time.
The board determines the persons to whom options are granted, the
option price, the number of shares to be covered by each option, the period of
each option, the times at which options may be exercised and whether the option
is an incentive or non-statutory option. No employee may be granted options or
stock purchase rights under the 2002 Plan for more than an aggregate of
15,000,000 shares in any given fiscal year. We do not receive any monetary
consideration upon the granting of options. Options are exercisable in
accordance with the terms of an option agreement entered into at the time of
grant.
The board may also award our shares of common stock under the 2002
Plan as stock purchase rights. The board determines the persons to receive
awards, the number of shares to be awarded and the time of the award. Shares
received pursuant to a stock purchase right are subject to the terms, conditions
and restrictions determined by the board at the time the award is made, as
evidenced by a restricted stock purchase agreement. No stock purchase rights
have been granted under the 2002 Plan.
As of February 10, 2003, no options have been granted under the 2002
Plan.
Changes in and disagreements with accountants
on accounting and financial disclosure
On March 12, 2002, we engaged Hansen, Barnett & Maxwell as our independent
auditor following our
-38-
dismissal, effective March 12, 2002, of Grant Thornton, LLP ("Grant Thornton").
Our Board of Directors approved the engagement of Hansen, Barnett & Maxwell and
the dismissal of Grant Thornton.
Grant Thornton had served as our independent accountants since
February 1999. Grant Thornton's auditors' report on the restated consolidated
financial statements of the registrant and subsidiaries as of and for the year
ended December 31, 2000 contained a separate paragraph stating that "the Company
has an accumulated deficit, has suffered losses from operations and has negative
working capital that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty." Except as noted above,
Grant Thornton's report on our restated financial statements for the fiscal year
ended December 31, 2000, contained no adverse opinions or disclaimer of
opinions, and were not qualified as to audit scope, accounting principles, or
uncertainties.
As required by applicable rules of the Securities and Exchange
Commission (the "Commission"), we notified Grant Thornton that during our two
most recent fiscal years and the interim period from January 1, 2002, through
March 12, 2002, we were unaware of any disputes between us and Grant Thornton as
to matters of accounting principles or practices, financial statement
disclosure, or audit scope or procedure, which disagreements, if not resolved to
the satisfaction of Grant Thornton, would have caused it to make a reference to
the subject matter of the disagreements in connection with its reports.
We requested that Grant Thornton furnish us with a letter addressed
to the Commission stating whether or not it agrees with the above statements. A
copy of the letter received from Grant Thornton with respect to our request,
addressed to the Commission, was filed with the Commission.
Effective March 12, 2002, we engaged Hansen, Barnett & Maxwell as our
independent auditors with respect to the fiscal year ending December 31, 2001.
During our most recent fiscal year and through March 12, 2002, we had not
consulted with Hansen, Barnett & Maxwell regarding either: (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on our financial
statements, and neither a written report was provided to us nor was oral advice
provided that Hansen, Barnett & Maxwell concluded was an important factor
considered by us in reaching a decision as to the accounting, auditing or
reporting issue; or (ii) any matter that was either the subject of a
disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K, or a reportable
event, as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.
Index to Financial Statements
Audited Financial Statements: Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2
Consolidated Statements of Operations for Years Ended December 31, 2001 and 2000 F-3
Consolidated Statement of Stockholders' Deficit for the Years Ended December 31, 2000 and F-4
2001
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-7
Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 Q-3
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, Q-4
2002 and 2001
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, Q-5
2002 and 2001
Notes to Condensed Consolidated Financial Statements Q-6
-39-
Experts
Our consolidated balance sheets as of December 31, 2001 and 2000, and
the consolidated statements of operations, stockholders' deficit, and cash
flows, for the years then ended, have been inlcuded in the registration
statement on Form SB-2 of which this prospectus forms a part, in reliance on the
report of Hansen, Barnett & Maxwell, independent certified public accountants,
given on the authority of that firm as experts in auditing and accounting.
Legal matters
The validity of the Shares offered hereby will be passed upon for us
by Durham Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City,
Utah 84111.
-40-
Table of Contents
Summary about CirTran Corporation
and this offering...................................................2
Risk factors.........................................................4
Use of proceeds.....................................................10
Determination of offering price.....................................10
Description of business.............................................10
Property............................................................15
Management's discussion and analysis or plan of
operation...........................................................17
Forward-looking statements..........................................23
Selling Shareholders................................................23
Plan of distribution................................................25
Regulation M........................................................26
Legal Proceedings...................................................26
Directors, executive officers, promoters and control
persons.............................................................30
Commission's position on indemnification for
Securities Act liabilities..........................................31
Security ownership of certain beneficial owners and
management..........................................................32
Description of common stock.........................................33
Certain relationships and related transactions......................34
Market for common equity and related stockholder
matters.............................................................35
Executive compensation..............................................37
Changes in and disagreements with accountants on
accounting and financial disclosure.................................39
Index to financial statements ......................................40
Experts.............................................................41
Legal matters.......................................................41
--------------------
Dealer Prospectus Delivery Obligation. Until [a date which is 90 days after the
effective date], all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
CirTran Corporation
127,562,500
SHARES
COMMON STOCK
--------------------
PROSPECTUS
-------------------
February ____, 2003
-41-
-42-
PART II. Information Not Required in the Prospectus
Item 24. Indemnification of Directors and Officers
Our Bylaws provide, among other things, that our officers or
directors are not personally liable to us or to our stockholders for damages for
breach of fiduciary duty as an officer or director, except for damages for
breach of such duty resulting from (a) acts or omissions which involve
intentional misconduct, fraud, or a knowing violation of law, or (b) the
unlawful payment of dividends. Our Bylaws also authorize us to indemnify our
officers and directors under certain circumstances. We anticipate we will enter
into indemnification agreements with each of our executive officers and
directors pursuant to which we will agree to indemnify each such person for all
expenses and liabilities incurred by such person in connection with any civil or
criminal action brought against such person by reason of their being an officer
or director of the Company. In order to be entitled to such indemnification,
such person must have acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
criminal actions, such person must have had no reasonable cause to believe that
his conduct was unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers or
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance And Distribution
We will pay all expenses in connection with the registration and sale
of the common stock by the selling shareholders. The estimated expenses of
issuance and distribution are set forth below.
Registration Fees $ 470.00
Transfer Agent Fees 1,000.00
Costs of Printing and Engraving 5,000.00
Legal Fees 15,000.00
Accounting Fees 5,000.00
----------------
Total Estimated Costs of Offering $ 26,470.00
Item 26. Recent Sales of Unregistered Securities
In April 1999, as Vermillion Ventures, Inc., we issued 200,000,000
restricted shares of our common stock (equivalent to 1,000,000 shares of common
stock as presently constituted), valued at $0.0001 per share ($20,000 in the
aggregate) to Milagro Holdings, Inc. for services rendered in connection with
the revival of Vermillion to seek a new business opportunity. Milagro was an
affiliate of Vermillion's principal, and for the purposes of this issuance,
Vermillion relied on the exemption from the registration and prospectus delivery
requirements provided by Section 4(2) of the Securities Act of 1933.
In July 2000, we issued an aggregate of 10,000,000 restricted shares
of common stock (150,000,000 shares of common stock as presently constituted) to
Circuit Technology, Inc. ("CTI") in connection with our acquisition of the
assets and liabilities of CTI. Of these restricted shares, 9,200,000 were
distributed on a pro-rata basis by way of liquidation to, and registered in the
name of, CTI's shareholders, from each of whom we obtained investment
representation letters. The balance of 800,000 common shares issued pursuant to
the CTI acquisition were paid to Cogent Capital Corp. in respect of financial
advisory services rendered in connection with the acquisition. See above under
the section entitled "Certain Relationships and Related Transactions." For the
purpose of these stock issuances, the Company relied on the exemption from the
registration and prospectus delivery requirements provided by Section 4(2) of
the Securities Act of 1933.
II-1
In July 2000, concurrent with our acquisition of CTI's assets, we
issued 25,333 restricted shares of our common stock to Milagro, Holdings, Inc.
and 1,000 restricted shares of our common stock (379,995 shares and 15,000
shares, respectively, as presently constituted) to each of Kurt Hughes and John
Lambert, in payment of services rendered to us in connection with the CTI
acquisition. For the purpose of these stock issuances, we relied on the
exemption from the registration and prospectus delivery requirements provided by
Section 4(2) of the Securities Act of 1933. No broker was involved and no
commissions were paid in connection with these transactions.
In November 2000, we issued 352,070 restricted shares of our common
stock (5,281,050 shares as presently constituted) to Future Electronics
Corporation in exchange for $324,284 in debt relief. For the purpose of this
stock issuance, we relied on the exemption from the registration and prospectus
delivery requirements provided by Section 4(2) of the Securities Act of 1933. No
broker was involved and no commissions were paid in connection with this
transaction.
In 2000, prior to our acquisition of CTI, CTI sold 830 restricted
shares of its common stock (subsequently exchanged into 627,238 restricted
shares of our common stock following our acquisition of CTI) for $945,473 to 29
accredited investors in reliance on the exemption from registration requirements
set forth in Section 4(2) of the Securities Act of 1933. During 1999, CTI sold
1,881 restricted shares of its common stock (subsequently exchanged into
1,421,488 restricted shares of our common stock following our acquisition of
CTI) for $2,171,235 to 19 accredited investors in reliance on the exemption from
registration requirements set forth in Section 4(2) of the Securities Act of
1933.
In July 2001, we issued 175,000 shares of common stock (2,625,000
shares post-forward split) pursuant to the exercise of stock options previously
granted pursuant to our 2001 Stock Plan.
The Equity Line Agreement, which is the subject of this registration
statement, resulted in our issuance of 2,375,000 shares to the Equity Line
Investor; 125,000 shares to Westrock Advisors, Inc., as finder's fees; and
62,500 shares to Butler Gonzales LLP, as partial payment of legal fees.
Additionally, the Equity Line Agreement provides for the issuance of shares to
the Equity Line Investor in lieu of repayment of advances under the Equity Line.
All of these shares were or will be sold in reliance on the exemption from
registration requirements set forth in Section 4(2) of the Securities Act of
1933.
In December, 2002, the Company entered into an agreement with Abacas
under which the Company issued an aggregate of 30,000,000 shares of common stock
in exchange for cancellation of an aggregate amount of $1,500,000 in senior debt
owed to the creditors by the Company. The shares were issued with an exchange
price of $0.05 per share, for the aggregate amount of $1,500,000. The Company
did not grant registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
In January, 2002, the Company entered into an agreement with Abacas
under which the Company issued an aggregate of 19,987,853 shares of common stock
in exchange for cancellation of an aggregate amount of $1,499,090 in senior debt
owed to the creditors by the Company. The shares were issued with an exchange
price of $0.075 per share, for the aggregate amount of $1,500,000. The Company
did not grant registration rights to the four creditors. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder.
Item 27. Exhibits
Copies of the following documents are filed with this registration statement as
exhibits:
Exhibit No. Document
II-2
5.1 Opinion of Durham Jones & Pinegar, P.C.
10.19 Equity Line of Credit Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of November 6, 2002 (previously
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed with the Commission November 13, 2002)
23.1 Consent of Hansen Barnett & Maxwell LLP
23.2 Consent of Counsel (included in Exhibit 5 Opinion Letter)
24. Power of Attorney (Included on Signature Page of Registration
Statement)
---------------
Item 28. Undertakings
Insofar as indemnification for liabilities under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the provisions described above, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by our director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
We hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To specify in the prospectus any facts or events arising
after the effective date of the registration statement (or
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) (Section
230.4242(b) of Regulation S-B) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii)To include any additional or changed material information
with respect to the plan of distribution not previously
disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGES FOLLOW.]
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, we certify that we have reasonable grounds to believe that we meet all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the city of Salt
Lake City, Utah, on February 13, 2003.
CIRTRAN CORPORATION
A Nevada Corporation
By: /s/ Iehab Hawatmeh
-------------------------------------------
Iehab Hawatmeh
Its: President and Director
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated:
/s/ Iehab Hawatmeh February 13, 2003
---------------------------------------------
Iehab Hawatmeh
President, Chief Financial Officer and Director
/s/ Raed Hawatmeh February 13, 2003
----------------------------------------------
Raed Hawatmeh
Director
/s/ Trevor Saliba February 13, 2003
----------------------------------------------
Trevor Saliba
Director
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints and
hereby authorizes Iehab Hawatmeh with the full power of substitution, as
attorney-in-fact, to sign in such person's behalf, individually and in his
capacity as a director, and to file any amendments, including post-effective
amendments to this Registration Statement.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following person in the capacity
and on the date stated.
/s/ Raed Hawatmeh February 13, 2003
----------------------------------------------
Raed Hawatmeh
Director
/s/ Trevor Saliba February 13, 2003
----------------------------------------------
Trevor Saliba
Director
II-5
The following financial statements of CirTran Corporation and related
notes thereto and auditors' report thereon are filed as part of this Form
10-KSB:
Audited Financial Statements: Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, F-3
2001 and 2000
Consolidated Statements of Operations for the Years F-4
Ended December 31, 2001 and 2000
Consolidated Statement of Stockholders' Deficit F-5
for the Years Ended December 31, 2000 and 2001
Consolidated Statements of Cash Flows for the F-6
Years Ended December 31, 2001 and 2000
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL (801) 532-22
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the of Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CirTran Corporation
and Subsidiary, as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit, has
suffered losses from operations and has negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 24, 2002
F-2
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
CIRTRAN CORPORATION AND SUBSIDIARY
December 31,
--------------------------
2001 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 499 $ 11,068
Trade accounts receivable, net of allowance for
doubtful accounts of $66,316 and $82,502 in
2001 and 2000, respectively 369,250 874,097
Inventories 1,773,888 1,755,786
Other 97,037 94,176
------------ ------------
Total current assets 2,240,674 2,735,127
Property and equipment, at cost, net 1,333,925 1,871,076
Other assets, net 10,887 10,587
------------ ------------
Total Assets $ 3,585,486 $ 4,616,790
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 159,964 $ 5,491
Accounts payable 2,141,290 1,561,752
Accrued liabilities 3,071,191 2,339,949
Notes payable to stockholders 1,390,125 1,088,966
Notes payable to related parties 2,405,507 2,435,007
Current maturities of capital lease obligations 41,206 39,274
Current maturities of long-term notes payable 863,650 929,083
------------ ------------
Total current liabilities 10,072,933 8,399,522
------------ ------------
Long-Term Liabilities
Long-term notes payable, less current maturities 447,155 529,964
Capital lease obligations, less current maturities 7,775 14,257
------------ ------------
Total long-term liabilities 454,930 544,221
------------ ------------
Commitments
Stockholders' Deficit
Common stock, par value $0.001; authorized
750,000,000 shares; issued and outstanding
160,951,005 and 156,301,005 in 2001 and
2000, respectively 160,951 156,301
Additional paid-in capital 5,977,164 5,664,154
Accumulated deficit (13,080,492) (10,147,408)
------------ ------------
Total Stockholders' Deficit (6,942,377) (4,326,953)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 3,585,486 $ 4,616,790
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended,
December 31,
--------------------------
2001 2000
------------ ------------
Net sales $ 1,870,848 $ 6,373,096
Cost of sales (2,340,273) (6,792,393)
------------ ------------
Gross Loss (469,425) (419,297)
Selling, general and administrative expenses (1,690,837) (2,710,275)
------------ ------------
Loss From Operations (2,160,262) (3,129,572)
------------ ------------
Other income (expense)
Interest (773,034) (1,051,027)
Other, net 212 945
------------ ------------
(772,822) (1,050,082)
------------ ------------
Net Loss $ (2,933,084) $ (4,179,654)
============ ============
Basic and diluted loss per common share $ (0.02) $ (0.03)
============ ============
Basic and diluted weighted-average
common shares outstanding 157,556,073 142,765,555
============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
Common Stock
------------------------ Additional Receivable
Number Paid-in from Accumulated
Shares Amount Capital Stockholders Deficit Total
------------ ---------- ----------- ---------- ------------ ------------
Balance -
December 31, 1999 129,271,560 $ 129,272 $ 4,645,799 $ (86,000) $ (5,967,754) $ (1,278,683)
Issuance of
common stock
for cash 9,408,585 9,408 936,692 - - 946,100
Redemption of
common stock (680,145) (680) (79,320) - - (80,000)
Issuance of
common stock
to acquire the
monetary assets
of CTISI 14,153,505 14,145 (14,154) - - -
Common stock
issued for
conversion of
debt 5,281,050 5,281 319,003 - - 324,284
Redemption of
common stock for
debt (1,133,550) (1,134) (143,866) - - (145,000)
Payment from
stockholders - - - 86,000 - 86,000
Net loss - - - - (4,179,654) (4,179,654)
------------ ---------- ----------- ---------- ------------ ------------
Balance -
December 31, 2000 156,301,005 156,301 5,664,154 - (10,147,408) (4,326,953)
Warrants issued
as a sales
sales commission - - 200,000 - - 200,000
Exercise of
warrants 3,000,000 3,000 (990) - - 2,010
Exercise of
employee options 1,650,000 1,650 114,000 - - 115,650
Net loss - - - - (2,933,084) (2,933,084)
------------ ---------- ----------- ---------- ------------ ------------
Balance -
December 31, 2001 160,951,005 $ 160,951 $ 5,977,164 - $(13,080,492) $ (6,942,377)
============ ========== =========== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended,
December 31,
------------------------
2001 2000
----------- -----------
Cash flows from operating activities
Net loss $(2,933,084) $(4,179,654)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 540,090 961,506
Provision for doubtful trade accounts receivables (16,186) 78,978
Provision for inventory obsolescence - 55,963
Warrants issued as a sales commission 200,000 -
Changes in assets and liabilities:
Trade accounts receivable 521,033 20,276
Inventories (18,102) 1,244,634
Prepaid expenses (3,411) -
Other assets 250 23,302
Accounts payable 612,038 (87,129)
Accrued liabilities 808,648 1,741,163
----------- -----------
Total adjustments 2,644,360 4,038,693
----------- -----------
Net cash used in operating activities (288,724) (140,961)
Cash flows from investing activities
Purchase of property and equipment (2,939) (12,770)
----------- -----------
Net cash used in investing activities (2,939) (12,770)
----------- -----------
Cash flows from financing activities
Increase (decrease) in checks written in
excess of cash in bank 154,473 (72,165)
Proceeds from notes payable to stockholders 301,159 86,000
Payments on notes payable to stockholders - (15,000)
Principal payments on long-term notes payable (445,903) (825,593)
Proceeds from long-term notes payable 158,255 254,663
Payments on capital lease obligations (4,550) (129,706)
Purchase and retirement of common stock - (80,000)
Proceeds from exercise of options to
purchase common stock 117,660 -
Proceeds from issuance of common stock - 946,100
----------- -----------
Net cash provided by financing activities 281,094 164,299
----------- -----------
Net increase (decrease) in cash and cash equivalents (10,569) 10,568
Cash and cash equivalents at beginning of year 11,068 500
----------- -----------
Cash and cash equivalents at end of year $ 499 $ 11,068
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Years Ended,
December 31,
------------------------
2001 2000
----------- -----------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 270,065 $ 622,266
Noncash investing and financing activities
Common stock issued for conversion of debt $ - $ 324,284
Notes issued for accounts payable 32,500 393,022
Redemption of common stock for debt - 145,000
Accrued interest converted to note payable 77,406 -
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Business Activity - Effective July 1, 2000, all of the assets and certain
liabilities of Circuit Technology Corporation (Circuit) were acquired by CTI
Systems, Inc. (CTISI), a Utah corporation and a wholly owned subsidiary of
Vermillion Ventures, Inc. (VVI), an inactive corporation. CTISI had no assets or
operations at the date of acquisition. The stockholders of Circuit received
138,000,000 shares of VVI common stock in the transaction. VVI had 2,153,505
common shares outstanding at the time of the acquisition, and an additional
12,000,000 shares were paid by Circuit to Cogent Capital Corp (Cogent) for
services performed in facilitating the transaction. CTISI subsequently changed
its name to CirTran Corporation (Utah), and VVI subsequently changed its name to
CirTran Corporation (Nevada).
The acquisition was accounted for as a reverse acquisition of VVI by Circuit.
Although VVI was the surviving legal entity, for accounting purposes Circuit was
treated as the surviving accounting entity, and its historical financial
statements are presented for the period prior to the acquisition. Circuit had
11,404 common shares outstanding prior to the acquisition. The shares issued to
the shareholders of Circuit have been accounted for as a 756-for-1 stock split,
and the accompanying financial statements have been restated for the effects of
the stock split for all periods presented. Neither VVI or CTISI had any assets
or operations at the date of acquisition; accordingly, the acquisition of VVI
was accounted for as the issuance of 14,153,505 shares of common stock for the
monetary assets of VVI, of which there were none.
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 OEMs in the communications,
networking, peripherals, gaming, consumer products, telecommunications,
automotive, medical and semiconductor industries. The Company provides a wide
variety of pre-manufacturing, manufacturing and post-manufacturing services. 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 1997, Circuit acquired the assets and assumed certain liabilities of Racore
Technology Corporation. The purchase price was $1,870,911, consisting of 938
shares of Circuit's common stock (10,632,824 post-acquistion, post-merger
shares) valued at $977,725; a non-interest bearing note payable of $103,191;
accrued acquisition costs of $27,434; and the assumption of $762,561 in
liabilities and obligations of Racore. The assets of Racore consisted of
accounts receivable, inventories, equipment and intellectual property. The
acquisition was accounted for as a purchase.
Principles of Consolidation-The consolidated financial statements include the
accounts of CirTran Corporation and its wholly owned subsidiary, Racore
Technology Corporation. All significant intercompany transactions have been
eliminated in consolidation.
Revenue Recognition-Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses experienced with such returns have not been
significant and have been recognized as incurred.
F-8
Cash and Cash Equivalents-The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash
equivalents.
Inventories - Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead costs. Overhead costs are
based on indirect costs allocated among cost of sales, work-in-process inventory
and finished goods inventory. Overhead costs are subject to management's
discretion regarding which inventory and cost of sale accounts are subject to
overhead allocation. Determining overhead costs also requires estimation based
on management's allocation of indirect costs.
When there is evidence that the inventory's value is less than original cost,
the inventory will be lowered to market value. The Company evaluates market
value on current resale amounts and whether there is technological obsolescence.
Currently, some of the Company's inventory is over one year old but still
considered the industry standard and will continue to be used in the Company's
production process.
Property and Equipment -Depreciation is provided in amounts sufficient to relate
the cost of depreciable assets to operations over the estimated service lives.
Leasehold improvements are amortized over the shorter of the life of the lease
or the service life of the improvements. The straight-line method of
depreciation and amortization is followed for financial reporting purposes.
Maintenance, repairs and renewals which neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in operating results.
Impairment of Long-Lived Assets -The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
occurred which 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, 2001, the Company does not consider any of its long-lived assets to
be impaired.
Checks Written in Excess of Cash in Bank-Historically, banks have temporarily
lent funds to us by paying out more funds than were in our accounts under
existing lines of credit with those banks. Subsequent to May 2000, when Abacas
purchase our line of credit obligation, the Company no longer had lines of
credit with banks, and those loans were no longer available or made to us.
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Income Taxes -The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. An
allowance against deferred tax assets is recorded when it is more likely than
not that such tax benefits will not be realized. Research tax credits are
recognized as utilized.
F-9
The Company operated, for tax purposes, as a corporation under provisions of
Subchapter S of the Internal Revenue Code through May 10, 2000.
Use of Estimates -In preparing the Company's financial statements in accordance
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
Concentrations of Risk -Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of trade accounts
receivable. The Company sells substantially to recurring customers, wherein the
customer's ability to pay has previously been evaluated. The Company generally
does not require collateral. Allowances are maintained for potential credit
losses, and such losses have been within management's expectations. At December
31, 2001 and 2000, this allowance was $66,316 and $82,502, respectively.
At December 31, 2000, accounts receivable from a customer located in Baltimore,
Maryland and a customer located in Nampa, Idaho, represented approximately 29
percent and 16 percent, respectively, of total trade accounts receivable. The
Company had accounts payable to the Baltimore, Maryland company of approximately
78 percent of the balance of the accounts receivable owed by the customer at
December 31, 2000. Sales to these same customers accounted for 30 percent and 4
percent of 2000 net sales, respectively. The Baltimore, Maryland customer no
longer does business with the Company.
At December 31, 2001, accounts receivable from the former customer located in
Baltimore, Maryland and a customer in Mountain View, California represented
approximately 63 percent and 12 percent, respectively, of total trade accounts
receivable. Sales to these same customers accounted for 0% and 3% of 2001 net
sales, respectively. Subsequent to year-end, the Baltimore, Maryland customer
("customer") and the Company reach a tentative settlement which would provide
for the payment of all amounts owed to the Company by the customer.
Fair Value of Financial Instruments -The carrying value of the Company's cash
and cash equivalents and trade accounts receivable, approximates their fair
values due to their short-term nature. The fair value of certain of the notes
payable in default is not determinable.
Loss Per Share -Basic Earnings per Share (EPS) are calculated by dividing
earnings (loss) available to common shareholders by the weighted-average number
of common shares outstanding during each period. Diluted EPS are 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.
Reclassifications Not Material -Certain reclassifications have been made to the
2000 financial statements to conform with the 2001 presentation.
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 from operations of $2,933,084 and
$4,179,654 for the years ended December 31, 2001 and 2000, respectively. As of
December 31, 2001 and 2000, the Company had an accumulated deficit of
$13,080,492 and $10,147,408, respectively and a total stockholders' deficit of
F-10
$6,942,377 and $4,326,953, respectively. In addition, the Company used, rather
than provided, cash in its operations in the amounts of $288,724 and $140,961
for the years ended December 31, 2001 and 2000, respectively.
Since February of 2000, the Company has operated without a line of credit. Many
of the Company's vendors stopped credit sales of components used by the Company
to manufacture products and as a result, the Company converted certain of its
turnkey customers to customers that provide consigned components to the Company
for production. These conditions raise a substantial doubt about the Company's
ability to continue as a going concern.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Abacas Ventures, Inc. (Abacas) purchased the Company's line of credit from the
lender. Subsequent to year-end, the Company has entered into an agreement
whereby the Company has issued common stock to certain principals of Abacas in
exchange for a portion of the debt. The Company's plans include working with
vendors to convert trade payables into long-term notes payable and common stock
and cure defaults with lenders through forbearance agreements that the Company
will be able to service. During 2001 and 2000, the Company successfully
converted approximately $32,500 and $800,000, respectively in trade payables
into notes and common stock. The Company intends to continue to pursue this type
of debt conversion going forward with other creditors. The Company has initiated
new credit arrangements for smaller dollar amounts with certain vendors and will
pursue a new line of credit after negotiations with certain vendors are
complete. If successful, these plans may add significant equity to the Company.
There is no assurance that these transactions will occur.
NOTE 3 - INVENTORIES
Inventories consist of the following:
2001 2000
----------- -----------
Raw materials $ 1,223,160 $ 1,088,312
Work-in process 142,048 169,676
Finished goods 408,680 497,798
----------- -----------
$ 1,773,888 $ 1,755,786
=========== ===========
F-11
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2001 2000 in Years
----------- ----------- -----------
Production equipment $ 3,141,992 $ 3,140,450 5-10
Leasehold improvements 958,940 957,845 7-10
Office equipment 628,824 628,522 5-10
Other 118,029 118,029 3-7
----------- ----------- -----------
4,847,785 4,844,846
Less accumulated depreciation
and amortization 3,513,860 2,973,770
----------- -----------
$ 1,333,925 $ 1,871,076
=========== ===========
NOTE 5 - LINE OF CREDIT
During 2000, the Company's line of credit of $2,792,609 was assumed by Abacas
Ventures, Inc. Abacas Ventures, Inc. converted the amount owing into a note
payable. Interest has been accrued at an interest rate of 10 percent. The entire
amount of the note is included in current maturities of long-term notes payable.
NOTE 6 - NOTES PAYABLE
Notes Payable consist of the following:
2001 2000
---------- ----------
Note payable to a financial institution, due in monthly
installments of $9,462, interest at 8.61%, with a
maturity date of April 2004, collateralized by
equipment 305,090 377,235
Note payable to a company, due in monthly installments
of $6,256, interest at 8%, until paid,
collateralized by equipment, in default 183,429 181,431
Note payable to a financial institution, due in monthly
installments of $20,000, interest at 4% over prime
(8.25% at December 31, 2001), with a maturity date
of July 2001, collateralized by equipment, in default 179,951 197,285
Note payable to a company, due in two installments of
$83,000 plus accrued interest at 10%, paid in full - 166,000
Note payable to a shareholder, due in monthly
installments of $12,748 until paid, interest at 10%
unsecured, in default 130,000 130,000
Note payable to a company, due in monthly installments
of $1,972 until paid, interest at 8%, unsecured,
in default 87,632 93,307
F-12
Note payable to an individual, due in monthly
installments of $5,000, interest at a rate of 9.5%,
matured May 2000, collateralized by all assets of
the Company, in default 85,377 85,377
Note payable to a finance corporation, due in monthly
installments of $50 to $5,000, interest at
prime plus 3% (7.75% at December 31, 2001) with
a maturity date of April 2004, collateralized by
equipment 86,522 78,105
Note payable to a company, due in 18 monthly
installments of $1,460 followed by six monthly
installments of $2,920, interest at 6%,
with a maturity date of April 2003, unsecured 65,973 73,000
Note payable to a finance corporation, due in monthly
installments of $50 to $3,843, interest at
9%, with a maturity date of December 2002,
collateralized by equipment and trade accounts
receivable 55,499 50,619
Note payable to a finance corporation, due in monthly
installments of $50 to $4,800, interest at
12%, matures July 2002, collateralized
by equipment and trade accounts receivable 18,883 15,083
Note payable to a finance corporation, due in monthly
installments of $50 to $8,000, interest at 9%,
matures July 2002, collateralized by
equipment and trade accounts receivable 12,866 11,605
Note payable to a company, due in monthly installments
of $2,827, interest at 8%, unsecured 21,732 -
Note payable to a bank, payable on demand,
interest at 10%, unsecured 39,367 -
Note payable to a finance corporation, due in monthly
installments of $50 to $5,443, interest at
12%, matures August 2002, collateralized
by equipment and trade accounts receivable 38,484 -
---------- ----------
Total Notes Payable 1,310,805 1,459,047
Less current maturities 863,650 929,083
---------- ----------
Long-Term Notes Payable $ 447,155 $ 529,964
========== ==========
F-13
The Company's notes payable at December 31, 2001 mature as follows:
Year Ending December 31,
------------------------
2002 $ 863,650
2003 333,263
2004 96,956
2005 16,936
Thereafter -
-----------
$ 1,310,805
===========
Certain of the Company's notes payable contain various covenants and
restrictions. The agreements provide for the acceleration of principal payments
in the event of a covenant violation or a material adverse change in the
operations of the Company. The Company is out of compliance on several notes
payable, primarily due to a failure to make monthly payments. In instances
where the Company is out of compliance, these amounts have been shown as
current.
NOTE 7 - LEASES
The Company conducts a substantial portion of its operations utilizing leased
facilities and equipment consisting of sales office, warehouses, manufacturing
plant, and transportation and computer equipment. Generally, the leases provide
for renewal for various periods at stipulated rates.
The following is a schedule by year of future minimum lease payments under
operating and capital leases, together with the present value of the net lease
payments as of December 31, 2001:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ --------- ---------
2002 $ 51,054 $ 223,050
2003 8,522 196,941
2004 2,475 191,688
2005 - 191,688
2006 - 175,714
Thereafter - -
--------- ---------
Future minimum lease payments 62,051 $ 979,081
Amounts representing interest 13,070 =========
---------
Present value of net minimum
lease payments 48,981
Less current maturities 41,206
---------
$ 7,775
=========
The building leases provide for payment of property taxes, insurance and
maintenance costs by the Company. One of the buildings is leased from related
parties. Rental expense for operating leases totaled $233,875 and $325,552 for
2001 and 2000, respectively.
The Company has an option to renew one building lease with related parties, for
two additional ten-year periods upon expiration of the term in 2006.
F-14
Property and equipment includes $126,195 of equipment under capital leases at
both December 31, 2001 and 2000. Accumulated amortization amounted to $89,503
and $66,842 at December 2001 and 2000, respectively, for equipment under capital
leases.
NOTE 8 - RELATED PARTY TRANSACTIONS
Lease -The Company entered into a lease for manufacturing and office space with
another company owned by certain stockholders of the Company. The terms of the
lease include monthly payments to the lessor of $15,974 through November 2006,
after which the lease is renewable for two additional ten-year periods.
Notes Payable -The Company had amounts due to stockholders from two separate
notes. The balance due to stockholders at December 31, 2001 and 2000 was
$1,390,125 and $1,088,966, respectively. Interest associated with amounts due to
stockholders is accrued at 10 percent, was $205,402 and $103,305 at December 31,
2001 and 2000, respectively, and is included in accrued liabilities. These
notes are due on demand.
The Company had amounts due to Abacas Ventures, Inc., a related party. The
balance due to Abacas at December 31, 2001 and 2000 was $2,405,507 and
$2,435,007, respectively. Interest associated with amounts due to Abacas is
accrued at 10 percent, was $380,927 and $142,042 at December 31, 2001 and 2000,
respectively, and is included in accrued liabilities. The amounts owed
are due on demand with no required monthly payments. This note is
collateralized by assets of the Company.
Common Stock -In 1999, Circuit entered into an agreement with 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, the Company issued
12,000,000 restricted shares of common stock to Cogent in July 2000 in
connection with the acquisition of the assets and certain liabilities of
Circuit. The principal of Cogent was a director of Circuit from 1999 through
July 1, 2000.
NOTE 9 - ACCRUED LIABILITIES
As of December 31, 2001, the Company had accrued liabilities in the amount of
$1,982,445 for delinquent payroll taxes, including interest estimated at
$215,268 and penalties estimated at $242,989. Of this amount, approximately
$257,510 was due the State of Utah. Concerning the amount owed the State of
Utah, during the first quarter of 2002, the Company negotiated a monthly payment
schedule of $4,000 , which did not provide for the forgiveness of any taxes,
penalties or interest. Approximately $1,713,996 is owed to the Internal Revenue
Service (IRS). During the first quarter of 2002, the Company negotiated a
payment schedule with respect to this amount, pursuant to which the Company is
currently making monthly payments of $25,000. Approximately $10,939 is owed the
State of Colorado.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation - Circuit (the surviving accounting entity, Note 1) was a defendant
in an alleged breach of a facilities sublease agreement in Colorado. A lawsuit
was filed in which the plaintiff sought to recover past due rent, future rent,
and other lease charges. The Company filed a suit against the landlord for an
amount in excess of $500,000 for missing equipment. Rent has been accrued
through December 31, 2000 and was included in accrued liabilities. Subsequent to
year-end, the Company settled the lawsuit as discussed in Note 17.
F-15
In March 2002, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $213,000 of punitive
damages from the Company related to the Company's non-payment for materials
provided by the vendor. The Company denies all substantive allegations made by
the vendor and intends to contest the action.
Circuit is also the defendant in numerous legal actions primarily resulting from
nonpayment of vendors for goods and services received. The Company has accrued
the payables and is currently in the process of negotiating settlements with
these vendors.
Registration Rights -In connection with the conversion of certain debt to
equity, the Company has granted the holders of 5,281,050 shares of common stock
the right to include 50% of the common stock of the holders in any registration
of common stock of the Company, under the Securities Act for offer to sell to
the public (subject to certain exceptions). The Company has also agreed to keep
any filed registration statement effective for a period of 180 days at its own
expense.
NOTE 11 - LOSS PER COMMON SHARE
The following data show the shares used in computing loss per common share:
2001 2000
----------- -----------
Common shares outstanding during entire period 156,301,005 129,271,560
Net weighted-average common shares issued
during period 1,255,068 13,493,995
----------- -----------
Weighted-average number of common shares
used in basic and diluted loss per share 157,556,073 142,765,555
=========== ===========
The Company has no potentially issuable common shares, therefore basic and
diluted loss per share are the same.
NOTE 12 - INCOME TAXES
The Company operated, for tax purposes, as a corporation under provisions of
Subchapter S of the internal Revenue Code through May 10, 2000. During this
period, taxes on income of the Company flowed through to the stockholders.
Accordingly, the Company was not subject to federal income taxes on Company
operating results for the period in which the S election was in existence, and
no provision or current liability or asset for federal or state income taxes for
those periods has been reflected.
On May 10, 2000, the Company revoked their S election and became a taxable
entity. Effective with the change, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," income taxes
are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. The Company is not entitled to any
benefit from the operating loss carry forwards incurred prior to the termination
of the S election.
Income tax expense at December 31, 2001 and 2000, consists of the following:
2001 2000
------- -------
Current $ - $ -
Deferred - -
------- -------
$ - $ -
======= =======
F-16
The tax effects of temporary differences which gave rise to deferred tax assets
and liabilities at December 31, 2001 and 2000, are as follows:
2001 2000
----------- -----------
Deferred Income Tax Assets:
Inventory reserve $ 188,880 $ 262,297
Bad debt reserve 24,736 30,773
Vacation reserve 12,569 13,591
Inventory Section 263A calculation 147,131 148,617
Research and development 55,579 55,579
Net operating loss carryforward 2,566,156 1,446,233
Intellectual property 188,050 200,053
----------- -----------
Total Deferred Income Tax Assets 3,183,101 2,157,143
Valuation allowance (3,119,594) (2,082,429)
----------- -----------
63,507 74,714
Deferred Income Tax Liability - depreciation (63,507) (74,714)
----------- -----------
Net Deferred Income Tax Asset $ - $ -
=========== ===========
The Company has sustained net operating losses in both of the 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,
2001 and 2000.
As of December 31, 2001, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $6,879,774 expiring in various years
through 2021. Utilization of approximately $1,791,000 of the total net operating
loss is dependent on the future profitable operation of Racore Technology
Corporation under the separate return limitation rules and limitations on the
carryforward of net operating losses after a change in ownership.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2001 and 2000:
2001 2000
----------- ------------
Benefit at statutory rate (34%) $ (997,249) $ (1,421,082)
Non-deductible expenses 56,876 49,171
Change in valuation allowance 1,037,165 1,509,840
State tax benefit, net of federal tax benefit (96,792) (137,929)
----------- ------------
Net Benefit From Income Taxes $ - $ -
=========== ============
F-17
NOTE 13 - STOCKHOLDER'S EQUITY
Forward Stock Split - On August 6, 2001, the Company effected a 15-for-1 forward
stock split of its outstanding shares of common stock. The Company also
increased authorized common shares from 500,000,000 to 750,000,000 shares. The
stock split has been retroactively reflected in the accompanying consolidated
financial statements for all periods presented.
Redemption of Common Stock - In February 2000, the Company redeemed 680,145
shares of common stock held by a director 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.
Also during 2000, the Company redeemed 1,133,550 shares of common stock held by
an unrelated party for a note payable in the amount of $145,000, which was the
amount of the original investment by the unrelated party. No other stated or
unstated rights, privileges, or agreements existed in conjunction with this
redemption.
Common Stock Issued for Conversion of Debt - The Company entered into a
settlement related to a lawsuit involving amounts owed to a vendor. The total
amount owed to the vendor was $646,284. This amount was satisfied through the
payment of $83,000 cash, the issuance of notes payable totaling $239,000 and the
issuance of 5,281,050 shares of common stock at $0.06 per share for the
remaining $324,284. The $0.06 per share was the fair value of the stock based
on the closing stock price on the date of the settlement.
NOTE 14 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Non-Employee Grant - During 2001, the Company granted options to purchase
3,000,000 shares of common stock to a non-employee sales consultant as the
settlement of a $200,000 prepaid sales commission agreement. The options vested
on the date granted and expire in September 2006. The exercise price of these
options was $.00067 per share. Because there is not an active market for the
Company's common stock, in this case the fair value of the sales commission
agreement is more reliably measurable, and the value of the options was
determined to be $200,000 in accordance with the provisions of SFAS No. 123. By
December 31, 2001, the sales consultant had not generated any sales and
management felt the probability that the sales consultant would generate any
future sales was remote. Accordingly, the $200,000 was expensed December 31,
2001. All 3,000,000 options were exercised during 2001 for cash proceeds of
$2,010. There were no non-employee options outstanding at December 31, 2001.
F-18
Employee Grants - On July 26, 2001 the Company adopted the 2001 Stock Option
Plan (the "2001 Plan") with 15,000,000 shares of common stock reserved for
issuance there under. The Company's Board of Directors administers the plan and
has discretion in determining the employees, directors, independent contractors
and advisors who receive awards, the type of awards (stock, incentive stock
options or non-qualified stock options) granted, and the term, vesting and
exercise prices.
During the year ended December 31, 2001, the Company granted options to purchase
1,650,000 shares of common stock to certain employees of the Company pursuant to
the 2001 Plan. These options vested on the date of grant. The related exercise
price for all options was $0.07 per share, the fair value of the Company's
common stock on the date of grant. The options are exercisable through September
2006. During 2001, all employee options granted were exercised. There were no
employee options outstanding at December 31, 2001.
Compensation Expense - During the year ended December 31, 2001, the Company
recognized no compensation expense relating to stock options and warrants. SFAS
123 requires the presentation of pro forma operating results as if the Company
had accounted for stock options granted to employees under the fair value method
prescribed by SFAS 123. The Company estimated the fair value of the employee
stock options at the grant date using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used in the Black-Scholes model
to determine the fair value of the employee options of $0.03 per option to
purchase a share of common stock: risk-free interest rate of 3.94 percent,
dividend yield of 0 percent, volatility of 411.44 percent, and expected lives of
..01 years.
Following are the pro forma disclosures and the related impact on the net
losses:
Years Ended December 31,
----------------------------
2001 2000
------------ ------------
Net loss as reported $ (2,933,084) $ (4,179,654)
Net loss pro forma (2,989,179) (4,179,654)
Basic and diluted loss per common
share as reported (0.02) (0.03)
Basic and diluted loss per common
share pro forma (0.02) (0.03)
Due to the nature and timing of option grants, the resulting pro forma
compensation cost may not be indicative of future years.
NOTE 15 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments; electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies. The Company evaluates performance of each segment based on earnings or
loss from operations. Selected segment information is as follows:
F-19
Electronics Ethernet
2001 Assembly Technology Total
---- ----------- ----------- -----------
Sales to external customers $ 1,352,085 $ 518,763 $ 1,870,848
Intersegment sales 309,374 - 309,374
Segment loss (2,336,084) (597,000) (2,933,084)
Segment assets 3,152,815 434,471 3,587,286
Depreciation and amortization 519,217 20,873 540,090
2000
----
Sales to external customers $ 4,686,045 $ 1,687,051 $ 6,373,096
Intersegment sales 1,015,349 40,423 1,055,772
Segment loss (2,950,406) (1,229,248) (4,179,654)
Segment assets 3,916,774 854,806 4,771,580
Depreciation and amortization 687,802 273,704 961,506
Sales 2001 2000
----- ----------- -----------
Total sales for reportable segments $ 2,180,222 $ 7,428,868
Elimination of intersegment sales (309,374) (1,055,772)
----------- -----------
Consolidated net sales $ 1,870,848 $ 6,373,096
=========== ===========
Net Loss
--------
Net loss for reportable segments $(2,933,084) $(4,179,654)
Elimination of intersegment losses - -
----------- -----------
$(2,933,084) $(4,179,654)
=========== ===========
Total Assets
------------
Total assets for reportable segments $ 3,587,286 $ 4,771,580
Adjustment for intersegment amounts (1,800) (154,790)
----------- -----------
Consolidated total assets $ 3,585,486 $ 4,616,790
=========== ===========
F-20
NOTE 16 - REVENUES
All revenue-producing assets are located in North America. Revenues are
attributed to the geographic areas based on the location of the customers
purchasing the products. The Company's net sales by geographic area are as
follows:
2001 2000
----------- -----------
United States of America $ 1,820,700 $ 5,921,890
Mexico - 45,216
Canada 338 -
Europe/Africa/Middle East 49,810 390,808
Asia/Australia - 15,182
----------- -----------
$ 1,870,848 $ 6,373,096
=========== ===========
NOTE 17 - SIGNIFICANT FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 2001, the Company determined that an insufficient
amount of overhead had been applied to the cost of sales for the year. The
Company reclassified $777,421 from selling, general and administrative expenses
to cost of sales. This adjustment results in $257,105, $186,726, $191,510 and
$136,080 of general and administrative expenses being reclassified to cost of
sales for the quarters ended March 31, 2001, June 30, 2001, September 30, 2001
and December 31, 2001.
NOTE 18 - SUBSEQUENT EVENTS
Settlement of Litigation - As discussed in Note 10, the Company settled the
lawsuit that alleged a breach of facilities sublease agreement involving
facilities located in Colorado. The Company's liability in this action was
originally estimated to range up to $2.5 million. The Company subsequently filed
a counter suit in the same court for an amount exceeding $500,000 for missing
equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. This
amount did not exceed the amount of rent accrued and payable at December 31,
2000, therefore this was treated as a conversion of accrued liabilities to notes
payable. The remainder, $170,000, was treated as a reduction of rent during the
year ended December 31, 2001, due to a change in estimate of rent expense. Of
this amount, $25,000 was paid upon execution of the settlement, and the
balance, together with interest at 8% per annum, is payable by July 18, 2002.
As security for payment of the balance, the Company executed and delivered to
the plaintiff a Confession of Judgment and also issued 3,000,000 shares of
common stock, which are currently held in escrow. If seventy-five percent (75%)
of the balance has not been paid by May 18, 2002, the Company has agreed to
prepare and file with the Securities & Exchange Commission, at its own expense,
a registration statement with respect to the escrowed shares. If, by July 18,
2002, the registration of the escrowed shares of the Company's common stock is
not completed and such shares are not replaced with registered, free-trading
common stock in an amount sufficient to cover the liability to Sunborne,
Sunborne may file the Confession of Judgment and proceed with execution thereon.
F-21
Common Stock issued for Debt - Effective January 14, 2002, the Company entered
into four substantially identical agreements with existing shareholders pursuant
to which the Company issued an aggregate of 43,321,186 shares of restricted
common stock at a price of $0.075 per share, the fair value of the shares on the
date of the agreements as determined by market prices, for $500,000 in cash and
the cancellation of $2,749,090 of notes payable. No gain or loss has been
recognized on these transactions as the fair value of the stock issued was equal
to the consideration given by the shareholders.
Employee Stock Options - Subsequent to year-end, the Company issued employees
options to purchase 5,000,000 shares of common stock at prices ranging from
$0.045 to $0.05. These options vest immediately and expire five years from the
grant date. The employees have exercised all 5,000,000 options to purchase
shares of common stock.
F-22
Condensed Consolidated Financial Statements (Unaudited):
Q-1
Balance Sheets as of September 30, 2002 (unaudited) and Q-3
December 31, 2001
Statements of Operations for the Nine Months ended Q-4
September 30, 2002 (unaudited) and 2001 (unaudited)
Statements of Cash Flows for the Nine Months ended Q-5
September 30, 2002 (unaudited) and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements Q-6
(unaudited)
Q-2
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
----------------------------------
2002 2001
---------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 882 $ 499
Trade accounts receivable, net of allowance for doubtful accounts
of $32,317 and $66,316, respectively 158,807 369,250
Inventories 1,624,543 1,773,888
Subscription receivable 25,000 -
Other 100,561 97,037
---------------- ---------------
Total current assets 1,909,793 2,240,674
Property and equipment, at cost, net 968,371 1,333,925
Other assets, net 23,102 10,887
---------------- ---------------
Total Assets $ 2,901,266 $ 3,585,486
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 123,268 $ 159,964
Accounts payable 1,297,281 2,141,290
Accrued liabilities 3,230,117 3,071,191
Notes payable to stockholders 2,465 1,390,125
Notes payable to related parties 1,547,397 2,405,507
Current maturities of capital lease obligations - 41,206
Current maturities of long-term notes payable 1,157,656 863,650
---------------- ---------------
Total current liabilities 7,358,184 10,072,933
---------------- ---------------
Long-Term Liabilities
Long-term notes payable, less current maturities 201,206 447,155
Capital lease obligations, less current maturities - 7,775
---------------- ---------------
Total long-term liabilities 201,206 454,930
---------------- ---------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding 211,772,191 at September 30, 2002 net of
3,000,000 shares held in treasury at no cost and 160,951,005
at December 31, 2001 211,772 160,951
Additional paid-in capital 9,510,433 5,977,164
Accumulated deficit (14,380,329) (13,080,492)
---------------- ---------------
Total Stockholders' Deficit (4,658,124) (6,942,377)
---------------- ---------------
Total Liabilities and Stockholders' Deficit $ 2,901,266 $ 3,585,486
================ ===============
See accompanying notes to unaudited condensed
consolidated financial statements.
Q-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended, For the Nine Months Ended,
September 30, September 30,
------------------------------------------ ------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- --------------------
Net Sales $ 367,755 $ 474,055 $ 1,981,103 $ 1,545,020
Cost of Sales 358,869 499,772 1,735,380 1,794,854
-------------------- -------------------- -------------------- --------------------
Gross Profit/(Loss) 8,886 (25,717) 245,723 (249,834)
Operating Expenses
Selling, general and administrative expenses 516,650 393,368 1,400,240 1,238,036
Non-cash compensation expense 25,000 - 25,000 -
-------------------- -------------------- -------------------- --------------------
Total Operating Expenses 541,650 393,368 1,425,240 1,238,036
Loss From Operations (532,764) (419,085) (1,179,517) (1,487,870)
-------------------- -------------------- -------------------- --------------------
Other income (expense)
Interest (41,865) (124,452) (282,609) (667,959)
Other, net 97 25 162,289 4,125
-------------------- -------------------- -------------------- --------------------
(41,768) (124,427) (120,320) (663,834)
-------------------- -------------------- -------------------- --------------------
Net Loss $ (574,532) $ (543,512) $ (1,299,837) $ (2,151,704)
==================== ==================== ==================== ====================
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
==================== ==================== ==================== ====================
Basic and diluted weighted-average
common shares outstanding 209,652,626 157,947,744 205,907,734 156,855,950
==================== ==================== ==================== ====================
See accompanying notes to unaudited condensed
consolidated financial statements.
Q-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended,
September 30,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Cash flows from operating activities
Net loss $ (1,299,837) $ (2,151,704)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 368,376 374,791
Provision for loss on trade receivables (33,999) 31,399
Settlement of litigation (25,000) -
Non-cash compensation expense 25,000
Issuance of common stock options for prepaid commission - 200,000
Payments made on behalf of the Company
as a settlement of a sublease agreement (152,500) -
Changes in assets and liabilities:
Trade accounts receivable 244,442 458,496
Inventories 149,345 (16,936)
Other assets (8,739) (198,502)
Accounts payable (547,727) 397,240
Accrued liabilities 366,602 771,738
----------------------- -----------------------
Total adjustments 385,800 2,018,226
----------------------- -----------------------
Net cash used in operating activities (914,037) (133,478)
----------------------- -----------------------
Cash flows from investing activities
Purchase of property and equipment (2,822) (1,844)
----------------------- -----------------------
Net cash used in investing activities (2,822) (1,844)
----------------------- -----------------------
Cash flows from financing activities
Increase (decrease) in checks written in excess of cash in bank (36,696) 134,841
Payments on notes payable to stockholders (140,125) -
Principal payments on long-term notes payable (348,402) (311,462)
Principal payments on capital leases - (4,550)
Proceeds from long-term notes payable 655,000 -
Proceeds from notes payable to stockholders 2,465 305,625
Proceeds from exercise of options to purchase common stock 285,000 -
Proceeds from issuance of common stock 500,000 -
----------------------- -----------------------
Net cash provided by financing activities 917,242 124,454
----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents 383 (10,868)
Cash and cash equivalents at beginning of period 499 11,068
----------------------- -----------------------
Cash and cash equivalents at end of period $ 882 $ 200
======================= =======================
See accompanying notes to unaudited condensed
consolidated financial statements.
Q-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine Months Ended,
September 30,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 186,311 $ 53,013
Noncash investing and financing activities
Prepaid commission by stock option issuance $ - $ 200,000
Notes payable issued for accounts payable 345,263 -
Common stock issued for notes payable to stockholders 1,250,000 -
Common stock issued for notes payable 1,499,090 -
Legal fees to be paid on behalf of lender 120,000 -
Accrued interest converted to notes payable 41,301 -
Exercise of options for subscription receivable 25,000 -
See accompanying notes to unaudited condensed
consolidated financial statements.
Q-6
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiary (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
included in the Company's December 31, 2001, Annual Report on Form 10-KSB. In
particular, the Company's significant accounting principles were presented as
Note 1 to the consolidated financial statements in that report. In the opinion
of management, all adjustments necessary for a fair presentation have been
included in the accompanying condensed consolidated financial statements and
consist of only normal recurring adjustments. The results of operations
presented in the accompanying condensed consolidated financial statements for
the nine months ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2002.
NOTE 2 - REALIZATION OF ASSETS
The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a going concern.
However, the Company sustained net losses of $1,299,837 and $2,933,084 for the
nine months ended September 30, 2002, and the year ended December 31, 2001,
respectively. As of September 30, 2002, and December 31, 2001, the Company had
an accumulated deficit of $14,380,329 and $13,080,492, respectively and a total
stockholders' deficit of $4,658,124 and $6,942,377, respectively. In addition,
the Company used, rather than provided, cash in its operations in the amounts of
$914,037 and $288,724 for the nine months ended September 30, 2002, and the year
ended December 31, 2001, respectively.
Since February 2000, the Company has operated without a line of credit. Many of
the Company's vendors stopped credit sales of components used by the Company to
manufacture products and as a result, the Company converted certain of its
turnkey customers to customers that provide consigned components to the Company
for production. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit from the
lender. During the nine months ended September 30, 2002, the Company entered
into an agreement whereby the Company exchanged common stock, issued to certain
principles of Abacas, for a portion of the debt. The Company's plans include
working with vendors to convert trade payables into long-term notes payable and
common stock and cure defaults with lenders through forbearance agreements that
the Company will be able to service. The Company intends to continue to pursue
Q-7
this type of debt conversion going forward with other creditors. The Company
also intends to continue to work with Abacas to maintain the good working
relationship between the Company and Abacas. The Company has
initiated new credit arrangements for smaller dollar amounts with certain
vendors and will pursue a new line of credit after negotiations with certain
vendors are complete. If successful, these plans may add significant equity to
the Company. There is no assurance that these transactions will occur.
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable -- The Company paid cash and issued stock as a
settlement of the principal amounts due on two separate notes payable to
stockholders. An additional $2,465 was advanced to the company during the
quarter ended September 30, 2002. The principal balance due to stockholders was
$2,465 and $1,390,125 at September 30, 2002, and December 31, 2001,
respectively. Interest associated with amounts due to stockholders was accrued
at 10 percent. Unpaid accrued interest was $210,734 and $205,402 at September
30, 2002, and December 31, 2001, respectively, and is included in accrued
liabilities. These notes are due on demand.
During the nine months ended September 30, 2002, Abacas completed negotiations
with several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as capital leases.
The total of these obligations was $345,263. In addition, Abacas agreed to
deduct as an offset of the amount owed to Abacas $120,000, constituting the
amounts paid by the Company as legal fees incurred by the Company as part of its
negotiations with the Company's vendors. The Company has recorded this
transaction as a $345,263 non-cash increase and a $120,000 non-cash payment to
the note payable owed to Abacas, pursuant to the terms of the Abacas agreement.
Additionally, 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, but the
principal balance cannot exceed $600,000 at any point in time. During the
nine months ended September 30, 2002, the Company received aggregate advances
of $655,000 and made cash payments of $156,258 for an outstanding balance
on the bridge loan of $498,742. The total principal amount owed to Abacas
between the note payable and the bridge loan was $1,547,397 as of September 30,
2002.
For the nine months ended September 30, 2002, the Company recorded $174,418 of
accrued interest and paid $7,089 of interest on the Abacas loans. Total accrued
interest due at September 30, 2002, was $548,255.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation - During the nine months ended September 30, 2002, the
Company settled a lawsuit that alleged a breach of facilities sublease agreement
involving facilities located in Colorado. The Company's liability in this action
was originally estimated to range up to $2.5 million. The Company subsequently
filed a counter suit in the same court for an amount exceeding $500,000 for
missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which are currently held in escrow and have been treated as treasury
stock recorded at no cost. Because seventy-five percent (75%) of the balance had
not been paid by May 18, 2002, the Company was required to prepare and file with
Q-8
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. Because, by July 18, 2002, the
remaining balance had not been paid, the registration statement with respect to
the escrowed shares had not been declared effective, and the Company had not
replaced the escrowed shares with registered free-trading shares pursuant to the
terms of the settlement agreement, the plaintiff filed the Confession of
Judgment and proceeded with execution thereon. The Company is currently
negotiating with the plaintiff to settle this obligation without the release of
the shares held in escrow.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002 in the amount
of $152,500, which has been recorded as other income. The Company did not
receive cash from this settlement, but certain obligations of the Company were
paid as follows: $109,125 of the principal balance of the note described in the
preceding paragraph related to the settlement mentioned above was paid; $7,000
was paid to the Company's legal counsel as a retainer for future services; and
the remaining $36,375 was paid to the above mentioned plaintiff as a settlement
of rent expense.
During September 2002, the plaintiff has filed a claim that the $109,125 portion
of the payment was to be applied as additional rent expense rather than a
principal payment on the note payable. The Company estimates that the
probability of the $109,125 being considered additional rent expense is remote
and disputes the claim. The Company intends to vigorously defend the action.
Litigation - In December 1999, a vendor of the Company filed a lawsuit that
alleges breach of contract and seeks payment in the amount of approximately
$213,000 of punitive damages from the Company related to the Company's
non-payment for materials provided by the vendor. The Company denies all
substantive allegations made by the vendor and intends to vigorously contest the
case.
The Company has been a party to a lawsuit with a customer stemming from an
alleged breach of contract. In July 2002, the Company reached a settlement with
the customer in which the customer was to make payments from August 1, 2002,
through October 29, 2002, to the Company totaling $265,000. As part of the
settlement, the Company returned inventory valued at $158,010, settled
receivables from the customer of 287,277, settled payables owed to the customer
in the amount of $180,287 and sold inventory to a Company related to the
customer for $13,949. At September 30, 2002, the Company had received $185,000.
Subsequent to September 30, 2002, the final payment of $80,000 had been
collected.
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and terms of a promissory note. The Company entered a settlement
agreement under which the Company is to pay $6,256.24 each month until the
obligation and interest thereon are paid. This did not represent the forgiveness
of any obligation, but rather the restructuring of the terms of the previous
agreement. The Company has defaulted on its payment obligations under the
settlement agreement. The Company is currently negotiating a new settlement
agreement.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2001 the Company had accrued the entire amount of the claim. The
Company is currently in settlement negotiations with the vendor.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. The parties are presently
negotiating settlement.
Q-9
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. The Company is currently in default
on this obligation and is currently negotiating a new settlement agreement.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,291.69 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has subsequently made
payments to the financial institution, reducing the obligation to $273,089 at
September 30, 2002, plus interest accruing from January 1, 2002. Negotiations
for settlement of the remaining claims are underway.
Suit was brought against the Company during April, 2001, by a former shareholder
alleging that the Company owed $121,825 under the terms of a promissory note. A
Stipulation for Settlement and for Entry of Judgment was executed by the parties
wherein the Company agreed to arrange for payment of a principal amount of
$145,000 in 48 monthly installments. The Company made seven payments and then
failed to make subsequent payments, at which time the shareholder obtained a
consent judgment against the Company. The Company is currently in settlement
negotiations with the former shareholder regarding the judgment.
The Company is the defendant in numerous legal actions primarily resulting from
nonpayment of vendor invoices for goods and services received. The Company has
accrued the payables and is currently in the process of negotiating settlements
with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity, the Company has granted the holders of 5,281,050 shares of common stock
the right to include 50% of the common stock of the holders in any registration
of common stock of the Company, under the Securities Act for offer to sell to
the public (subject to certain exceptions). The Company has also agreed to keep
any filed registration statement effective for a period of 180 days at its own
expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 9), the Company granted to the equity line
investor (the "Equity Line Investor") registration rights, in connection with
which the Company is required to file a registration statement covering the
resale of shares put to the Equity Line Investor under the equity line. The
Company is also required to keep the registration statement effective until two
years following the date of the last advance under the equity line. The Company
has not yet filed such registration statement.
Accrued Payroll Tax Liabilities -- As of September 30, 2002, the Company had
accrued liabilities in the amount of $2,219,709 for delinquent payroll taxes,
including interest estimated at $281,689 and penalties estimated at $264,249. Of
this amount, approximately $301,980 was due the State of Utah. During the first
quarter of 2002, the Company negotiated a monthly payment schedule of $4,000 to
the State of Utah, which did not provide for the forgiveness of any taxes,
penalties or interest. These monthly payments were not made during the third
quarter. Approximately $1,906,790 is owed to the Internal Revenue Service.
Q-10
During the first quarter of 2002, the Company negotiated a payment schedule with
respect to this amount, pursuant to which monthly payments of $25,000 were
required. In addition, the Company committed to keeping current on deposits of
federal withholding amounts. The required monthly payments were made during each
of the three months during the second quarter. None of the monthly payments were
made during the third quarter. The Company is currently renegotiating the terms
of the payment schedule with the Internal Revenue Service. In addition, the
Company failed to pay several of its current withholding obligations.
Approximately $10,939 is owed to the State of Colorado.
NOTE 5 - STOCKHOLDERS' EQUITY
Common Stock Issued for Cash and Debt - Effective January 14, 2002, the Company
entered into four substantially identical agreements with existing shareholders
pursuant to which the Company issued an aggregate of 43,321,186 shares of
restricted common stock at a price of $0.075 per share, the fair value of the
shares, for $500,000 in cash and the reduction of principle of $1,499,090 of
notes payable and $1,250,000 of notes payable to stockholders. No gain or loss
has been recognized on these transactions as the fair value of the stock issued
was equal to the consideration given by the shareholders. The Company used the
$500,000 cash as working capital.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Employee Grants - During March 2002, the Company granted options to purchase
5,000,000 shares of common stock to certain employees of the Company pursuant to
the 2001 Plan. These options vested on the date of grant. The related exercise
price for the options was $0.045 to $0.05 per share, the fair value of the
Company's common stock on the dates of grant. The options are exercisable
through September 2006. The employees exercised all 5,000,000 options for
$235,000 cash during the first quarter.
The Company granted options to purchase 2,500,000 shares of common stock at
$0.03 per share to an employee in July 2002. These options vested immediately
and expire in September 2006. The Company's common stock had a fair value of
$0.04 per share at the time these options were granted. Compensation relating to
these options of $25,000 or $0.01 per share was recognized at the time of grant.
The employee exercised all 2,500,000 options for $25,000 in cash and a $25,000
subscription receivable. The subscription receivable was collected in October
2002.
NOTE 7 - SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments; electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies in the Company's Annual Report on Form 10KSB/A. The Company evaluates
performance of each segment based on earnings or loss from operations. Selected
segment information is as follows:
Q-11
Electronics Ethernet
September 30, 2002 Assembly Technology Total
Sales to external customers $ 1,547,594 $ 433,509 $ 1,981,103
Intersegment sales 179,451 -- 179,451
Segment loss (1,157,244) (142,593) (1,299,837)
Segment assets 2,577,129 333,235 2,910,364
Depreciation and amortization 352,674 15,703 368,377
September 30, 2001
Sales to external customers $ 1,161,578 $ 383,442 $ 1,545,020
Intersegment sales 262,832 -- 262,832
Segment loss (2,159,721) 8,017 (2,151,704)
Segment assets 3,513,381 476,454 3,989,835
Depreciation and amortization 363,269 11,522 374,791
September 30,
Sales 2002 2001
Total sales for reportable segments $ 2,160,554 $ 1,807,852
Elimination of intersegment sales (179,451) (262,832)
Consolidated net sales $ 1,981,103 $ 1,545,020
Net Loss
Net loss for reportable segments $ (1,299,837) $ (2,151,704)
Elimination of intersegment losses -- --
$ (1,299,837) $ (2,151,704)
All intersegment sales are recorded at the carrying value of the goods. The
carrying value includes materials, labor and overhead. Therefore, the sales
result in no intersegment gain or loss.
September 30, December 31,
Total Assets 2002 2001
Total assets for reportable segments $ 2,910,364 $ 3,587,286
Adjustment for intersegment amounts (9,098) (1,800)
Consolidated total assets $ 2,901,266 $ 3,585,486
NOTE 8 - SUBSEQUENT EVENTS
On November 5, 2002, the Company entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with a private investor (the "Equity Line
Investor"). Under the Equity Line Agreement, the Company has the right to draw
up to $5,000,000 from the Equity Line Investor against an equity line of credit
(the "Equity Line"), and to put to the Equity Line Investor shares of the
Company's common stock in lieu of repayment of the draw. The number of shares to
be issued is determined by dividing the amount of the draw by the lowest closing
bid price of the Company's common stock over the five trading days after the
advance notice is tendered. The maximum amount of any single draw is $85,000.
Q-12
The Equity Line Investor is required under the Equity Line Agreement to tender
the funds requested by the Company within two trading days after the
five-trading-day period used to determine the market price.
In connection with the Equity Line Agreement, the Company granted registration
rights to the Equity Line Investor, in connection with which the Company is
required to use its best efforts to file a registration statement and have it
declared effective by the Securities and Exchange Commission. The Company has
not yet filed such registration statement. The Company is unable to draw on the
Equity Line until the registration statement has been declared effective.
Q-13