================================================================================
CIRTRAN CORPORATION
A Nevada Corporation
100,000,000 Shares of Common Stock
$0.001 per share
This prospectus relates to the resale of up to 100,000,000 shares (the "Shares")
of common stock of CirTran Corporation, a Nevada corporation. One of our
shareholders, Highgate House Funds, Ltd., (the "Selling Shareholder") is
offering all of the Shares covered by this prospectus. The Selling Shareholder
may receive shares in connection with conversions of our 5% Secured Convertible
Debenture (the "Debenture") sold to the Selling Shareholder pursuant to a
Securities Purchase Agreement (the "Purchase Agreement"), discussed in more
detail herein. The Selling Shareholder may elect to convert, at its option, all
or part of the principal amount, together with accrued interest on the
Debenture, into shares of our common stock at a conversion price discussed in
more detail herein. This Prospectus, and the registration statement of which it
is a part does not register the resale of any shares issued as interest accrued
or accruable in connection with the Debenture. The Selling Shareholder will
receive all of the proceeds from the sale of the Shares and we will receive none
of those proceeds. Highgate House Funds, Ltd. may be deemed to be 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 18 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 July 20, 2006, was approximately $0.03 per share.
Nevertheless, the Selling Shareholders do not have to sell the Shares in
transactions reported on the OTC Bulletin Board, and may offer their 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.
-------------------------
August ___, 2006
1
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........................... 3
Risk factors..................................................................16
Use of proceeds...............................................................25
Determination of offering price...............................................25
Description of business.......................................................25
Management's discussion and analysis or plan of operation.....................42
Forward-looking statements....................................................57
5% Convertible Debenture......................................................57
Selling Shareholders..........................................................60
Plan of distribution..........................................................62
Regulation M..................................................................65
Legal Proceedings.............................................................65
Directors, executive officers, promoters and control persons..................68
Commission's position on indemnification for Securities Act liabilities.......70
Security ownership of certain beneficial owners and management................71
Description of common stock...................................................73
Certain relationships and related transactions................................74
Market for common equity and related stockholder matters......................76
Executive compensation........................................................81
Changes in and disagreements with accountants on accounting and financial
disclosure...................................................................87
Index to financial statements ................................................87
Experts.......................................................................87
Legal matters.................................................................87
2
Summary about CirTran Corporation and this offering
CirTran Corporation
CirTran Corporation is a Nevada corporation engaged in providing a mixture of
high and medium size volume turnkey manufacturing services for electronics
original equipment manufacturers ("OEMs") in the communications, networking,
peripherals, gaming, consumer products, telecommunications, automotive, medical,
and semiconductor industries. These services include providing design and new
product introduction services, just-in-time delivery on low-volume to
medium-volume turnkey and consignment projects, and other value-added
manufacturing services. Our manufacturing processes include the following:
surface mount technology, ball-grid array assembly and pin-through-hole
technology, which are all methods of attaching electronic components to circuit
boards; manufacturing and test engineering support and design for
manufacturability; and in-circuit and functional test and full-system mechanical
assembly. We also design and manufacture Ethernet cards that are used to connect
computers through fiber optic networks and market these cards through an
international network of distributors, value-added resellers and system
integrators.
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 May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate" or the "Selling Shareholder"), relating to the issuance by us of a
5% Secured Convertible Debenture, due December 31, 2007, in the aggregate
principal amount of $3,750,000 (the "Convertible Debenture").
In connection with the purchase of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to
Highgate, and legal fees of $5,668. As such, of the total purchase amount of
$3,750,000, the net proceeds to us were $1,228,567, which we received following
the closing of the issuance of the Convertible Debenture. We used these proceeds
for general corporate and working capital purposes.
The Convertible Debenture bears interest at a rate of 5%. Highgate is entitled
to convert, at its option, all or part of the principal amount owing under the
Convertible Debenture into shares of our common stock at a conversion price
equal to the lesser of (a) $0.10 per share, or (b) an amount equal to the lowest
closing bid price of the Common Stock as listed on the OTC Bulletin Board, as
quoted by Bloomberg L.P. for the twenty (20) trading days immediately preceding
the conversion date. Except as otherwise set forth in the Convertible Debenture,
3
Highgate's right to convert principal amounts owing under the Convertible
Debenture into shares of our common stock is limited as follows:
1. Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the market price of our
stock is $0.10 per share or less at the time of conversion;
2. Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the price of our stock is
greater than $0.10 per share at the time of conversion,
provided, however, that Highgate may convert in excess of the
foregoing amounts if we and Highgate mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), Highgate may, in its sole discretion,
accelerate full repayment of all debentures outstanding and
accrued interest thereon or may, notwithstanding any
limitations contained in the Convertible Debenture and/or the
Purchase Agreement, convert the Convertible Debenture and
accrued interest thereon into shares of our common stock
pursuant to the Convertible Debenture.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
18.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
We filed this registration statement to register the resale of shares issuable
to Highgate upon conversions by Highgate of the Convertible Debenture. However,
this registration statement does not register the resale of any shares issued to
Highgate as payment of interest accrued on the Convertible Debenture, and
neither this registration statement nor the prospectus may be used to sell
shares issued to Highgate as payment of interest accrued on the Convertible
Debenture.
On June 15, 2006, we entered into an agreement with Highgate to amend the
registration rights agreement, pursuant to which we agreed to use our best
efforts to have the registration statement declared effective by July 31, 2006.
On August 10, 2006, we entered into a further agreement with Highgate to amend
the registration rights agreement, pursuant to which we agreed to use our best
efforts to have the registration statement declared effective by August 31,
2006. Under the second amendment agreement, if the registration statement has
not been declared effective by August 31, 2006, Highgate may declare us in
default under the Convertible Debenture.
The number of shares issuable in connection with this registration statement is
also limited by our authorized capital, which as of July 20, 2006, was
750,000,000 shares. In other words, we are not authorized to issue more than
750,000,000 shares of our common stock, irrespective of how many shares are
covered by this registration statement and prospectus, unless we increase our
authorized capital, as discussed below in the "Risk Factors" section on page 22.
The terms of the Convertible Debenture include and set forth other information,
including certain limitations on conversions by Highgate and redemption of the
Convertible Debenture, all discussed more fully below in the Section "5%
Convertible Debenture." Additionally, in connection with the issuance of the
Convertible Debenture, we entered into additional agreements with Highgate,
including a registration rights agreement, a security agreement, and an escrow
agreement, all discussed more fully below in the Section "5% Convertible
Debenture."
4
Recent Developments
Diverse Media Group
On March 21, 2006, the Company issued a press release "CirTran Forms New
Division to Serve Direct Response and Entertainment Industries." The new
division will concentrate its efforts on product marketing, production, media
funding and merchandise manufacturing services working as a complete
vertically-integrated platform that can augment our manufacturing services in
the direct response industry. Our experience in this industry over the past two
years has taught us that there is a need for a single source solution. In
addition, we feel it will help us capture additional business that might
otherwise had been lost at the manufacturing level allowing us to participate in
all additional areas.
CirTran Products Division
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006
CirTran Products was established to pursue manufacturing relationships on both a
contracted and proprietary basis in the consumer products industry. Proprietary
products will be product lines where the intellectual property (logo, trade name
etc.) are owned by CirTran Products as well as exclusively manufactured by
CirTran Corporation. The marketing efforts may also be managed exclusively by
CirTran, or CirTran may choose to engage third party consultants or partner with
an independent marketing firm. CirTran Products also intends to pursue contract
manufacturing relationships in the consumer products industry which can include
product lines including: home/garden, kitchen, health/beauty, toys, licensed
merchandise and apparel for film, television, sports and other entertainment
properties. Licensed merchandise and apparel can be defined as any item that
bears the image of, likeness, or logo of a product sold or advertised to the
public. Licensed merchandise and apparel are sold and marketed in the
entertainment (film and television) and sports (sports franchises) industries.
As of July 20, 2006, we had concentrated our product development efforts into
three areas, home/kitchen appliances, beauty products and licensed merchandise.
We anticipate that these products will be introduced into the market under one
uniform brand name or under a separate trademarked names owned by CirTran
Products.
Additional Convertible Debenture Transaction
On December 30, 2005, we entered into a securities purchase agreement
(the "Purchase Agreement") with Cornell Capital Partners, a Delaware limited
partnership ("Cornell Capital"), relating to the issuance by us of a 5% Secured
Convertible Debenture, due July 30, 2008, in the aggregate principal amount of
$1,500,000 (the "Cornell Debenture").
We also paid a commitment fee of $120,000, and a structuring fee of
$10,000 to Cornell Capital. As such, of the total purchase amount of $1,500,000,
the net proceeds to us were $1,370,000. We will use these proceeds for general
corporate and working capital purposes, in our discretion.
The Cornell Debenture bears interest at a rate of 5%. Cornell Capital
is entitled to convert, at its option, all or part of the principal amount owing
under the Debenture into shares of the Company's common stock at a conversion
price equal one hundred percent (100%) of the lowest closing bid price of the
Common Stock as listed on the OTC Bulletin Board, as quoted by Bloomberg L.P.
for the twenty (20) trading days immediately preceding the Conversion Date,
subject to certain restrictions and limitations set forth in the Cornell
Debenture.
Under the terms of the Cornell Debenture, except upon an event of
default as defined in the Cornell Debenture, Cornell Capital may not convert the
Cornell Debenture for a number of shares of common stock in excess of that
5
number of shares of common stock which, upon giving effect to such conversion,
would cause the aggregate number of shares of Common Stock beneficially owned by
Cornell Capital and its affiliates to exceed 4.99% of the outstanding shares of
the common stock following such conversion.
Pursuant to the Cornell Debenture, interest is to be paid at the time
of maturity or conversion. We may, at our option, pay accrued interest in cash
or in shares of our common stock. If paid in stock, the conversion price shall
be the closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Also pursuant to the Cornell Debenture, we have the right to redeem, by
giving 3 days' written notice to Cornell Capital, a portion or all of the
Cornell Debenture then outstanding by paying an amount equal to one hundred five
percent (105%) of the amount redeemed plus interest accrued thereon. In the
event that we redeem only a portion of the outstanding principal amount of the
Cornell Debenture, Cornell Capital may convert all or any portion of the unpaid
principal or interest of the Cornell Debenture not being redeemed by us.
Additionally, if after the earlier to occur of (x) fifteen (15) months following
the date of the purchase of the Cornell Debenture or (y) twelve (12) months
following the date on which the initial registration statement is declared
effective, all or any portion of the Cornell Debenture remains outstanding, then
we, at the request of Cornell Capital, are required to redeem such amount
outstanding at the rate of five hundred thousand dollars ($500,000) per each
30-day period. Finally, upon the occurrence of an event of default as defined in
the Cornell Debenture, Cornell Capital can convert all outstanding principal and
accrued interest under the Cornell Debenture irrespective of any of the
limitations set forth in the Cornell Debenture and/or the Purchase Agreement,
and in such event, all such principal and interest shall become immediately due
and payable.
In connection with the Purchase Agreement, we also agreed to grant to
Cornell Capital warrants (the "Cornell Warrants") to purchase up to an
additional 10,000,000 shares of our common stock. The Cornell Warrants have an
exercise price of $0.09 per share, and expire three years from the date of
issuance. The Cornell Warrants also provide for cashless exercise if at the time
of exercise there is not an effective registration statement or if an event of
default has occurred.
Additionally, we entered into an investor registration rights agreement
(the "Registration Rights Agreement") with Cornell Capital, pursuant to which we
agreed to file, within 120 days of the closing of the purchase of the Cornell
Debenture, a registration statement to register the resale of shares of our
common stock issuable to Cornell Capital upon conversion of the Cornell
Debenture. We agreed to register the resale of up to 42,608,696 shares,
consisting of 32,608,696 shares underlying the Cornell Debenture, and 10,000,000
shares underlying the Cornell Warrants. We agreed to keep such registration
statement effective until all of the shares issuable upon conversion of the
Cornell Debenture have been sold. In the event that we issue more than
32,608,696 shares of its common stock upon conversion of the Cornell Debenture,
we will file additional registration statements as necessary.
On June 15, 2006, we entered into an agreement with Cornell to amend
the registration rights agreement, pursuant to which we agreed to file the
registration statement not later than August 15, 2006, instead of 120 days
following the closing of the issuance of the Cornell Debenture. On August 10,
2006, we entered into a further agreement with Cornell to extend the filing date
to October 15, 2006. Under the second agreement, if the registration statement
has not been filed by October 15, 2006, Cornell may declare us in default under
the Cornell Debenture.
We also entered into a security agreement (the "Security Agreement")
with Cornell Capital, pursuant to which we granted a second position security
interest in all of our property, including goods; inventory; contract rights and
general intangibles; documents, receipts, and chattel paper; accounts and other
receivables; products and proceeds; and any interest in any subsidiary, joint
venture, or other investment interest to secure our obligation under the Cornell
Debenture and the related agreements.
We also entered into an escrow agreement (the "Escrow Agreement") with
Cornell Capital relating to the holding and disbursement of payment of the
purchase price of the Cornell Debenture and cash payments made by us in payment
of the obligations owing under the Cornell Debenture. We agreed with Cornell
6
Capital to appoint David Gonzalez as the Escrow Agent under the Escrow
Agreement.
By way of background, we have previously entered into financing
transactions with Cornell Capital. In April 2003, we had entered into an equity
line of credit agreement with Cornell Capital, pursuant to which we drew a total
of $2,150,000 on the equity line, and issued a total of 57,464,386 shares of
common stock to Cornell Capital. In May 2004, we entered into a standby equity
distribution agreement with Cornell Capital, but the agreement was terminated
before any funds were drawn or any shares were issued. Between June 2003 and
January 2005, Cornell Capital loaned to us an aggregate of $5,595,000 pursuant
to promissory notes issued to Cornell Capital. These notes were paid in full by
May 2005.
Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate"), who is the Selling Shareholder under this registration statement,
and Cornell Capital have the same general partner, Yorkville Advisors, but have
different portfolio managers. Additionally, the escrow agent appointed in
connection with the purchase and sale of both the Cornell Capital debenture
transaction and the Highgate debenture transaction is David Gonzalez, who is an
officer of Cornell Capital.
The Company does not anticipate that it will use any of the proceeds of
the sale of the Cornell Debenture to Cornell Capital to repay the debenture sold
to Highgate.
Exclusive Manufacturing Agreement
On December 28, 2005, we signed an Exclusive Manufacturing Agreement (the
"Agreement") with Arrowhead Industries, Inc. ("Arrowhead"), pursuant to which we
will become the exclusive manufacturer of a tool for assisting with the removal
of door hinges called the "Hinge Helper" (the "Product"). Under the Agreement,
Arrowhead agreed to buy the Product exclusively from us for the period of the
Agreement, which is three years. The Product will be manufactured by us or by
sub-manufacturers selected by us.
The Agreement provides that Arrowhead will own all right, title, and interest in
the Product, and will sell and market the Product under its trademarks, service
marks, or trade names.
On January 9, 2006, we issued a press release which referred, in the title, to
the Agreement as a "$22 Million Exclusive Manufacturing Agreement." The dollar
amount referenced relates to the potential amount of income or revenue which we
may receive over the anticipated life of the Agreement.
CirTran announced on January 9, 2006, that Arrowhead Industries, Inc., of
Windermere, Florida, had awarded us an exclusive contract to manufacture its
patented Hinge Helper (TM) do-it-yourself utility tool for the home. The Hinge
Helper will be manufactured by CirTran-Asia, the Company's China-based
subsidiary. The exclusive manufacturing contract for the product is for three
years. Arrowhead has filmed a Hinge Helper infomercial for TV with an airing
date scheduled for late April.
The Hinge Helper is a unique hand tool designed and developed for use by
household customers as well as tradesmen. Recognized by the U.S. Patent Office
(#6,308,390 B1), its trademark and patent are owned by and registered to
Arrowhead. The specific advantage of the Hinge Helper is its ease-of-use and
simplistic design. It can be applied to any residential hinge on wood, metal or
composite doors, and is being manufactured with highly-durable materials,
enabling it to carry a lifetime guarantee.
The contract is for three years, and Arrowhead agreed to purchase a minimum of
ten million (10,000,000) units of the Product (the "Minimum Quantity"), subject
to the terms and conditions of the Agreement. Arrowhead and CirTran have agreed
on the Minimum Quantity in good faith, although the parties acknowledged that in
certain circumstances described in the agreement, the agreement may be
terminated prior to the sale of the entire Minimum Quantity. Arrowhead agreed to
submit purchase orders for the Product from time to time in accordance with the
terms of the agreement. Arrowhead agreed to pay CirTran for the Product
purchased at the prices ranging from $2.95 to $1.90 per unit, depending on the
cumulative number of units of Product which have been purchased by Arrowhead.
7
Arrowhead will also be entitled to a rebate equal to 10% of the purchase Price
paid for Product in the previous Tier. Rebates will be payable only in the form
of a credit memo against future purchases. Rebate credit memos will not be paid
in cash and may not be applied against outstanding balances. We will calculate
eligibility for the Rebate as soon as practicable following the end of the month
in which a new Tier is entered.
We have produced hand made samples, which have been sent to Arrowhead. These
were approved and we are awaiting final approval for the production samples that
were supplied at the end of March 2006.. Once the production samples are
approved, we will start production according to the release schedule that should
be provided by Arrowhead shortly thereafter.
Aegis Assessments
On March 14th, 2006, we announced that we had received a $250,000 order to build
and deliver the first production run of the next generation SafetyNet(TM)
RadioBridge(TM) which we redesigned at the request and on behalf of Aegis
Assessments, Inc., a Scottsdale, Arizona-based homeland security contractor.
Since the announcement, we have been procuring materials to manufacture the
units and ship to Aegis so they can start fulfilling their orders to their
customers. We delivered the new, redesigned units and received payment in full
from Aegis in April 2006.
Settlement of Legal Proceedings
On April 12th, 2006, we announced that we had settled all major litigation in
which we were a defendant. These litigation matters had been described in our
previous SEC filings and were settled for less than the original claims against
us. We were able to settle these cases with a total cash outlay of only $200,000
after originally having exposure of up to $4.25 million. We settled with Howard
Salamon, a financial consultant who originally sued us for $1.75 million through
the issuance of 4 million restricted shares and a warrant to purchase an
additional 7 million shares exercisable at $.05 per share. We also settled our
dispute with Sunborne XII, LLC, a Colorado limited liability company and the
owner of a building in Colorado Springs, Colorado, to which we expanded our
operations in the late 1990s, for $200,000 in cash. Sunborne's claim originally
ranged up to $2.5 million. Both settlements were reached in February 2006. Our
subsidiary, CirTran Asia, will continue to proceed with its action against
International Edge, Inc., Michael Casey Enterprises, Inc., Michael Casey, David
Hayek, and HIPMG, Inc., as discussed below under "Legal Proceedings."
Real Deal Grill
On April 18th, 2006, we announced that we had joined forces with former
heavyweight champion Evander Holyfield to market and promote "The Real Deal
Grill(TM)," a new electric indoor/outdoor cooking product to be sold via TV
infomercials. We arranged with the former champion's company, Holyfield
Management, Inc., of Georgia, for his services to promote the product and to
film a series of TV infomercials featuring Mr. Holyfield and The Real Deal
Grill, which are scheduled to be filmed in Florida in May 2006. Mr. Holyfield
will receive a talent fee for all units sold.
HBD/Reliant Agreement
On April 19, 2006, we announced that we had signed an agreement relating to "The
Real Deal Grill(TM) (the "Grill"), which will initially be sold on TV worldwide
and endorsed by Evander Holyfield, the four-time heavyweight boxing champion of
the world. The agreement was signed with Harrington Business Development ("HBD")
of St. Petersburg, Florida, giving HBD the rights to market the Grill in the
Americas and Japan (the "Territory"). Under the contract, HBD will initially
market the Grill on TV through infomercials in the U.S., Canada, South America
and Japan, which will be filmed in Florida featuring Mr. Holyfield. Under the
terms of the contract, we have paid one-half of the costs of producing the
initial infomercial, in the amount of $37,500. Under the contract, HBD granted
to us the right to use the raw footage, including audio and video, for the
initial infomercial to produce infomercials or other advertisements for the
Grill for use solely outside of the Territory. The agreement has an initial term
8
of 3 years and may be renewed. HBD is part of Reliant International Media
Corporation ("Reliant"), a full-service direct response company founded by
industry pioneers and leaders Tim and Kevin Harrington. The Harringtons, who
have been in the direct response industry since the early 1980's, have produced
long and short form infomercials for products in numerous categories, which have
been seen on TV around the world.
In further consideration for use of the Infomercial footage, we agreed to pay to
HBD a royalty of $2.00 per unit of product on all products sold outside of the
territory covered by the agreement (consisting of North America, South America,
and Japan) by the Company or sublicensees of the Infomercial footage, net of
returns and warranty replacements. For purposes of this royalty obligation, a
unit of product consists of the Real Deal Grill itself including any accessories
included in the price of the grill. The royalty to HBD for any accessories or
options which are advertised in the Infomercial and which may be sold separately
shall be 10% of the wholesale price for such items received by the Company.
Sales will be calculated on a cash basis, and royalties are due within 14 days
of the receipt of payment by the Company for the product.
As of July 20, 2006, we had not received any purchase orders for the Grill, the
infomercial had not been filmed, and we had not begun manufacturing the Grill.
Once we receive the initial purchase order, we anticipate that we will begin
manufacturing, although there can be no guarantee that HBD or Reliant will place
any orders or that we will receive the maximum amount possible under the
agreement, announced as $30 million, which assumed that HBD would purchase $30
million worth of the Grill.
Diverse Talent Group Agreement
On May 26, 2006, Diverse Media Group Corp. ("DMG") a Utah corporation and a
wholly-owned subsidiary of CirTran Corporation, entered into an assignment and
exclusive services agreement (the "Services Agreement") with Diverse Talent
Group, Inc., a California corporation, ("DT Group") and Christopher Nassif
("Nassif" and together with DT Group, "DT"). The Services Agreement was made
effective as of April 1, 2006 (the "Effective Date"). The term of the Services
Agreement is for five years, and expires on March 31, 2011.
Prior to entering into the Services Agreement, Nassif and DT Group operated a
talent agency in Los Angeles, California, with extensive industry contacts. DMG,
a subsidiary of the Company, was seeking to commence a diversified media
business of product marketing, infomercial production, media financing and
product merchandising services to the Direct Response and Entertainment
Industries.
Pursuant to the Services Agreement, DMG and DT entered into an exclusive
operations relationship whereby DMG agreed to outsource its talent agency
operations to DT and to provide financing to DT to assist in DT's growth. Under
the Services Agreement, DMG and DT created a relationship whereby DT would
operate exclusively under the DMG business structure.
Pursuant to the Services Agreement, DT agreed to provide all creative and
operational needs of DMG's talent division. DT agreed to supply these services
exclusively to DMG. Additionally, all gross revenues generated from DT's
operations after the Effective Date are to be paid to DMG.
At the time of signing the Services Agreement, DMG paid to DT an initial payment
of $50,000 in consideration of the following:
- the right to use the name "Diverse" and be associated with the
existing reputation of DT;
- the right to obtain DT's services on an exclusive basis;
- all accounts receivable and contracts receivable of DTGroup as
of the Effective Date; and
- the assignment by DT of certain talent contracts.
As future compensation for services provided, DMG agreed to pay to DT a
percentage of the gross profits for the talent contracts entered into between DT
and its clients. The percentage ranges from 62.5% to 85%, depending on the type
9
of talent contract and the amount of gross compensation paid under the talent
contract.
In connection with the Services Agreement, Nassif entered into an employment
agreement (the "Employment Agreement") with DMG. Nassif's continued employment
with DMG is an express condition of the Services Agreement. Under the Employment
Agreement, DMG agreed to cause to be issued to DT options (the "Options") to
purchase a total of 2,500,000 shares of the Company's common stock, with an
exercise price of $0.045 per share. The Options will expire five years from the
date of grant if not exercised prior to that date. The Options vest as follows:
500,000 on the date of grant, and an additional 500,000 on each of the next four
anniversaries of the Effective Date, subject to Nassif's continued employment
with DMG.
Additionally, Nassif will receive 5% of the gross margin received by DMG on any
new business opportunities generated for DMG through Nassif's personal efforts
and contacts (the "New Business Payments"). The New Business Payments may be
made in cash or in shares of the Company's restricted common stock, subject to
compliance with all applicable securities laws.
DMG also agreed in the Services Agreement to provide financing to DT, in the
form of a non-interest-bearing capital line of credit (the "Capital Line"), not
to exceed $200,000, pursuant to a loan agreement (the "Loan Agreement"). DT may
make weekly draws not to exceed $20,000, on terms as set forth in the Loan
Agreement.
In connection with the Loan Agreement, DT and DMG entered into a security
agreement (the "Security Agreement"), pursuant to which DT granted to DMG a
security interest (the "Security Interest") in all of the personal property of
DT, including inventory, accounts, equipment, general intangibles, deposit
accounts, and other items listed in the Security Agreement. The Security
Interest secures DT's obligations to DMG under the Capital Line.
Also in connection with the Loan Agreement, Nassif provided a fraudulent
transaction guarantee (the "Guarantee"), pursuant to which Nassif agreed to
indemnify DMG and its officers, affiliates, and others against any damages
arising out of any fraudulent actions by DT.
May 2006 Private Offering
On May 24, 2006, we closed a private placement of shares of our common stock and
warrants (the "Private Offering"). Pursuant to a securities purchase agreement
(the "Agreement"), we sold Fourteen Million, Two Hundred Eighty-five Thousand,
Seven Hundred Fifteen (14,285,715) shares of our Common Stock (the "Shares") to
ANAHOP, Inc., a California corporation (the "Purchaser"). The consideration paid
for the Shares was One Million Dollars ($1,000,000). There were no underwriting
discounts. In addition to the Shares, we issued warrants (the "Warrants") to
designees of the Purchaser as follows:
- A warrant to purchase up to 10,000,000 shares, with an
exercise price of $0.15 per share, exercisable upon the date
of issuance, to Albert Hagar.
- A warrant to purchase up to 5,000,000 shares, with an exercise
price of $0.15 per share, exercisable upon the date of
issuance, to Fadi Nora.
- A warrant to purchase up to 5,000,000 shares, with an exercise
price of $0.25 per share, exercisable upon the date of
issuance, to Fadi Nora.
- A warrant to purchase up to 10,000,000 shares, with an
exercise price of $0.50 per share, to Albert Hagar.
The Warrants have exercise prices ranging from $0.15 to $0.50 as noted above,
and are exercisable as of the date of issuance and through and including the
date which is five years following the date on which our Common Stock is listed
for trading on either the Nasdaq Small Cap Market, the Nasdaq Capital Market,
the American Stock Exchange, or the New York Stock Exchange (the "Expiration
Date").
With respect to the shares underlying the Warrants, we granted piggyback
registration rights as follows: (A) once all of the warrants with an exercise
10
price of $0.15 (the "Fifteen Cent Warrants") have been exercised, we agreed to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifteen Cent Warrants; (B) once all of
the warrants with an exercise price of $0.25 (the "Twenty-five Cent Warrants")
have been exercised, we agreed to include in the next registration statement
that is filed by us the resales of the shares issued upon exercise of the
Twenty-five Cent Warrants; and (C) once all of the warrants with an exercise
price of $0.50 (the "Fifty Cent Warrants") have been exercised, we agreed to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifty Cent Warrants. We did not grant any
registration rights with respect to the Shares.
The Shares and the Warrants were issued without registration under the 1933 Act
in reliance on Section 4(2) of the 1933 Act and the rules and regulations
promulgated thereunder. We intend to use the proceeds from the Private Offering
for working capital and general business purposes.
Closing and Approval of Asset Purchase Agreement
On June 6, 2006, CirTran Corporation (the "Company") and Advanced Beauty
Solutions, LLC ("ABS") closed a transaction (the "Asset Purchase") whereby the
Company purchased certain assets of ABS, subject to the approval of the U.S.
Bankruptcy Court adjudicating the bankruptcy proceedings of ABS (the "ABS
Bankruptcy Court"). On June 7, 2006, the ABS Bankruptcy Court entered an order
approving the Asset Purchase.
Background
- ----------
On January 19, 2005, the Company signed an Exclusive Manufacturing Agreement
with ABS, a California limited liability company, relating to the manufacture of
a flat iron hair product in California. On July 7, 2005, the Company signed
another Exclusive Manufacturing Agreement with ABS, relating to the manufacture
of a hair dryer product in California.
In early October 2005, the Company was notified that ABS had defaulted on its
obligation to its financing company. Following the notice of ABS's default, the
Company terminated the agreements for both products based on the default. In
January 2006, following efforts to resolve the disputes with ABS, the Company
filed a lawsuit against ABS, claiming breach of contract, interference with
contractual relationships, unjust enrichment, and fraud, and seeking damages
from ABS.
With respect to the flat iron products, through October 2005, CirTran had
shipped directly to ABS approximately $4,746,000 worth of the product, and
CirTran had received from ABS or its finance company total payments of
approximately $788,000. In November 2005, the Company repossessed from ABS
approximately $2,341,000 worth of the products in the United States, as the
Company was permitted to do pursuant to the agreement.
Since November 2005, the Company has been pursuing its rights under the
agreements and has been offering the flat iron product for sale directly to
ABS's customers. In doing so, the Company sold to ABS's international customers
directly approximately $426,000 worth of the flat iron product. The shipments
have all been paid in full. These products shipped were not part of the
repossessed inventory.
On January 24, 2006, ABS filed a voluntary petition for relief under chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the "ABS
Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
11
the settlement was further modified.
Pursuant to the Sale Motion, the Company and ABS entered into negotiations for
the purchase by the Company of certain of the assets and assumption of certain
of the obligations (described more fully below) of ABS. Because ABS was subject
to the jurisdiction of the ABS Bankruptcy Court, any agreement between the
Company and ABS relating to the sale of ABS's assets had to be approved by the
ABS Bankruptcy Court.
On June 6, 2006, the Company and ABS signed an agreement (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS.
Pursuant to the settlement of ABS's bankruptcy proceedings and the Asset
Purchase Agreement, the Company has an allowed claim against the ABS's estate in
the amount of $2,350,000, of which $750,000 is to be credited to the purchase of
substantially all of ABS's assets. Under the settlement, the Company shall be
allowed to participate as a general unsecured creditor of ABS's estate in the
amount of $1,600,000 on a pari passu basis with the $2,100,000 general unsecured
claim of certain insiders of ABS and subject to the prior payment of certain
secured, priority, and non-insider claims in the amount of approximately
$1,507,011.
Under the Asset Purchase Agreement, the Company agreed to purchase substantially
all of ABS's assets in exchange for:
(i) a cash payment in the amount of $1,125,000;
(ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
(iii) the assumption of any assumed liabilities; and
(iv) the obligation to pay ABS a royalty equal to $3.00 per True
Ceramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
The Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings (collectively, the "Assets").
Under the Asset Purchase Agreement, the Royalty Obligation is capped at
$4,135,000. To the extent the amounts paid to ABS on account of the Royalty
Obligation equal less than $435,000 on the 2 year anniversary of the Closing,
then, within 30 days of such anniversary, the Company agreed to pay ABS an
amount equal to $435,000 less the royalty payments made to date. As part of the
settlement, the Company agreed to exchange general releases with, among others,
ABS, Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolved a related dispute with
ICG in which ICG assigned $65,000 of its secured claim against ABS to the
Company.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
(a) The Royalty Obligation payments will be made exclusively to
ICG and MFC (collectively, the "Secured Parties") until (i) the Secured
Parties have been paid in full on account of their $1,243,208.44
secured claim, or (ii) the Secured Parties have been paid $100,000 in
payments under the Royalty Obligation, whichever comes first.
(b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an individual
with an allowed claim (in the amount of $20,000).
(c) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation payments
12
will be used for distribution to allowed general unsecured claims not
including those of the Company and certain insiders with unpaid notes
(the "Insider Noteholders").
(d) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among the
Insider Noteholders (with a total allowed aggregate claim of
$2,100,000), and the Company (with a general unsecured claim in the
amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the
Company begins to share in the Royalty Obligation payments is $435,000.
Marketing and Distribution Agreement
On July 3, 2006, we finalized a Marketing and Distribution Agreement
(the "MD Agreement") with Media Syndication Global, LLC, a Delaware limited
liability company ("MSG"). The MD Agreement relates to the marketing and
distribution by MSG of a product designed by Advanced Beauty Solutions, LLC
("ABS"), which we purchased (as discussed above).
Background
- ----------
In a Current Report filed with the SEC on June 13, 2006, we announced
that we had closed a transaction (the "Asset Purchase") whereby we purchased
certain assets of ABS, subject to the approval of the U.S. Bankruptcy Court
adjudicating the bankruptcy proceedings of ABS (the "Bankruptcy Court"). On June
7, 2006, the Bankruptcy Court entered an order approving the Asset Purchase.
Pursuant to the order entered by the Bankruptcy Court, we were required
to give to Tristar Products, Inc. ("Tristar") a first-right opportunity to enter
into a world-wide marketing and distribution agreement with the Company. The
term of the first-right period ended on July 3, 2006.
Prior to the approval of the Asset Purchase by the Bankruptcy Court,
and in anticipation of such approval, we had entered into the MD Agreement with
MSG, subject to (A) the approval of the Asset Purchase by the Bankruptcy Court;
(B) our completion of the purchase of ABS's assets; and (C) our failure to enter
into a distribution agreement with Tristar. We entered into the MD Agreement
with MSG on April 24, 2006, although the effective date of the MD Agreement was
the date on which all three conditions listed above were satisfied.
Additionally, the MD Agreement provided to MSG the opportunity to perform test
marketing of the product, which was successfully completed.
Pursuant to the MD Agreement, we granted to MSG the exclusive,
world-wide rights to advertise, promote, market, sell, and otherwise distribute
the True Ceramic Pro Bionic hair styler (the "Product"), designed by ABS.
Additionally, MSG agreed that during the term of the MD Agreement, MSG would
purchase 100% of its requirements of the Product, together with any products
that are substantially similar to the Product (a "Similar Product"), from us.
MSG also agreed that it would not purchase, manufacture, or cause any third
party to manufacture any Similar Product during the term of the MD Agreement and
for one year following the termination of the MD Agreement, except from us.
Under the MD Agreement, MSG is required to purchase an initial minimum
quantity of 10,000 units, and yearly quantities of at least 400,000 units. The
initial term of the MD Agreement is for three years from the effective date. If
MSG has purchased the required minimum quantities during the initial term, the
MD Agreement will renew for additional one-year terms.
The MD Agreement may be terminated by either party upon 45 days' notice
to the other party upon the breach by the other party of any material terms,
covenants, conditions, or obligations under the MD Agreement. However, if the
breach upon which such notice of termination is based shall have been fully
cured to the reasonable satisfaction of the non-breaching party within such
notice period, then such notice of termination shall be deemed rescinded. We
13
agreed with MSG that such right of termination was in addition to such other
rights and remedies as the terminating party would have under applicable law.
We agreed with MSG that all customer lists, price lists, written and
unwritten marketing plans, techniques, methods and data, sales and transaction
data, and other information designated or deemed either by MSG or us as being
confidential or a trade secret, would constitute confidential information of MSG
or CirTran, respectively ("Confidential Information"). We agreed with MSG to
hold all Confidential Information in the strictest confidence and shall protect
all Confidential Information with the same degree of care that MSG or we would
exercise with respect to its own proprietary information.
June 2006 Private Offering
On June 30, 2006, we closed a second private placement of shares of our
common stock and warrants (the "June Private Offering"). Pursuant to a
securities purchase agreement (the "June Agreement"), the Company agreed to sell
Twenty-Eight Million, Five Hundred Seventy-One Thousand, Four Hundred
Twenty-Eight (28,571,428) shares of its Common Stock (the "June Shares") to
ANAHOP. The total consideration to be paid for the Shares will be Two Million
Dollars ($2,000,000) if all tranches of the sale close.
Pursuant to the Agreement, ANAHOP agreed to pay Three Hundred Thousand
Dollars ($300,000) at the time of closing, and an additional Two Hundred
Thousand Dollars ($200,000) within 30 days of the closing. (The payments of
$300,000 and $200,000 are referred to collectively as the "First Tranche
Payment.") Upon the receipt of the First Tranche Payment, we agreed to issue a
certificate or certificates to the Purchaser representing 7,142,857 of the
Shares.
The remaining $1,500,000 is to be paid by ANAHOP as follows:
(i) No later than thirty calendar days following the date
on which any class of our capital stock is first
listed for trading on either the Nasdaq Small Cap
Market, the Nasdaq Capital Market, the American Stock
Exchange, or the New York Stock Exchange, ANAHOP
agreed to pay an additional $500,000 to us; and
(ii) No later than sixty calendar days following the date
on which any class of our capital stock is first
listed for trading on either the Nasdaq Small Cap
Market, the Nasdaq Capital Market, the American Stock
Exchange, or the New York Stock Exchange, ANAHOP
agreed to pay an additional $1,000,000 to us. (The
payments of $500,000 and $1,000,000 are referred to
collectively as the "Second Tranche Payment.")
Upon receipt by us of the Second Tranche Payment, we agreed to issue a
certificate or certificates to ANAHOP representing the remaining 21,428,571
Shares. Additionally, once we have received the Second Tranche Payment, we
agreed to issue warrants to designees of the Purchaser as follows:
- A warrant to purchase up to 20,000,000 shares, with
an exercise price of $0.15 per share, exercisable
upon the date of issuance, to Albert Hagar.
- A warrant to purchase up to 10,000,000 shares, with
an exercise price of $0.15 per share, to Fadi Nora.
- A warrant to purchase up to 10,000,000 shares, with
an exercise price of $0.25 per share, exercisable
upon the date of issuance, to Fadi Nora.
- A warrant to purchase up to 23,000,000 shares, with
an exercise price of $0.50 per share, exercisable
upon the date of issuance, to Albert Hagar.
The Warrants have exercise prices ranging from $0.15 to $0.50 as noted
above, and are exercisable as of the date of issuance and through and including
the later of (1) the fifth anniversary of the date of the Warrant or (2) the
fifth anniversary of the date on which our Common Stock is first listed for
trading on either the Nasdaq Small Cap Market, the Nasdaq Capital Market, the
14
American Stock Exchange, or the New York Stock Exchange (the "Expiration Date").
With respect to the shares underlying the Warrants, we granted
piggyback registration rights as follows: (A) Once all of the warrants with an
exercise price of $0.15 (the "Fifteen Cent Warrants") have been exercised, we
agreed to include in the next registration statement that is filed by us the
resales of the shares issued upon exercise of the Fifteen Cent Warrants; (B)
Once all of the warrants with an exercise price of $0.25 (the "Twenty-five Cent
Warrants") have been exercised, we agreed to include in the next registration
statement that is filed by us the resales of the shares issued upon exercise of
the Twenty-five Cent Warrants; and (C) Once all of the warrants with an exercise
price of $0.50 (the "Fifty Cent Warrants") have been exercised, we agreed to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifty Cent Warrants. We did not grant any
registration rights with respect to the Shares.
The Shares and the Warrants were issued without registration under the
1933 Act in reliance on Section 4(2) of the 1933 Act and the rules and
regulations promulgated thereunder. We intend to use the proceeds from the June
Private Offering for working capital and general business purposes.
Lockdown Agreements
On July 20, 2006, we entered into two lockdown agreements with existing
security holders.
The first agreement (the "Cornell Agreement") was with Cornell and
related to the Cornell Debenture. Pursuant to the Cornell Agreement, Cornell
agreed that it would not convert any of the principal or interest on the Cornell
Debenture or exercise any of the Warrants granted to Cornell until we had taken
the steps necessary to increase our authorized capital. As such, we were able to
lock down 50,000,000 shares underlying the Cornell Debenture and 10,000,000
shares underlying the Cornell Warrants.
The second agreement (the "ANAHOP Agreement") was with ANAHOP, Albert
Hagar, and Fadi Nora, and related to the May and June private placement
transactions discussed above. Pursuant to the ANAHOP Agreement, Hagar and Nora
agreed that they would not exercise any of the warrants they received in
connection with the May or June private offerings until we had taken the steps
necessary to increase our authorized capital. Additionally, ANAHOP agreed that
it would not make the Second Tranche Payment to purchase the Second Tranche
Shares until we had taken the steps necessary to increase our authorized
capital. As such, under the ANAHOP Agreement, we were able to lock down
21,428,571 shares (the Second Tranche Shares), and 93,000,000 shares underlying
the warrants issued to Hagar and Nora in the May and June private placements.
Press Release Regarding Sales Increase
On July 19, 2006, the Company issued a press release stating it was
projecting an increase in sales of 30% for the second quarter of 2006,
consisting of sales of approximately $2.2 million, compared with sales of
approximately $1.7 million for the first quarter of 2006. The projection was
based on a preliminary summary of second quarter sales for the Company and its
subsidiaries as follows:
Sales for the Sales for the
Second Quarter 2006 Second Quarter 2005
Electronics Assembly $ 687,470 $ 946,162
CirTran Asia, Inc. 944,958 3,332,275
CirTran Products Corporation 243,652 -0-
Racore Technology Corporation 6,830 40,747
Diverse Media Group Corporation 374,896 -0-
------------- -------------
Total Sales $ 2,257,806 $ 4,309,184
Although as of August 10, 2006, the Company had not finalized its financial
statements for the quarter ended June 30, 2006, it appears that sales decreased
to $3,995,630 for the six month period ended June 30, 2006, as compared to
$7,229,649 during the same period in 2005, for a decrease of $3,234,019 or
44.7%. A significant portion of this sales decrease can be attributed to the
bankruptcy of a major customer, Advanced Beauty Solutions, Inc. (ABS). During
the second quarter of 2005, the Company recorded sales of $2,002,363 to ABS
whereas there were no sales to ABS in the second quarter of 2006 due to ABS's
filing of bankruptcy in January 2006.
As of August 10, 2006, other financial information about the Company's
operations for the second quarter of 2006 was being prepared and will be
released when the Company issues its quarterly report on Form 10-QSB for the
quarter ended June 30, 2006.
15
Risk Factors
The short- and long-term success of CirTran is subject to certain risks, many of
which are substantial in nature and outside the control of CirTran. You should
consider carefully the following risk factors, in addition to other information
contained herein. When used in this prospectus, words such as "believes,"
"expects," "intends," "plans," "anticipates," "estimates," and similar
expressions are intended to identify forward-looking statements, although there
may be certain forward-looking statements not accompanied by such expressions.
You should understand that several factors govern whether any forward-looking
statement contained herein will or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected herein.
These forward-looking statements include plans and objectives of management for
future operations, including the strategies, plans and objectives relating to
the products and the future economic performance of CirTran and its subsidiaries
discussed above. We disclaim any intention or obligation to update or revise and
forward-looking statement, whether as a result of new information, future
events, or otherwise. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by CirTran or any other person that
the objectives or plans of CirTran will be achieved.
In addition to the other information in this report, the following risk factors
should be considered carefully in evaluating our business before making any
investment decisions with respect to any of our shares of common stock. A
purchase of our common stock is speculative and involves significant and
substantial risks. Any person who is not in a position to lose the entire amount
of his investment should forego purchasing our common stock.
Risks Related to Our Operations
We have a history of operating losses which could have a material adverse impact
on our ability to continue operations.
Our current assets exceeded our current liabilities by $300,528 as of March 31,
2006. Our accumulated deficit increased to $19,605,311 at March 31, 2006,
compared to $19,327,310 at December 31, 2005. Our net loss for the quarter
ending March 31, 2006, was $277,998, compared to $201,728 for the quarter ended
March 31, 2005. The change was mostly attributable to settlements of notes
payable. Our current liabilities exceeded our current assets by $1,142,874 as of
December 31, 2005, and by $3,558,826 as of December 31, 2004. Our net loss for
the year ending December 31, 2005, was $527,708, which included a gain on
forgiveness of debt of $337,761, compared to $658,322 for the year ended
December 31, 2004, which included a gain on forgiveness of debt of $1,713,648.
Our ability to operate profitably depends on our ability to increase our sales
further and achieve sufficient gross profit margins for sustained growth. We can
give no assurance that we will be able to increase our sales sufficiently to
enable us to operate profitably, which could have a material adverse impact on
our business. Our ability to obtain funding has had a material effect on our
operations. Additionally, there is no guarantee that the fluctuations in the
volume of our sales will stabilize or that we will be able to continue to
increase our revenues to exceed our expenses. There are doubts that we will be
able to continue as a going concern.
Our current liabilities exceeded our current assets, which raises doubts that we
may continue as a going concern.
Our current assets exceeded our current liabilities by $300,528 as of March 31,
2006. For the three months ended March 31, 2006 and 2005, we had negative cash
flows from operations of $719,898 and $385,701, respectively. As of December 31,
2005, our current liabilities exceeded our current assets by $1,142,874,
compared to $3,558,826 as of December 31, 2004. For the year ended December 31,
2005 and 2004, we had negative cash flows from operations of $1,751,744 and
$1,680,054, respectively. There can be no guarantee that our current assets will
exceed our current liabilities. As such, and in light of our recent history,
there remains a doubt we will be able to meet our obligations as they come due
and will be able to execute our long-term business plans. If we are unable to
meet our obligations as they come due or are unable to execute our long-term
business plans, we may be forced to curtail our operations, sell part or all of
our assets, or seek protection under bankruptcy laws.
16
The "going concern" paragraph in the reports of our independent registered
public accounting firm for the years ended December 31, 2005 and 2004, raises
doubts about our ability to continue as a going concern.
The independent registered public accounting firm's reports for our financial
statements for the years ended December 31, 2005 and 2004, include an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern. This may have an adverse effect on our ability to obtain
financing for our operations and to further develop and market our products.
Our volume of sales has fluctuated significantly over the last four years, and
there is no guarantee that we will be able to increase sales. These fluctuations
in sales volume could have a material adverse impact on our ability to operate
our business profitably.
Our sales volume increased in the year of 2005 as compared to 2004. Our sales
volumes for the previous four years have changed as indicated by the following
levels of net sales for the periods indicated: $2,299,668 for the year ended
December 31, 2002; $1,215,245 for the year ended December 31, 2003 and
$8,862,715 for the year ended December 31, 2004. For the year ended December 31,
2005 our sales increased to $12,992,512 which is a 46.6% increase from year
ended December 31, 2004. This increase indicates an increasing trend in sales
volume. There is no guarantee that the fluctuations in the volume of our sales
will stabilize or that we will be able to continue to increase our sales volume.
One of our customers was responsible for approximately 71% of our accounts
receivable at December 31, 2005. That customer filed bankruptcy in January 2006.
If the bankruptcy estate is unable to make full payments on this account
receivable, or if such payments are delayed, the resulting impact on our
collections could have a material adverse impact on our business.
As of December 31, 2005, one customer, Advanced Beauty Solutions ("ABS"),
accounted for approximately 71% of our accounts receivable, in the amount of
$2,350,000. On January 24, 2006, ABS filed a voluntary petition for relief (the
"ABS Bankruptcy Case") under Chapter 11 of the U.S. Bankruptcy Code. We have an
allowed claim of $2,350,000 against ABS's estate (the "Estate"). In connection
with a settlement of the ABS Bankruptcy Case, we recently closed the purchase of
the assets of ABS, which included a reduction of our claim by approximately
$750,000, leaving us with a remaining claim of approximately $1,600,000. On June
7, 2006, the transaction was approved by the ABS Bankruptcy Court.
We intend to continue to produce and sell the ceramic flat iron products under
our contracts with ABS. However, we are required to pay to the Estate royalties
on each unit sold. The Estate will then use those royalties to pay the claims
against the Estate, including our claim of approximately $1,600,000. There can
be no guarantee that we will be able to sell sufficient quantities of the flat
iron products and pay royalties to the Estate to allow us to recover the full
amount of our remaining claim. If we are unable to recover the claimed amount,
the resulting impact on our collections could have a material adverse impact on
our business operations.
We are involved in numerous legal proceedings that may give rise to significant
liabilities, which could impair our ability to continue as a going concern.
We are involved in legal proceedings, several of which involve lawsuits filed
against us. As of July 20, 2006, one company had a judgment against us in the
amount of $37,966, and there were additional claims, in connection with pending
litigation, in the aggregate amount of approximately $10,000,000. This pending
litigation involves CirTran Asia and the other plaintiffs whom have filed their
reply to the counterclaim, disputing all of the allegations and claims.
International Edge filed a motion to dismiss for lack of jurisdiction, which was
pending as of the date of this report. This claim involves licensing issues
relating to a product which generated approximately $3,510,000 in revenue in
2004 and $960,000 in 2005. As discussed in the "Legal Proceedings" section, we
are currently attempting to negotiate with each of these claimants to settle the
claims against CirTran, although in many cases, we have not yet reached final
settlements. There can be no assurance that we will be successful in those
17
negotiations or that, if successful, we will be able to service any payment
obligations which may result from such settlements.
There is substantial risk, therefore, that the existence and extent of these
liabilities could adversely affect our business, operations and financial
condition. The liabilities and claims could also result in a reduction in our
revenues to the extent that claims relate to specific products or licenses. As a
result, we may be forced to curtail our operations, sell part or all of our
assets, or seek protection under bankruptcy laws. Additionally, there is
substantial risk that our vendors could expand their collection efforts to
collect the unpaid amounts. If they undertake significant collection efforts,
and if we are unable to negotiate settlements or satisfy our obligations, we
could be forced into bankruptcy.
In connection with the sale of the Convertible Debentures, we granted a security
interest in all of our assets to secure our payment obligations under the
Convertible Debentures. If we are unable to satisfy our payment obligations,
Highgate or Cornell Capital could execute on the security interest and take
control of our assets.
In connection with the sale of the Convertible Debenture to Highgate, we entered
into a security agreement with Highgate, pursuant to which we pledged all of our
property, including goods; inventory; contract rights and general intangibles;
documents, receipts, and chattel paper; accounts and other receivables; products
and proceeds; and any interest in any subsidiary, joint venture, or other
investment interest to secure our obligation under the Convertible Debenture and
the related agreements. Similarly, in connection with the sale of the
Convertible Debenture to Cornell Capital, we entered into a security agreement
with Cornell Capital, pursuant to which we gave a second position security
interest and pledged all of our property, including goods; inventory; contract
rights and general intangibles; documents, receipts, and chattel paper; accounts
and other receivables; products and proceeds; and any interest in any
subsidiary, joint venture, or other investment interest to secure our obligation
under the Cornell Capital Convertible Debenture and the related agreements. In
the event that we are unable to make our payment obligations under the
Convertible Debentures or to work out alternate arrangements with Highgate
and/or Cornell Capital, or to arrange for financing to enable us to make our
payment obligations to Highgate and/or Cornell Capital, Highgate and/or Cornell
Capital could execute on the security interest and take control of all of our
property and assets.
We are dependent on the continued services of our President and other officers,
and the untimely death or disability of Iehab Hawatmeh could have a serious
adverse effect upon our Company.
We view the continued services of our president, Iehab Hawatmeh, and our other
officers as critical to the success of our Company. Though we have employment
agreements with Mr. Iehab Hawatmeh, Mr. Trevor Saliba, and Mr. Shaher Hawatmeh
(see "Executive Compensation"), and a key-man life insurance policy for Mr.
Iehab Hawatmeh, the untimely death or disability of Mr. Hawatmeh could have a
serious adverse affect on our operations.
Our international business activities subject us to risks that could adversely
affect our business.
For the year ended December 31, 2005, sales of products manufactured in the
United States accounted for 24.1 percent of our total net revenues, and sales of
products manufactured in China accounted for 75.9 percent of our total net
revenues. Our sales of our products manufactured internationally have increased,
and now represents a larger percentage of our sales. Additionally, the portion
of our products that are produced at facilities in close proximity to our
CirTran-Asia production facilities in ShenZhen, China, has increased. As a
result, we are subject to the risks inherent in international operations. Our
international business activities could be affected, limited, or disrupted by a
variety of factors, including:
* the imposition of or changes in governmental controls, taxes,
tariffs, trade restrictions and regulatory requirements;
* the costs and risks of localizing products for foreign
countries;
18
* longer accounts receivable payment cycles;
* changes in the value of local currencies relative to our
functional currency;
* import and export restrictions;
* loss of tax benefits due to international production;
* general economic and social conditions within foreign
countries;
* taxation in multiple jurisdictions; and/or
* political instability, war or terrorism.
All of these factors could harm future sales of our products to international
customers or future production outside of the United States of our products, and
have a material adverse effect on our business, results of operations and
financial condition.
We may continue to expand our operations in international markets. Our failure
to effectively manage our international operations could harm our business.
Entering new international markets, including our entry into China with
CirTran-Asia, may require significant management attention and expenditures and
could adversely affect our operating margins and earnings. To date, we have only
recently begun to penetrate international markets. To the extent that we are
unable to do so, our growth in international markets would be limited, and our
business could be harmed.
We expect that our international business operations will be subject to a number
of material risks, including, but not limited to:
* difficulties in managing foreign sales channels;
* difficulties in enforcing agreements and collecting
receivables through foreign legal systems and addressing other
legal issues;
* longer payment cycles;
* taxation issues;
* differences in international telecommunications standards and
regulatory agencies;
* product requirements different from those of our current
customers;
* fluctuations in the value of foreign currencies; and
* unexpected domestic and international regulatory, economic or
political changes.
A combination of any or all of these risks could have a material adverse impact
both on our international business, and on our core business operations in the
United States.
We are dependent on the continued services of Charles Ho, the President of our
CirTran-Asia subsidiary, and the untimely death or disability of Mr. Ho could
have a serious adverse effect upon our subsidiary and Company.
19
We view the continued services of Charles Ho, the president of our CirTran-Asia
subsidiary, as critical to the success of that subsidiary. Though we have an
employment agreement with Mr. Ho (see "Executive Compensation"), we have no
key-man life insurance policy for Mr. Ho. The untimely death or disability of
Mr. Ho could have a serious adverse affect on our international operations and
our operations overall.
We have not held an annual shareholder meeting in several years, which could
result in a legal action being brought against the Company to compel an annual
meeting.
We have not held an annual meeting of shareholders since 2001. Under Nevada law,
if a Nevada corporation does not hold a meeting to elect directors of the
corporation within eighteen months after the last election of directors, a
shareholder or shareholders owning at least fifteen percent of the Company's
outstanding voting stock can apply to a court for an order compelling the
Company to hold a shareholder meeting to elect directors. Because it has been
more than eighteen months since our last meeting where directors were elected,
an action could be brought, pursuant to Nevada law, against the Company to
compel us to hold an annual meeting and elect directors of the Company.
Our authorized capital presently would be insufficient to allow us to issue
shares upon conversion of our outstanding derivative securities, which could
result in our being in default or subject to claims of breach of contract, and
could have a material adverse impact on our business.
Our authorized capital stock consists of 750,000,000 shares of common stock. As
of July 20, 2006, we had 636,874,906 shares issued and outstanding. A
hypothetical conversion of the remaining principal amount of the Highgate
Convertible Debenture, namely $3,000,000, would result in the issuance of
100,000,000 shares, assuming a hypothetical conversion price of $0.03 per share.
Conversion of the full principal amount of the Cornell Convertible Debenture,
namely $1,500,000, would result in the issuance of 50,000,000 shares of common
stock, assuming a hypothetical conversion price of $0.03 per share.
Additionally, in May 2006, we issued warrants to purchase up to an additional
30,000,000 shares of our common stock and in June 2006, we entered into an
agreement to issue additional warrants to purchase up to 63,000,000 shares of
our common stock, although we have entered into a lockdown agreement with the
holders of the 93,000,000 warrants. Presently, we do not have sufficient shares
to permit a full conversion of all of the convertible debentures and exercise of
outstanding warrants. We have also entered into a lockdown agreement with
Cornell relating to the Cornell Debenture, whereby Cornell agreed not to convert
any of the Cornell Debenture until we can increase our authorized capital.
Nevertheless, under the Highgate Convertible Debenture and the Cornell
Convertible Debenture, failure to deliver shares upon conversion can constitute
an event of default, giving Highgate or Cornell, as applicable, the right to
accelerate the payment of all remaining amounts due and owing under the
debentures. Additionally, failure to deliver shares upon exercise of the
warrants could result in claims being brought against us for breach of contract,
among others.
We intend to hold an annual meeting of shareholders to seek approval of our
shareholders to amend our articles of incorporation to increase our authorized
capital, although there can be no guarantee that we will be able to obtain
shareholder approval to do so. If we do not receive shareholder approval to
increase our authorized capital, we would not have sufficient shares to permit a
full conversion of the convertible debentures and exercise of the outstanding
warrants. A failure to deliver shares upon conversion or exercise of our
outstanding derivative securities or to increase our authorized capital could
have a material adverse impact on our business and operations
Risks Related to Our Industry
The variability of customer requirements in the electronics industry could
adversely affect our results of operations.
Electronic manufacturing service providers must provide increasingly rapid
turnaround time for their OEM customers. We do not obtain firm, long-term
purchase commitments from our customers and have experienced a demand for
reduced lead-times in customer orders. Our customers may cancel their orders,
20
change production quantities or delay design and production for several factors.
Cancellations, reductions or delays by a customer or group of customers could
adversely affect our results of operations. Additional factors that affect the
electronics industry and that could have a material adverse effect on our
business include the inability of our customers to adapt to rapidly changing
technology and evolving industry standards and the inability of our customers to
develop and market their products. If our customers' products become obsolete or
fail to gain commercial acceptance, our results of operations may be materially
and adversely affected, which could make it difficult for us to continue as a
going concern.
Our customer mix and base fluctuates significantly, and responding to these
fluctuations could cause us to lose business or have delayed revenues, which
could have a material adverse impact on our business.
A percentage of our revenue is generated from our electronics assembly and
manufacturing services. Of this amount our three largest customers generate
approximately 12% of the total revenue. Our customers include electronics,
telecommunications, networking, automotive, gaming, exercise equipment, and
medical device OEMs that contract with us for the manufacture of specified
quantities of products at a particular price and during a relatively short
period of time. As a result, the mix and number of our clients varies
significantly from time to time. Responding to the fluctuations and variations
in the mix and number of our clients can cause significant time delays in the
operation of our business and the realization of revenues from our clients.
These delays could have a material adverse impact on our business, resulting
from, among other things, the costs associated from shifting operations to
respond to different orders.
Our industry is subject to rapid technological change. If we are not able to
adequately respond to changes, our services may become obsolete or less
competitive and our operating results may suffer.
We may not be able to effectively respond to the technological requirements of a
changing market, including the need for substantial additional capital
expenditures that may be required as a result of these changes. The electronics
manufacturing services industry is characterized by rapidly changing technology
and continuing process development. The future success of our business will
depend in large part upon our ability to maintain and enhance our technological
capabilities and successfully anticipate or respond to technological changes on
a cost-effective and timely basis. In addition, our industry could in the future
encounter competition from new or revised technologies that render existing
technology less competitive or obsolete. If we are unable to respond adequately
to such changes, our business operations could be adversely impacted, which
could make it difficult for us to continue as a going concern.
There may be shortages of required components which could cause us to curtail
our manufacturing or incur higher than expected costs.
Component shortages or price fluctuations in such components could have an
adverse effect on our results of operations by delaying or making it more
difficult or expensive for us to fill customer orders. We purchase the
components we use in producing circuit board assemblies and other electronic
manufacturing services and we may be required to bear the risk of component
price fluctuations. In addition, shortages of electronic components have
occurred in the past and may occur in the future. These shortages and price
fluctuations could potentially have an adverse effect on our results of
operations, again by delaying or making it more difficult or expensive for us to
fill orders or to seek new orders.
Holders of CirTran common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of common
stock in connection with the Convertible Debentures.
The following table describes the number of shares of common stock that would be
issuable, assuming that the full principal amount of the Convertible Debentures
(excluding any interest accrued) was converted into shares of our common stock,
irrespective of the availability of registered shares and any conversion
limitations contained in the Convertible Debentures, and further assuming that
the applicable conversion or exercise prices at the time of such conversion or
exercise were the following amounts:
21
- --------------------------------------------------------------------------------
Shares Issuable Upon Shares Issuable Total Shares
Conversion of Upon Conversion of Issuable in
$3,000,000 Principal $1,500,000 Connection with
Amount of Principal Amount Conversion of
Convertible of Convertible Aggregate
Hypothetical Debenture by Debenture by Principal Amount
Conversion Highgate House Cornell Capital of Convertible
Price Funds, Ltd. Partners Debentures
- --------------------------------------------------------------------------------
$0.01 300,000,000 150,000,000 450,000,000
- --------------------------------------------------------------------------------
$0.02 150,000,000 75,000,000 225,000,000
- --------------------------------------------------------------------------------
$0.03 100,000,000 50,000,000 150,000,000
- --------------------------------------------------------------------------------
$0.04 75,000,000 37,500,000 112,500,000
- --------------------------------------------------------------------------------
$0.05 60,000,000 30,000,000 90,000,000
- --------------------------------------------------------------------------------
$0.10 30,000,000 15,000,000 45,500,000
- --------------------------------------------------------------------------------
Given the formula for calculating the shares to be issued in connection with
conversions of the Convertible Debentures, there effectively is no limitation on
the number of shares of common stock which may be issued in connection with
conversions of the Convertible Debentures, except for the number of shares
registered under prospectuses and related registration statements. As such,
holders of our common stock may experience substantial dilution of their
interests to the extent that Highgate and/or Cornell Capital converts amounts
under the Convertible Debentures.
Although we have entered into an agreement with Cornell wherein Cornell agreed
that it would not convert any of the principal or interest on the Cornell
Debenture or exercise any of the Warrants granted to Cornell until we had taken
the steps necessary to increase our authorized capital, if we are successful in
increasing our authorized capital, Cornell will be able to convert the Cornell
Debenture pursuant to its terms, which could result in the dilution described
above.
Our issuances of shares in connection with conversions of the Convertible
Debentures likely will result in overall dilution to market value and relative
voting power of previously issued common stock, which could result in
substantial dilution to the value of shares held by shareholders prior to sales
under this prospectus.
The issuance of common stock in connection with conversions of the Convertible
Debenture by Highgate and Cornell Capital may result in substantial dilution to
the equity interests of holders of CirTran common stock other than Highgate and
Cornell Capital. Specifically, the issuance of a significant amount of
additional common stock will result in a decrease of the relative voting control
of our common stock issued and outstanding prior to the issuance of common stock
in connection with conversions of the Convertible Debentures. Furthermore,
public resales of our common stock by Highgate and/or Cornell Capital following
the issuance of common stock in connection with conversions of the Convertible
Debentures likely will depress the prevailing market price of our common stock.
Even prior to the time of actual conversions and public resales, the market
"overhang" resulting from the mere existence of our obligation to honor such
conversions or exercises could depress the market price of our common stock,
which could make it more difficult for existing investors to sell their shares
of our common stock, and could reduce the amount they would receive on such
sales.
Existing shareholders likely will experience increased dilution with decreases
in market value of common stock in relation to our issuances of shares in
connection with the Convertible Debentures, which could have a material adverse
impact on the value of their shares.
The formulas for determining the number of shares of common stock to be issued
in connection with conversions of the Convertible Debentures are based, in part,
on the market price of the common stock. With respect to the Highgate
Convertible Debenture, the conversion price is are equal to the lower of $0.10
per share or the lowest closing bid price of our common stock over the twenty
trading days after the conversion notice is tendered by us to Highgate. With
respect to the Cornell Capital Convertible Debenture, the conversion price is
are equal to the lowest closing bid price of our common stock over the twenty
trading days after the conversion notice is tendered by us to Cornell Capital.
As a result, the lower the market price of our common stock at and around the
22
time we issue shares to Highgate or Cornell Capital in connection with the
Convertible Debentures, the more shares of our common stock Highgate or Cornell
Capital, respectively, will receive. Any increase in the number of shares of our
common stock issued upon conversion of principal or interest on the Convertible
Debentures as a result of decreases in the prevailing market price would
compound the risks of dilution described in the preceding paragraphs.
There is an increased potential for short sales of our common stock due to the
sales of shares issued to Highgate and Cornell Capital in connection with the
Convertible Debentures, which could materially effect the market price of our
stock.
Downward pressure on the market price of our common stock that likely will
result from sales of our common stock by Highgate and/or Cornell Capital issued
in connection with conversions of the Convertible Debentures, could encourage
short sales of common stock by Highgate or Cornell Capital. A "short sale" is
defined as the sale of stock by an investor that the investor does not own.
Typically, investors who sell short believe that the price of the stock will
fall, and anticipate selling at a price higher than the price at which they will
buy the stock. Significant amounts of such short selling could place further
downward pressure on the market price of our common stock, which could make it
more difficult for existing shareholders to sell their shares.
The restrictions on the number of shares issued upon conversion of the
Convertible Debentures may have little if any effect on the adverse impact of
our issuance of shares in connection with the Convertible Debentures, and as
such, Highgate and Cornell Capital may sell a large number of shares, resulting
in substantial dilution to the value of shares held by our existing
shareholders.
Both Highgate and Cornell Capital are prohibited, except in certain
circumstances, from converting amounts of the Convertible Debentures to the
extent that the issuance of shares would cause Highgate or Cornell Capital,
respectively, to beneficially own more than 4.99% of our then outstanding common
stock. These restrictions, however, do not prevent Highgate or Cornell Capital
from selling shares of common stock received in connection with a conversion,
and then receiving additional shares of common stock in connection with a
subsequent conversion. In this way, either Highgate or Cornell Capital could
sell more than 4.99% of the outstanding common stock in a relatively short time
frame while never holding more than 4.99% at one time. As a result, existing
shareholders and new investors could experience substantial dilution in the
value of their shares of our common stock.
The trading market for our common stock is limited, and investors who purchase
shares from Highgate or Cornell Capital may have difficulty selling their
shares.
The public trading market for our common stock is limited. On July 15, 2002, our
common stock was listed on the OTC Bulletin Board. Nevertheless, an established
public trading market for our common stock may never develop or, if developed,
it may not be able to be sustained. The OTCBB is an unorganized, inter-dealer,
over-the-counter market that provides significantly less liquidity than other
markets. Purchasers of our common stock therefore may have difficulty selling
their shares should they desire to do so.
It may be more difficult for us to raise funds in subsequent stock offerings as
a result of the sales of our common stock by Highgate and Cornell Capital in
connection with the Convertible Debentures.
As noted above, sales by Highgate and/or Cornell Capital likely will result in
substantial dilution to the holdings and interest of current and new
shareholders. Additionally, as noted above, the volume of shares sold by
Highgate and Cornell Capital could depress the market price of our stock. These
factors could make it more difficult for us to raise additional capital through
subsequent offerings of our common stock, which could have a material adverse
effect on our operations.
We may be required to pay liquidated damages to Highgate for failure to meet
certain obligations under the registration rights agreement.
In connection with the sale of the Debenture to Highgate, we entered into a
registration rights agreement with Highgate, pursuant to which we agreed to file
23
a registration statement within 120 days of closing the sale of the Debenture,
and to have the registration statement declared effective within 90 days of its
filing. More than 90 days have passed since the filing of the registration
statement, and it has not yet been declared effective. Under the terms of the
registration rights agreement, we were required to pay one percent of the
liquidated value of the Debenture outstanding as liquidated damages for the
period commencing one day after the date on which the registration statement
should have been declared effective and ending sixty days thereafter, plus two
percent of the liquidated value of the Convertible Debentures outstanding as
liquidated damages for each thirty-day period commencing sixty-one days after
the date on which the registration statement was to be declared effective during
which the registration statement has not been declared effective by the SEC.
Although we recently entered into an amendment to the registration rights
agreement pursuant to which Highgate agreed to a later date by which we need to
have the registration statement effective, there can be no guarantee that we
will be successful in meeting this extended deadline. As such, we may be
required to make substantial liquidated damages payments to Highgate.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Securities in the OTC market are generally more difficult to trade than those on
the Nasdaq National Market, the Nasdaq SmallCap Market or the major stock
exchanges. In addition, accurate price quotations are also more difficult to
obtain. The trading market for our common stock is subject to special
regulations governing the sale of penny stock.
A "penny stock," is defined by regulations of the Securities and Exchange
Commission as an equity security with a market price of less than $5.00 per
share. However, an equity security with a market price under $5.00 will not be
considered a penny stock if it fits within any of the following exceptions:
* the equity security is listed on Nasdaq or a national
securities exchange;
* the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
* the issuer of the equity security has been in continuous
operation for more than three years, and has net tangible
assets of at least $2,000,000.
If you buy or sell a penny stock, these regulations require that you receive,
prior to the transaction, a disclosure explaining the penny stock market and
associated risks. Furthermore, trading in our common stock would be subject to
Rule 15g-9 of the Exchange Act, which relates to non-Nasdaq and non-exchange
listed securities. Under this rule, broker-dealers who recommend our securities
to persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if their market price is at least $5.00 per share.
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
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
24
if our share price were substantially higher.
The price of our common stock is volatile, and an investor may not be able to
resell our shares at or above the purchase price.
In recent years, the stock market in general, and the OTC Bulletin Board and the
securities of technology companies in particular, has experienced extreme price
and trading volume fluctuations. These fluctuations have often been unrelated or
disproportionate to the operating performance of individual companies. These
broad market fluctuations may materially adversely affect our stock price,
regardless of operating results. Investors in our common stock should be aware
that they may not be able to resell our shares at or above the price paid for
them due to the fluctuations in the market.
There may be additional unknown risks which could have a negative effect on us
and our business.
The risks and uncertainties described in this section are not the only ones
facing CirTran. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the foregoing risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline.
Use of Proceeds
All of the shares of common stock issued in connection with conversions of the
Convertible Debenture, if and when sold, are being offered and sold by the
Highgate as the Selling Shareholder or its pledgees, donnees, transferees, or
other successors in interest. We will not receive any proceeds from those sales.
Under the Convertible Debenture and related purchase agreement, we used
$2,265,000 to repay two promissory notes to Cornell Capital Partners, LP
("Cornell"), one in the amount of $1,700,000, and the other in the amount of
$565,000.
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to
Highgate, and legal fees of $5,668. As such, of the total purchase amount of
$3,750,000, the net proceeds to us were $1,228,567. We used these proceeds for
general corporate and working capital purposes.
As discussed below in the section "MET Advisors Agreement," we presently have no
acquisitions pending or anticipated. Nevertheless, we will continue to review
potential acquisition candidates as they arise, and we may choose to use the
proceeds of the sale of the Convertible Debenture in connection with future
acquisitions.
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
This discussion should be read in conjunction with Managements' Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-KSB for the year ended December 31, 2005.
25
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the increase in revenue for the year ended
December 31, 2004 and the year ended December 31, 2005. This division is an
Asian-based, wholly owned subsidiary of CirTran Corporation and provides a
myriad of manufacturing services to the direct response and retail consumer
markets. Our experience and expertise in manufacturing enables CirTran-Asia to
enter a project at any phase: engineering and design, product development and
prototyping, tooling, and high-volume manufacturing. We anticipate that
CirTran-Asia will pursue manufacturing relationships beyond printed circuit
board assemblies, cables, harnesses and injection molding systems by
establishing complete "box-build" or "turn-key" relationships in the
electronics, retail, and direct consumer markets. This strategic move into the
Asian market has helped to elevate CirTran to an international contract
manufacturer status for multiple products in a wide variety of industries, and
has, in short order, allow us to target large-scale contracts.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines.
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006.
On March 21, 2006, we announced that we had formed a new subsidiary to provide
end-to-end services to the direct response and entertainment industries. The new
division will provide product marketing, production, media funding and
merchandise manufacturing services. Forming this new division was a necessary
step to maximize product manufacturing opportunities for CirTran's proprietary
products and to provide marketing services for individual entrepreneurs and
inventors. The new division will be headquartered in CirTran's Los Angeles
(Century City) offices and be headed by Mr. Saliba. We are presently in
development of proprietary programs to be launched in the product marketing
division, production services and media funding divisions. We are also in final
discussions on two projects for our merchandising division. We continue to
pursue opportunities in the direct response and entertainment division to
maximize manufacturing and business opportunities.
On June 1, 2006, the Company, through its newly formed subsidiary Diverse Media
Group ("Diverse Media"), signed an exclusive services agreement with the Diverse
Talent Group, Inc. ("DTG") a nationally known talent and literary agency, and
its founder and CEO Christopher Nassif. The agreement covers a five-year period
that commenced on April 1, 2006, when the companies began co-marketing and
working together, and includes the assignment of all of DTG's talent contacts
and the first right of refusal on all new and existing business to Diverse
Media.
By joining forces with DTG, the Company intends to add business and a record of
business success to this new joint venture. The Company believes that Diverse
Media can meet its needs of marketing-driven companies in the U.S. and overseas
by pairing talent and products to establish a recognizable and long-standing
brand. Management believes that talent and product together can create a
powerful brand and it is the intention of Diverse Media, in its partnership with
DTG, to develop this concept. The agreement also provides the Company with
26
access to the Diverse Talent Group's talent pool which will be a valuable
resource in developing in-house marketing programs for future products. By doing
so, CirTran anticipates that it will be able to generate a potential profit
margin from the marketing of its programs. Plans for Diverse Media also include
the establishment of a full-service music division as well as product
merchandise and direct response divisions, although there can be no guarantee
that the Company will be able to establish these additional divisions.
Included in the terms of the agreement, Diverse Media agreed to provide DTG with
a $200,000 line of credit. The line will be available to DTG in increments of
$20,000 per week, which DTG will use to cover operating expenses during its
seasonally slow periods from about June to August, which coincides with the lull
in industry production prior to its new fall programming releases. As of July
20, 2006, DTG had drawn $40,000 on the line of credit.
Fitness Products
In early June 2004, the Company entered into an exclusive manufacturing
agreement with certain Developers, including Charles Ho, the President of
CirTran-Asia. Under the terms of the agreement, CirTran, through its
wholly-owned subsidiary CirTran-Asia, has the exclusive right to manufacture
certain products developed by the Developers or any of their affiliates.
Pursuant to the agreement, we could enter into addendum agreements with the
developers with respect to particular products to be produced and manufactured.
The agreement was to be for an initial term of 36 months, and may be continued
after that on a month-to-month basis unless terminated by either party by
providing written notice.
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, from International Edge relating to the manufacture of
80,000 abdominal fitness machines. This order was the first order placed with
CirTran-Asia under the exclusive manufacturing agreement. Subsequently, on June
14, 2004, we received another order for 80,000 units of the abdominal fitness
machines, which was announced on June 16, 2004, through a separate press
release. The Company received many orders subsequent to these first orders.
Since these announcements, CirTran-Asia has manufactured, shipped, and received
payments of approximately $5,546,000. On August 13, 2004, we also announced that
on August 11, 2004 we had received new orders for Wal-Mart. The Company shipped
to Wal-Mart the complete order of abdominal fitness machines and received
payments of approximately $400,000 through the date of this Report. The units
were distributed to Wal-Mart stores throughout Canada.
On September 9, 2004, we announced that on September 6, 2004, CirTran-Asia had
been awarded the rights to manufacture the Ab Trainer Club Pro, a new abdominal
fitness machine, for Tristar Products, under an exclusive manufacturing
agreement. This new product is another type of abdominal fitness machine. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately $42,000.
On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had
been awarded the rights to manufacture the AbRoller, another type of an
abdominal fitness machine, for Tristar Products, under an exclusive
manufacturing agreement. Since this announcement, and through the date of this
Report, CirTran-Asia had manufactured and shipped units, and received payments
of approximately $1,700,000.
On September 14, 2004, we announced that on September 7, 2004, we had begun
manufacturing the Instant Abs product, another type of abdominal fitness
machine, for Tristar Products, under an exclusive manufacturing agreement. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured, and shipped units, and received payments of approximately
$640,000.
On September 30, 2004, we announced that on September 23, 2004, CirTran-Asia had
been awarded the rights to manufacture the Denise Austin Pilates product, a
pilates fitness machine, for Tristar Products, under an exclusive manufacturing
agreement. Since this announcement, and through the date of this Report,
CirTran-Asia had manufactured and shipped units, and received payments of
approximately $85,000.
27
On April 28, 2005, CirTran-Asia announced that it has been awarded a contract
(the "April 2005 Agreement") from Guthy - Renker Corporation ("GRC") to be the
exclusive manufacturer of a new fitness machine (the "Fitness Product") for the
sold-on-TV direct response industry. Pursuant to the April 2005 Agreement, GRC
agreed to purchase all of its requirements of the Fitness Product during the
term of the April 2005 Agreement, which is defined as running from the signing
of the agreement through the time when the Fitness Product is not being sold in
quantity. Since signing the April 2005 Agreement, we have received orders
totaling approximately $1,370,000. Since these announcements, CirTran-Asia has
manufactured and shipped orders and has received $1,033,000 as payment for such
shipments.
New Products
On August 11, 2004, we announced that CirTran-Asia received a purchase order
from Emson in New York, on August 10, 2004 relating to the manufacture of a
household cooking appliance for hot dogs and sausages. Since these
announcements, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately
$1,630,000.
On October 1, 2004, we entered into an agreement with Transactional Marketing
Partners, Inc. ("TMP"), for consulting services. Pursuant to the agreement, we
engaged TMP to provide strategic planning and for introduction of new business
to us. Under the agreement, we agreed to pay to TMP a fee of ten percent of the
net proceeds received by us from business brought to us by TMP. The fee is to be
paid within 15 calendar days following the end of the month in which we receive
the net proceeds. Additionally, we agreed to pay $7,500 during each of the first
six months of the term of the agreement, with such payments being viewed as an
advance against the fee to be earned. The advance payments are not refundable,
but will be deducted from fees earned by TMP. The agreement had an initial term
of six months, beginning October 1, 2004, and could automatically extended for
successive six-month periods unless either party gives written notice at least
30 days prior to the expiration of the term of the agreement of its intent not
to renew. Additionally, we may terminate the agreement at any time by giving 30
days' written notice. In March 2006, the parties have agreed to six-month
extensions through September 2006. The parties will evaluate the relationship at
that time and decide if there needs to be another extension. To date the
relationship has proven successful, resulting in multiple new manufacturing
relationships.
On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing
Agreement with Advanced Beauty Solutions L.L.C. ("ABS"), a company relating to
the manufacture of a hair product in California. In early October 2005, we were
notified that ABS had defaulted on its obligation to its financing company. We
have stopped shipping under credit and are in the process of exercising our
rights permitted by the agreements.
On July 7, 2005, CirTran Corporation signed another Exclusive Manufacturing
Agreement with ABS, relating to the manufacture of a hair dryer product in
California. We had already begun shipment on previous contracts and were
projecting to begin early in 2006.
In October 2005, following the notice of ABS's default, we terminated the
agreement for both products based on the default. In January 2006, following
efforts to resolve the disputes with ABS, the Company filed a lawsuit against
ABS, claiming breach of contract, interference with contractual relationships,
unjust enrichment, and fraud, and seeking damages from ABS.
With respect to the flat iron products, through October 2005, CirTran had
shipped directly to ABS approximately $4,746,000 worth of the product, and
CirTran had received from ABS or its finance company a total amount of
approximately $788,000. In November 2005, we repossessed from ABS approximately
$2,341,000 worth of the products in the United States, as we were permitted to
do pursuant to the agreement.
Since November 2005, we have been pursuing our rights under the agreement and
have been offering the flat iron product for sale directly to ABS's customers.
In doing so, we sold to ABS's international customers directly approximately
$426,000 worth of the flat iron product. The shipments have all been paid in
28
full. These products shipped were not part of the repossessed inventory.
On January 24, 2006, ABS filed a voluntary petition for relief under chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the "ABS
Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
settlement were read into the ABS Bankruptcy Court's record at the Hearing on
the Settlement Motion and the March 24, 2006 hearing on the Sale Motion
("Proposed Modifications"). Written notice of the Proposed Modifications was
provided to creditors and parties in interests on March 27, 2006, and the
Declaration of James C. Bastian, Jr., attesting that no objections to the
Proposed Modifications have been received by ABS, was filed with the ABS
Bankruptcy Court.
On June 6, 2006, the Company and ABS signed an agreement (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS.
Pursuant to the settlement of ABS's bankruptcy proceedings and the Asset
Purchase Agreement, the Company has an allowed claim against the ABS's estate in
the amount of $2,350,000, of which $750,000 is to be credited to the purchase of
substantially all of ABS's assets. Under the settlement, the Company shall be
allowed to participate as a general unsecured creditor of ABS's estate in the
amount of $1,600,000 on a pari passu basis with the $2,100,000 general unsecured
claim of certain insiders of ABS and subject to the prior payment of certain
secured, priority, and non-insider claims in the amount of approximately
$1,507,011.
Under the Asset Purchase Agreement, the Company agreed to purchase substantially
all of ABS's assets in exchange for:
i) a cash payment in the amount of $1,125,000;
ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
iii) the assumption of any assumed liabilities; and
iv) the obligation to pay ABS a royalty equal to $3.00 per True
Ceramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
The Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings (collectively, the "Assets").
Under the Asset Purchase Agreement, the Royalty Obligation is capped at
$4,135,000. To the extent the amounts paid to ABS on account of the Royalty
Obligation equal less than $435,000 on the 2 year anniversary of the Closing,
then, within 30 days of such anniversary, the Company agreed to pay ABS an
amount equal to $435,000 less the royalty payments made to date. As part of the
settlement, the Company agreed to exchange general releases with, among others,
ABS, Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolved a related dispute with
ICG in which ICG assigned $65,000 of its secured claim against ABS to the
Company.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
29
(a) The Royalty Obligation payments will be made exclusively to
ICG and MFC (collectively, the "Secured Parties") until (i) the Secured
Parties have been paid in full on account of their $1,243,208.44
secured claim, or (ii) the Secured Parties have been paid $100,000 in
payments under the Royalty Obligation, whichever comes first.
(b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an individual
with an allowed claim (in the amount of $20,000).
(c) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation payments
will be used for distribution to allowed general unsecured claims not
including those of the Company and certain insiders with unpaid notes
(the "Insider Noteholders").
(d) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among the
Insider Noteholders (with a total allowed aggregate claim of
$2,100,000), and the Company (with a general unsecured claim in the
amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the
Company begins to share in the Royalty Obligation payments is $435,000.
On December 28, 2005, we signed an Exclusive Manufacturing Agreement (the
"Agreement") with Arrowhead Industries, Inc. ("Arrowhead"), pursuant to which we
will become the exclusive manufacturer of a tool for assisting with the removal
of door hinges called the "Hinge Helper" (the "Product"). Under the Agreement,
Arrowhead agreed to buy the Product exclusively from us for the period of the
Agreement, which is three years. The Product will be manufactured by us or by
sub-manufacturers selected by us.
The Agreement provides that Arrowhead will own all right, title, and interest in
the Product, and will sell and market the Product under its trademarks, service
marks, or trade names.
On January 9, 2006, we issued a press release which referred, in the title, to
the Agreement as a "$22 Million Exclusive Manufacturing Agreement." The dollar
amount referenced relates to the potential amount of income or revenue which we
may receive over the anticipated life of the Agreement.
CirTran announced on January 9, 2006, that Arrowhead Industries, Inc., of
Windermere, Florida, had awarded us an exclusive contract to manufacture its
patented Hinge Helper (TM) do-it-yourself utility tool for the home. The Hinge
Helper will be manufactured by CirTran-Asia, the Company's China-based
subsidiary. The exclusive manufacturing contract for the product is for three
years. Arrowhead has filmed a Hinge Helper infomercial for TV with an airing
date scheduled for late April.
The Hinge Helper is a unique hand tool designed and developed for use by
household customers as well as tradesmen. Recognized by the U.S. Patent Office
(#6,308,390 B1), its trademark and patent are owned by and registered to
Arrowhead. The specific advantage of the Hinge Helper is its ease-of-use and
simplistic design. It can be applied to any residential hinge on wood, metal or
composite doors, and is being manufactured with highly-durable materials,
enabling it to carry a lifetime guarantee.
The contract is for three years, and Arrowhead agreed to purchase a minimum of
ten million units of the Product (the "Minimum Quantity"), subject to the terms
and conditions of the Agreement. Arrowhead and CirTran have agreed on the
Minimum Quantity in good faith, although the parties acknowledged that in
certain circumstances described in the agreement, the agreement may be
terminated prior to the sale of the entire Minimum Quantity. Arrowhead agreed to
submit purchase orders for the Product from time to time in accordance with the
terms of the agreement. Arrowhead agreed to pay CirTran for the Product
purchased at the prices ranging from $2.95 to $1.90 per unit, depending on the
cumulative number of units of Product which have been purchased by Arrowhead.
30
Arrowhead will also be entitled to a rebate equal to 10% of the purchase Price
paid for Product in the previous Tier. Rebates will be payable only in the form
of a credit memo against future purchases. Rebate credit memos will not be paid
in cash and may not be applied against outstanding balances. We will calculate
eligibility for the Rebate as soon as practicable following the end of the month
in which a new Tier is entered.
We have produced hand made samples, which have been sent to Arrowhead. These
were approved and we are awaiting final approval for the production samples that
were supplied at the end of March 2006. Once the production samples are
approved, we will start production according to the release schedule that should
be provided by Arrowhead shortly thereafter. As of July 20, 2006, the product
samples had been approved. Arrowhead had released and the Company shipped 1,500
units to test media. We are awaiting final production releases.
Electronics Business and Lines of Products
On June 10, 2005, we announced that Racore Technology Inc., ("Racore"), a
subsidiary of CirTran Corporation, received a purchase order from the New York
Fire Department, an established city public department on the east coast for
fiber optic Ethernet network adapters. Since this announcement, the product has
been manufactured and shipped, and a payment of $9,000 has been received. We
continue to market and solicit orders on the Racore product line from various
commercial and public agency clients.
On June 23, 2005, we announced that CirTran Corporation entered the "sold-on-TV"
market by having its CirTran-Asia subsidiary build consumers' electronics
products in China, and is now bringing business to the United States,
refurbishing popular skill-stop slot machines from Japan for home amusement use
in the United States. We continue to receive the imported machines from Rock
Bottom Slots, perform the conversion and refurbishment services and ship
directly to the customer.
On June 24, 2005, we announced that Racore received a purchase order from
Lockheed-Martin, a well-known aerospace manufacturing company for fiber optic
token-ring network adapters. Direct sales of new and repeat business from this
company have totaled more than $30,000. Since this announcement the product has
been manufactured and shipped, and payment has been received. As of July 20,
2006, we had shipped an additional $45,000 worth of product to this company.
On July 22, 2005, we announced that Racore received a purchase order from the
United States Air Force for OptiCORE network interface cards. Since this
announcement, the product has been manufactured and shipped, and payments of
$15,000 have been received.
On August 1, 2005, we announced that Racore received a purchase order for fiber
optics products from Cherokee City Appraisal District, another city public
department located in the southern United States for fiber optic PCI Ethernet
network interface cards with VF-45 connectors. Since this announcement, the
product has been manufactured and shipped, and a payment of $1,030 has been
received.
On August 4, 2005, we announced that Racore received a purchase order from Walt
Disney World, a well-known amusement park in the southeastern United States, for
more than $21,000 worth of network interface cards. Since this announcement, the
product has been manufactured and shipped, and payment has been received.
On August 9, 2005, we announced that CirTran Corporation completed the first
phase of the redevelopment of the next-generation SafetyNet(TM) RadioBridge(TM).
Since this announcement, the Company has completed working on the second phase
of the contract. On March 14, 2006, we announced that we had received a $250,000
order to build and deliver the first production run of the next generation
SafetyNet(TM) RadioBridge(TM) which we redesigned at the request and on behalf
of Aegis Assessments, Inc., a Scottsdale, Arizona-based homeland security
contractor. We delivered the new, redesigned units and received payment in full
from Aegis in April 2006.
On September 13, 2005, we announced that Racore had been named an "approved
vendor" by the City of New York. Racore began its current business relationship
31
with the City of New York in April when it received a request for an evaluation
unit of the Racore M8190A Fiber Optic Fast Ethernet Network Adapters with
Volition Patch Cords. Racore subsequently received an order placed through one
of its value-added resellers. Since this announcement, the product has been
manufactured and shipped, and a payment of $4,500 has been received.
On October 11, 2005, we announced that CirTran Corporation was opening a
satellite office in Los Angeles in accordance with the Company's internal
expansion program. The new 2,500-square foot office will be located on the 17th
floor at 1875 Century Park East in the Century City Entertainment and Business
District of Los Angeles. Scheduled to open in late November, the office will
serve as headquarters for CirTran's business development and strategic planning
activities for the Company's multiple business divisions including electronics,
consumer products, direct response/retail and "as sold-on-TV" products. Current
plans call for CirTran to open additional satellite offices in New York and
London in 2006. Since this announcement, we have leased office space in Los
Angeles, California.
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006
CirTran Products was established to pursue manufacturing relationships on both a
contracted and proprietary basis in the consumer products industry. Proprietary
products will be product lines where the intellectual property (logo, trade name
etc.) are owned by CirTran Products as well as exclusively manufactured by
CirTran Corporation. The marketing efforts may also be managed exclusively by
CirTran, or CirTran may choose to engage third party consultants or partner with
an independent marketing firm. CirTran Products also intends to pursue contract
manufacturing relationships in the consumer products industry which can include
product lines including: home/garden, kitchen, health/beauty, toys, licensed
merchandise and apparel for film, television, sports and other entertainment
properties. Licensed merchandise and apparel can be defined as any item that
bears the image of, likeness, or logo of a product sold or advertised to the
public. Licensed merchandise and apparel are sold and marketed in the
entertainment (film and television) and sports (sports franchises) industries.
As of July 20, 2006, we have concentrated our product development efforts into
three areas, home/kitchen appliances, beauty products and licensed merchandise.
We anticipate that these products will be introduced into the market under one
uniform brand name or under separate trademarked names owned by CirTran
Products.
Industry Background
The contract manufacturing industry specializes in providing the program
management, technical and administrative support and manufacturing expertise
required to take products from the early design and prototype stages through
volume production and distribution. The goal is to provide a quality product,
delivered on time and at the lowest cost, to the client. This full range of
services gives the client an opportunity to avoid large capital investments in
plant, inventory, equipment and staffing and to concentrate instead on
innovation, design and marketing. By using our contract manufacturing services,
our customers have the ability to improve the return on their investment with
greater flexibility in responding to market demands and exploiting new market
opportunities.
We believe two important trends have developed in the contract manufacturing
industry. First, we believe customers increasingly require contract
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis where the customer supplies
all materials and the contract manufacturer supplies only labor. Turnkey
contracts involve design, manufacturing and engineering support, the procurement
of all materials, and sophisticated in-circuit and functional testing and
distribution. The manufacturing partnership between customers and contract
manufacturers involves an increased use of "just-in-time" inventory management
techniques that minimize the customer's investment in component inventories,
personnel and related facilities, thereby reducing costs.
32
We believe a second trend in the industry, that relates to our electronics
division, has been the increasing shift from pin-through-hole, or PTH, to
surface mount technology, or SMT, interconnection technologies. Surface mount
and pin-through-hole printed circuit board assemblies are printed circuit boards
on which various electronic components, such as integrated circuits, capacitors,
microprocessors and resistors are mounted. These assemblies are key functional
elements of many types of electronic products. PTH technology involves the
attachment of electronic components to printed circuit boards with leads or pins
that are inserted into pre-drilled holes in the boards. The pins are then
soldered to the electronic circuits. The drive for increasingly greater
functional density has resulted in the emergence of SMT, which eliminates the
need for holes and allows components to be placed on both sides of a printed
circuit. SMT requires expensive, highly automated assembly equipment and
significantly more operational expertise than PTH technology. We believe the
shift to SMT from PTH technology has increased the use of contract manufacturers
by OEMs seeking to avoid the significant capital investment required for
development and maintenance of SMT expertise.
Electronics Assembly and Manufacture
As of December 31, 2005, approximately 23% of our revenues were generated by our
low-volume electronics assembly activities, which consist primarily of the
placement and attachment of electronic and mechanical components on printed
circuit boards and flexible (i.e., bendable) cables. We also assemble
higher-level sub-systems and systems incorporating printed circuit boards and
complex electromechanical components that convert electrical energy to
mechanical energy, in some cases manufacturing and packaging products for
shipment directly to our customers' distributors. In addition, we provide other
manufacturing services, including refurbishment and remanufacturing. We
manufacture on a turnkey basis, directly procuring any of the components
necessary for production where the OEM customer does not supply all of the
components that are required for assembly. We also provide design and new
product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more value-added
services, and price-sensitive, high-volume production. Our goal is to offer
customers significant competitive advantages that can be obtained from
manufacturing outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management and increased
purchasing power.
As part of our electronics assembly and manufacture focus, in April 2004, we
entered into a Preferred Manufacturing Agreement (the "Broadata Agreement") with
Broadata Communications, Inc. ("Broadata"). Under this agreement, we will
perform exclusive "turn-key" manufacturing services handling most of Broadata's
manufacturing operations from material procurement to complete finished
box-build. Specifically, Broadata agreed that during the three-year term of the
Broadata Agreement, we would be the exclusive manufacturer of the Broadata
products covered by the Broadata Agreement. Under the Broadata Agreement,
Broadata issues us purchase orders specifying the work to be completed and the
delivery time. The price paid for work performed under the Broadata Agreement is
our costs plus 10%, plus an assembly fee of $0.07 per component and an hourly
charge of $18 per hour for manual assembly, mechanical assembly, and testing,
subject to periodic review and adjustment. We agreed to ship the products
manufactured FOB West Valley City, Utah. Beginning in May 2005, we began
handling a portion of Broadata's manufacturing operations from material
procurement to complete finished box-build. The initial term of the agreement is
three years, continuing month to month thereafter unless terminated by either
party.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation ("Racore"), we design,
manufacture, and distribute Ethernet cards. These components are used to connect
computers through fiber optic networks. In addition, we produce private label,
custom designed networking products and technologies on an OEM basis. Our
products serve major industrial, financial, and telecommunications companies
worldwide. We market our products through an international network of
distributors, value added resellers, and systems integrators who sell, install,
and support our entire product catalogue.
33
Additionally, we have established, and continue to seek to establish, key
business alliances with major multinational companies in the computing and data
communications industries for which we produce private label, custom designed
networking products and technologies on an OEM basis. These alliances generally
require that Racore either develop custom products or adapt existing Racore
products to become part of the OEM customer's product line. Under a typical
contract, Racore provides a product with the customer's logo, packaging,
documentation, and custom software and drivers to allow the product to appear
unique and proprietary to the OEM customer. Contract terms generally provide for
a non-recurring engineering charge for the development and customization
charges, together with a contractual commitment for a specific quantity of
product over a given term.
Contract Manufacturing
Through our subsidiary, CirTran-Asia, we design, engineer, manufacture and
supply products in the electronics, consumer products and general merchandise
industries for various marketers, distributors and national retailers. This new
division is our Asian-based, wholly owned subsidiary, and provides manufacturing
services to the direct response and retail consumer markets. Our experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase:
engineering and design; product development and prototyping; tooling; and
high-volume manufacturing. This strategic move into the Asian market has helped
to elevate CirTran to an international contract manufacturer status for multiple
products in a wide variety of industries, and has, in short order, allowed us to
target large-scale contracts.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. CirTran-Asia intends to pursue manufacturing
relationships beyond printed circuit board assemblies, cables, harnesses and
injection molding systems by establishing complete "box-build" or "turn-key"
relationships in the electronics, retail, and direct consumer markets.
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and reliance
upon, the use of manufacturing specialists by many OEMs, marketing firms,
distributors and national retailers. We believe the trend towards outsourcing
manufacturing will continue. OEMs utilize manufacturing specialists for many
reasons, including the following:
* To Reduce Time to Market. Due to intense competitive pressures
in the electronics and general manufacturing industry, OEMs are faced with
increasingly shorter product life-cycles and, therefore, have a growing need to
reduce the time required to bring a product to market. We believe OEMs can
reduce their time to market by using a manufacturing specialist's manufacturing
expertise and infrastructure.
* To Reduce Investment. The investment required for internal
manufacturing has increased significantly as products have become more
technologically advanced and are shipped in greater unit volumes. We believe use
of manufacturing specialists allows OEMs to gain access to advanced
manufacturing capabilities while substantially reducing their overall resource
requirements.
* To Focus Resources. Because the electronics industry is
experiencing greater levels of competition and more rapid technological change,
many OEMs are focusing their resources on activities and technologies which add
the greatest value to their operations. By offering comprehensive electronics
assembly and related manufacturing services, we believe manufacturing
specialists allow OEMs to focus on their own core competencies such as product
development and marketing.
* To Access Leading Manufacturing Technology. Electronic
34
products and electronics manufacturing technology have become increasingly
sophisticated and complex, making it difficult for OEMs to maintain the
necessary technological expertise to manufacture products internally. We believe
OEMs are motivated to work with a manufacturing specialist to gain access to the
specialist's expertise in interconnect, test and process technologies.
* To Improve Inventory Management and Purchasing Power.
Electronics industry OEMs are faced with increasing difficulties in planning,
procuring and managing their inventories efficiently due to frequent design
changes, short product life-cycles, large required investments in electronic
components, component price fluctuations and the need to achieve economies of
scale in materials procurement. OEMs can reduce production costs by using a
manufacturing specialist's volume procurement capabilities. In addition, a
manufacturing specialist's expertise in inventory management can provide better
control over inventory levels and increase the OEM's return on assets.
An important element of our strategy is to establish partnerships with major and
emerging OEM leaders in diverse segments across the electronics industry. Due to
the costs inherent in supporting customer relationships, we focus our efforts on
customers with which the opportunity exists to develop long-term business
partnerships. Our goal is to provide our customers with total manufacturing
solutions for both new and more mature products, as well as across product
generations.
Another element of our strategy is to provide a complete range of manufacturing
management and value-added services, including materials management, board
design, concurrent engineering, assembly of complex printed circuit boards and
other electronic assemblies, test engineering, software manufacturing, accessory
packaging and post-manufacturing services. We believe that as manufacturing
technologies become more complex and as product life cycles shorten, OEMs will
increasingly contract for manufacturing on a turnkey basis as they seek to
reduce their time to market and capital asset and inventory costs. We believe
that the ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it serves. In
addition, we believe that due to the difficulty and long lead-time required to
change manufacturers, turnkey projects generally increase an OEM's dependence on
its manufacturing specialist, which can result in a more stable customer base.
In our high volume electronics, consumer products, and general merchandise
manufacturing divisions, we believe we add value by providing turn-key solutions
in design, engineering, manufacturing and supply of products to our clients.
Suppliers; Raw Materials
Our sources of components for our electronics assembly business are either
manufacturers or distributors of electronic components. These components include
passive components, such as resisters, capacitors and diodes, and active
components, such as integrated circuits and semi-conductors. Our suppliers
include Siemens, Muriata-Erie, Texas Instruments, Fairchild, Harris and
Motorola. Distributors from whom we obtain materials include Avnet, Future
Electronics, Digi-key and Force Electronics. Although we have experienced
shortages of various components used in our assembly and manufacturing
processes, we typically hedge against such shortages by using a variety of
sources and, to the extent possible, by projecting our customer's needs.
Research and Development
During 2005 and 2004, CirTran Corporation spent approximately $200,000 and
$75,000, respectively, on research and development of new products and services.
The costs of that research and development were paid for by our customers. In
addition, during the same periods, our subsidiary, Racore, spent approximately
$45,000 and $42,536, respectively. None of Racore's expenses were paid for by
its customers. We remain committed, particularly in the case of Racore, to
continuing to develop and enhance our product line as part of our overall
business strategy.
35
Beginning in 2004, Racore started working more aggressively on marketing
existing products by simplifying ordering and sales processing to existing
customers. We are also working towards some cost reduced versions of existing
product line and adding new sales channels. We are also in the process of
expanding the current product line, adding new product categories to existing
sales channels, along with products with reduced development costs, quicker time
to market, higher profit margins, greatly reduced support costs, less pressure
from competitors and shorter sales cycles.
In the coming months, we anticipate that Racore will redesign some of its
products to reduced versions of existing products, but also similar yet unique
products that will satisfy market needs which currently have no deliverable or
affordable solutions. These products will realize reduced development costs,
quicker time to market, higher profit margins, greatly reduced support costs,
less pressure from competitors, and shorter sales and delivery cycles. These
products will leverage our expertise in the areas of fiber optics, security, and
portability.
We possess advanced design and engineering capabilities with experienced
professional staffs at both our Salt Lake City and ShenZhen offices for
electrical, software, mechanical and industrial design. This provides the end
client a total solution for original design, re-design and final design of
products.
Sales and Marketing
As of July 20, 2006, we had three individuals on our internal sales staff, and
we have continued to pursue sales representative relationships with firms that
work as independent contractors in generating new business. We signed an
agreement with TMP and have other outside independent contractors that we
continue to work with. This is advantageous to the Company, as it provides the
Company with a broad sales network with no direct cost. It is our intention to
continue pursuing sales representative relationships as well as internal
salaried sales executives. Early in 2006 the Company opened a dedicated
satellite sales/engineering office in Los Angeles to headquarter all business
development activities companywide. The Company has since begun staffing this
office with administrative and project management staff. The Company is still
pursuing product development and business development professionals with
concentrated efforts on the direct response, product and retail distribution
divisions as well as sales executives for the electronics manufacturing
division.
We are working aggressively to market existing products through current sales
channels. We will also add major new conduits to deliver products and services
directly to end users, as well as motivate our distributors, partners, and other
third party sales mechanisms. We continue to simplify and improve the sales,
order, and delivery process. We are also pursuing strategic relationships with
retail distribution firms to engage with us in a reciprocal relationship where
they would act as CirTran's retail distribution arm and we would act as their
manufacturing arm with both parties giving the other priority and first
opportunity to work on the other's products.
Historically, we have had substantial recurring sales from existing customers,
though we continue to seek out new customers to generate increased sales. We
treat sales and marketing as an integrated process involving direct salespersons
and project managers, as well as senior executives. We also use independent
sales representatives in certain geographic areas. We have also engaged
strategic consulting groups to make strategic introductions to generate new
business. This strategy has proven successful, and has already generated
multiple manufacturing contracts. These relationships were responsible for a
portion of sales generated in 2005 and we anticipate will be a major factor in
our sales growth for 2006 and 2007.
During the typical sales process, a customer provides us with specifications for
the product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
In 2005, 38% of our net sales were derived from pre-existing customers, whereas
during the year ended December 31, 2004, only 20% of our net sales were derived
from customers that were also customers during 2003. In 2005, 62% of our sales
36
were derived from new business, with the majority of those sales being secured
by exclusive manufacturing contracts. In 2005, our major new customer was
Advanced Beauty Solutions, LLC which accounted for about 35% of our net sales.
Our second and third largest customers for 2005 were also new customers, Tristar
Products with about 14%, and Emson with 9% of our net sales. Our largest
pre-existing customer was Dynojet Research Inc. with over 8% of our net sales.
We anticipate that our exclusive manufacturing contracts with Guthy-Renker,
Reliant and Arrowhead Industries will contribute significantly to our sales for
2006 and 2007 as those projects are scheduled to roll out in the second and
third quarter of 2006. Historically, a small number of customers accounted for a
significant portion of our electronics assembly and manufacture division net
sales.
Our expansion into China manufacturing has allowed us to increase our sales,
manufacturing capacity and output with minimal capital investment required. By
using various subcontractors among which are Zhejiang Hengtai Machinery
Manufacturing Co., Ltd., which manufactures the Supreme Pilates and Zhejiang
Cuiori Electrical Appliances Co., Ltd,, which manufactures the Perfect Grill, we
leverage our upfront payments for inventories and tooling to control costs and
receive benefits from economics of scale in Asian manufacturing facilities.
These expenses can be upwards of $100,000 per product. The Company will,
depending on the contract, prepay anywhere from 10% to 50% of the purchase
orders for materials to some of the factories we have contracts with. In
exchange for theses financial commitments, the Company receives dedicated
manufacturing responsiveness hence eliminating the costly expense associated
with capitalizing complete proprietary facilities.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. As of July 20, 2006, our backlog was
approximately $1,152,000 with confirmed deliveries dates. The Company also has a
total of approximately $90,000,000 of signed contracts for blanket quantities
(i.e. the full amount of the contract), in which the customer agrees to purchase
a set amount and will issue purchases against the contract when product is
needed. The majority of these blanket quantities orders are two contracts from
Arrowhead for $22,000,000 and Reliant for $30,000,000. We have a $30,000,000
contract from Guthy - Renker Corporation, a contract from Emson for about
$7,000,000 along with a few other smaller contracts. Each contract contains a
buy out clause that varies, depending on the product and amounts of product
agreed upon.
In December of 2004, we issued a press release relating to our hiring of Mr.
Patrick L. Gerrard Sr. as a director of our corporate Quality Control Systems.
We also announced that we had received an order for the United States Air Force.
The products were built and shipped to them.
Management has continued its internal plan for increasing sales, reducing costs
and restructuring the overall financial condition. As part of this strategy,
sales for the Company in 2005 were greater than sales in 2004, and the Company
reached an offer in compromise with the Internal Revenue Service in 2004 and the
State of Utah in 2006 settling all outstanding tax liabilities.
The year 2004 was a critical year for CirTran Corporation. The most significant
event for CirTran in 2004 was the acceptance of the offer in compromise by the
Internal Revenue Service settlement of the Company's prior tax obligation. This
has been a top priority for management and the board of directors as the
Company's viability was in question. With this new milestone, management feels
the Company is financially stable and in position to continue its plan to grow.
In addition, our effort to enter high-volume manufacturing in the electronics,
consumer products and general merchandise industries has had a dramatic impact
to the Company's sales and backlog. Also, management's constant pursuit of
establishing the Company as a world-class manufacturer was recognized with the
Company receiving ISO9001:2000 certification on March 31, 2005. This is an
international monitoring agency that requires all companies who are certified to
comply with a set standard of policies on quality and manufacturing.
Material Contracts and Relationships
We generally use form agreements with standard industry terms as the basis for
our contracts with our customers. The form agreements typically specify the
general terms of our economic arrangement with the customer (number of units to
37
be manufactured, price per unit and delivery schedule) and contain additional
provisions that are generally accepted in the industry regarding payment terms,
risk of loss and other matters. We also use a form agreement with our
independent marketing representatives that features standard terms typically
found in such agreements.
Cogent Agreement
On September 14, 2003, we entered into an agreement with Cogent Capital Corp.
("Cogent"), under which we engaged Cogent to provide strategic planning and
advisory services relating to acquisitions and with a view to obtaining a
listing on either the American Stock Exchange or the NASDAQ. In a September 2003
press release, we mentioned that Cogent was assisting us in connection with a
proposed direct investment in CirTran, but that transaction was not closed. We
continue to work with Cogent, and they continue to provide strategic planning
and advice.
MET Advisors Agreement
In August 2003, we entered into an agreement with MET Advisors ("MET") under
which we retained MET to identify and provide detailed information on potential
acquisition targets. Pursuant to the MET agreement, we agreed to pay MET a
transaction fee equal to 5% of the total value of the transaction (but not less
than $100,000), together with expenses incurred by MET in connection with the
potential acquisition.
In January and March 2004, we issued press releases relating to a new agreement
with a contract electronics manufacturer. The January 21, 2004, press release
stated that we had entered into a Letter of Intent to purchase all the assets of
a leading contract electronics manufacturer of printed circuit board assemblies
based in Orange County, California. The March 2, 2004 press release was issued
to give an update on the due diligence process. However, the letter of intent
expired on March 5, 2004, and no agreement was reached regarding an extension.
We have decided not to pursue further negotiations relating to this matter.
In March 2004, we issued two additional press releases relating to our potential
acquisition of an interest in a manufacturer of digital fiber optic cable
equipment. On March 18, 2004, we announced that we had signed a letter of intent
to acquire a minority interest in a manufacturer based in southern California,
and that in connection with the acquisition, we anticipated that we would enter
into an exclusive manufacturing agreement. On March 26, 2004, we announced that
we anticipated that we expected to finalize the acquisition of the interest and
the exclusive agreement. On April 13, 2004, we entered into a stock purchase
agreement with Broadata Communications, Inc., a California corporation
("Broadata") under which we purchased 400,000 shares of Broadata Series B
Preferred Stock (the "Broadata Preferred Shares") for an aggregate purchase
price of $300,000. The Broadata Preferred Shares are convertible, at our option,
into an equivalent number of shares of Broadata common stock, subject to
adjustment. The Broadata Preferred Shares are not redeemable by Broadata. As a
holder of the Broadata Preferred Shares, we have the right to vote the number of
shares of Broadata common stock into which the Broadata Preferred Shares are
convertible at the time of the vote. Separate from the acquisition of the
Broadata Preferred Shares, we also entered into a Preferred Manufacturing
Agreement with Broadata. Under this agreement, we will perform exclusive
"turn-key" manufacturing services handling most of Broadata's manufacturing
operations from material procurement to complete finished box-build of all of
Broadata's products. The initial term of the agreement is three years,
continuing month to month thereafter unless terminated by either party.
As of July 20, 2006, we had no other acquisitions planned or anticipated. We
continue to work with MET and Cogent with respect to potential acquisitions.
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
38
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
Furthermore, the Asian manufacturing market is growing at a rapid pace.
Particularly in China, therefore, management feels that the Company is
strategically positioned to hedge against unforeseen obstacles and continues its
efforts to increase establishing additional relationships with manufacturing
partners, facilities and personnel.
Regulation
We are subject to typical federal, state and local regulations and laws
governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee safety laws and
regulations and labor practices laws and regulations. We are not required under
current laws and regulations to obtain or maintain any specialized or
agency-specific licenses, permits, or authorizations to conduct our
manufacturing services. Other than as discussed in "Item 3 - Legal Proceedings"
concerning delinquent payroll taxes, we believe we are in substantial compliance
with all relevant regulations applicable to our business and operations.
Employees
As of July 20, 2006, we employed a total staff of 104 persons in the United
States. In our Salt Lake headquarters, we employed 101 persons: 6 in
administrative positions, 5 in engineering and design, 88 in clerical and
manufacturing, and 2 in sales. In our sales office in Los Angeles, we employed 3
persons: 1 administrative and sales, 1 project manager, and 1 clerical
assistant. At this time we are actively searching for additional qualified sales
staff for our new office. In our CirTran-Asia division, we employed 7 people: 1
administrative, 2 accounting staff, 2 quality engineers, and 2 design engineers.
We believe that our relationship with our employees is good.
Corporate Background
Our core business was commenced by Circuit Technology, Inc. ("Circuit"), in 1993
by our president, Iehab Hawatmeh. Circuit enjoyed increasing sales and growth in
the subsequent five years, going from $2.0 million in sales in 1994 to $15.4
million in 1998, leading to the purchase of two additional SMT assembly lines in
1998 and the acquisition of Racore Computer Products, Inc., in 1997. During that
period, Circuit hired additional management personnel to assist in managing its
growth, and Circuit executed plans to expand its operations by acquiring a
second manufacturing facility in Colorado. Circuit subsequently determined in
early 1999, however, that certain large contracts that accounted for significant
portions of our total revenues provided insufficient profit margins to sustain
the growth and resulting increased overhead. Furthermore, internal accounting
controls then in place failed to apprise management on a timely basis of our
deteriorating financial position.
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until July 1, 2000, when we issued a total of 10,000,000 shares
of our common stock (150,000,000 of our shares as presently constituted) to
acquire, through our wholly-owned subsidiary, CirTran Corporation (Utah),
substantially all of the assets and certain liabilities of Circuit.
In 1987, Vermillion Ventures, Inc. filed an S-18 registration statement with the
United States Securities and Exchange Commission ("SEC") but did not at that
time become a registrant under the Securities Exchange Act of 1934 ("1934 Act").
39
From 1989 until 2000, Vermillion did not make any filings with the SEC under the
1934 Act. In July 2000, we commenced filing regular annual, quarterly, and
current reports with the SEC on Forms 10-KSB, 10-QSB, and 8-K, respectively, and
have made all filings required of a public company since that time. In February
2001, we filed a Form 8-A with the SEC and became a registrant under the 1934
Act. We may be subject to certain liabilities arising from the failure of
Vermillion to file reports with the SEC from 1989 to 1990, but we believe these
liabilities are minimal because there was no public market for the common shares
of Vermillion from 1989 until the third quarter of 1990 (when our shares began
to be traded on the Pink Sheets) and it is likely that the statute of
limitations has run on whatever public trades in the shares of our common stock
may have taken place during the period during which Vermillion failed to file
reports.
On August 6, 2001, we effected a 1:15 forward split and stock distribution which
increased the number of our issued and outstanding shares of common stock from
10,420,067 to 156,301,005. We also increased our authorized capital from
500,000,000 to 750,000,000 shares.
The short- and long-term success of CirTran is subject to certain risks, many of
which are substantial in nature and outside the control of CirTran. You should
consider carefully the following risk factors, in addition to other information
contained herein. When used in this Report, words such as "believes," "expects,"
"intends," "plans," "anticipates," "estimates," and similar expressions are
intended to identify forward-looking statements, although there may be certain
forward-looking statements not accompanied by such expressions. You should
understand that several factors govern whether any forward-looking statement
contained herein will or can be achieved. Any one of those factors could cause
actual results to differ materially from those projected herein. These
forward-looking statements include plans and objectives of management for future
operations, including the strategies, plans and objectives relating to the
products and the future economic performance of CirTran and its subsidiaries
discussed above.
Description of Property
On December 17, 2003, we entered into a ten-year lease agreement (the "Lease")
with PFE Properties, LLC, a Utah limited liability company (the "Lessor"), for
our existing 40,000 square-foot headquarters and manufacturing facility, located
at 4125 South 6000 West in Salt Lake City, Utah. The workspace includes 10,000
square feet of office space to support the Company's Administration, Sales, and
Engineering Staff. The 30,000 square feet of manufacturing space includes a
highly secured inventory area, shipping and receiving areas, and manufacturing
and assembly space that support six full surface-mount lines with
state-of-the-art equipment capable of placing over 360 million components per
year.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with a fair value of $800,000 on the date of issuance.
No registration rights were granted. The shares were issued without registration
under the 1933 Act in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"), and the rules and regulations promulgated thereunder.
The primary asset of PFE is its rights, titles and interests in and to a parcel
of real property, together with any improvements, rents and profits thereon or
associated therewith, located at 4125 S. 6000 W., West Valley City, Utah, 84128,
where the Company presently has its headquarters and manufacturing facility.
Following the acquisition of the PFE interests, PFE will continue to own the
building. PFE will remain a separate LLC due to liability issues and the Company
will continue to make intercompany lease payments under the 2003 lease.
Our facilities in Shenzhen, China, constitute a sales and business office. We
have no manufacturing facilities in China. Our office in Shenzhen is
approximately 1,600 square feet. Under the terms of our lease on the space, the
40
monthly payment is 15,000 Renminbi, which in was approximately $1,900 on July
20, 2006. The term of the lease is for two years, running from July 18, 2004.
As of December, 2005, CirTran had begun occupying a commercial space in the
Century City district of Los Angeles located at 1875 Century Park East, Suite
1790. The space is approximately 2,500 square feet of office space. The office
will serve as the Business Development, Sales, Marketing and Strategic Planning
Headquarters company-wide and for all divisions and subsidiaries. The sublease,
which was signed in October of 2005 expires in October of 2007. The lease
payment is $4,500 per month, all inclusive.
We believe that the facilities and equipment described above are generally in
good condition, are well maintained, and are generally suitable and adequate for
our current and projected operating needs.
Where to get additional information
Federal securities laws require us to file information with the Commission
concerning our business and operations. Accordingly, we file annual, quarterly,
and special reports, and other information with the Commission. You can inspect
and copy this information at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549.
You can get additional information about the operation of the Commission's
public reference facilities by calling the Commission at 1-800-SEC-0330. The
Commission also maintains a web site (http://www.sec.gov) at which you can read
or download our reports and other information.
CirTran's internet address' are www.cirtran.com., www.cirtran-asia.com,
www.racore.com.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, law enforcement,
consumer products, telecommunications, automotive, medical, and semiconductor
industries. Our services include pre-manufacturing, manufacturing and
post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the increase in revenue since that time. This
division is an Asian-based, wholly owned subsidiary of CirTran Corporation and
provides a myriad of manufacturing services to the direct response and retail
consumer markets. Our experience and expertise in manufacturing enables
CirTran-Asia to enter a project at any phase: engineering and design, product
development and prototyping, tooling, and high-volume manufacturing. We
anticipate that CirTran-Asia will pursue manufacturing relationships beyond
printed circuit board assemblies, cables, harnesses and injection molding
systems by establishing complete "box-build" or "turn-key" relationships in the
electronics, retail, and direct consumer markets. This strategic move into the
Asian market has helped to elevate CirTran to an international contract
manufacturer status for multiple products in a wide variety of industries, and
has, in short order, allow us to target large-scale contracts.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines.
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The new division will be
run from our new Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. We
anticipate that consumer products built by our CirTran Asia subsidiary, as well
as other products which we plan to acquire, will be available for retail sale in
2006.
On March 21, 2006, we announced that we had formed a new subsidiary to provide
end-to-end services to the direct response and entertainment industries. The new
division will provide product marketing, production, media funding and
merchandise manufacturing services. Forming this new division was a necessary
step to maximize product manufacturing opportunities for CirTran's proprietary
products and to provide marketing services for individual entrepreneurs and
inventors. The new division will be headquartered in CirTran's Los Angeles
(Century City) offices and be headed by Mr. Saliba. We are presently in
development of proprietary programs to be launched in the product marketing
division, production services and media funding divisions.
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 contained
in our Annual Report on form 10-KSB 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
42
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material, and overhead costs. Overhead costs are based on
indirect costs allocated among cost of sales, work-in-process inventory, and
finished goods inventory. Indirect overhead costs have been charged to cost of
sales or capitalized as inventory based on management's estimate of the benefit
of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled. The market value of related inventory is based upon
those agreements.
The Company typically orders inventory on a customer-by-customer basis. In doing
so the Company enters into binding agreements that the customer will purchase
any excess inventory after all orders are complete. Almost 80% of the total
inventory in the electronics manufacturing division is secured by these
agreements.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this
section under "Liquidity and Capital Resources - Liquidity and Financing
Arrangements," and in "Certain Relationships and Related Transactions."
Results of Operations - Comparison of Periods ended March 31, 2006 and 2005, and
Years Ended December 31, 2005 and 2004
Sales and Cost of Sales
Net sales decreased to $1,737,824 for the three month period ended March 31,
2006, as compared to $2,920,465 during the same period in 2005, for a decrease
of 40.5%. This decrease was attributed to the loss of sales in the CirTran Asia
division due to legal issues with the Ab King Pro and ABS (see Legal Proceedings
section). Cost of sales decreased by 48.2%, to $990,370 during the three month
period ended March 31, 2006, from $1,949,773 during the same period in 2005. The
decrease in cost of sales is directly due to the decrease in revenue. Our gross
profit margin for the three month period ended March 31, 2006, was 43.0%, up
from 33.2% for the same period in 2005. The majority of the increase is due to a
considerable decrease in CirTran-Asia sales which have more favorable margins
compared to the electronics assembly and Ethernet technology business
operations. The sales in these divisions have remained consistent.
43
Net sales increased 46.6% to $12,992,512 for the year ended December 31, 2005,
as compared to $8,862,715 for the year ended December 31, 2004. This sales
increase can be attributed to several factors. The biggest factor contributed to
the increase of net sales during the 2005 was the establishment of the new
division CirTran-Asia, which has contributed $4,569,221 of the increase in
revenue. Another factor was the strengthening of the overall marketing strategy
of the Company. We have added many new customers mostly in CirTran Asia which
contributed to the large increase. Also, industry-wide, we are seeing more OEMs
release larger order commitments with extended time tables. The second
significant factor directly related to CirTran is our marketing approach. Most
contract manufacturers approach customers on a job-by-job basis. CirTran
approaches customers on a partner basis. We have developed a program where we
can be more effective when we control the material procurement, purchasing, and
final assembly, providing the customer a final quality product delivered on time
and at a lower market cost. This approach for the electronics assembly and
manufacture division has resulted in sales to new customers of $170,504 during
the year ended December 31, 2005. The biggest factor contributing to the
increase of net sales during 2005 was our contract manufacturing division, which
has resulted in sales to new customers of $4,598,211.
Cost of sales decreased by 4.6%, from $7,030,934 during year ended December 31,
2004, to $6,706,135 during year ended December 31, 2005. The decrease in cost of
sales is due to an increase in revenue. Our gross profit margin for the year
ended December 31, 2005, was 48.1%, up from 20.5% from the year ended December
31, 2004. The increase in margins is attributable to the outsourcing strategy of
most of CirTran Asia's business to other subcontractors in China to better
control cost of materials, direct labor, and scrap.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our two main areas of operations, i.e., Asia Division,
electronics assembly and Ethernet technology, during 20043 and 2005; and (ii)
comparisons during these two years for each division between sales generated by
pre-existing customers and sales generated by new customers.
- ------------ ------------ ------------- ------------------ -----------------
Period Sales Cost of Sales Gross Loss/Margin
- ------------ ------------ ------------- ------------------ -----------------
Contract Three months $ 941,239 $ 735,136 $ 206,103
Manufacture ended March
31, 2006
------------ ------------- ------------------ -----------------
Three months 2,124,844 1,609,774 515,070
ended March
31, 2005
------------ ------------- ------------------ -----------------
Year ended 9,865,023 5,739,436 4,125,587
December 31,
2005
------------ ------------- ------------------ -----------------
Year ended 5,458,944 4,736,479 722,465
December 31,
2004
- ------------ ------------ ------------- ------------------ -----------------
Electronics Three months 774,359 244,877 529,482
Assembly ended March
31, 2006
------------ ------------- ------------------ -----------------
44
------------ ------------- ------------------ -----------------
Three months 773,013 329,239 443,774
ended March
31, 2005
------------ ------------- ------------------ -----------------
Year ended 3,002,038 973,953(2) 2,028,085
December 31,
2005
------------ ------------- ------------------ -----------------
Year ended 3,354,057 2,282,253(1) 1,071,804
December 31,
2004
- ------------ ------------ ------------- ------------------ -----------------
Ethernet Three months 22,226 10,357 11,869
Technology ended March
31, 2006
------------ ------------- ------------------ -----------------
Three months 22,608 10,760 11,848
ended March
31, 2005
------------ ------------- ------------------ -----------------
Year ended 125,451 79,850(3) 45,601
December 31,
2005
------------ ------------- ------------------ -----------------
Year ended 49,714 25,202 24,512
December 31,
2004
- ------------ ------------ ------------- ------------------ -----------------
- ------------ ------------ ------------- ------------------ -----------------
Total Pre-existing New
Period Sales Customers Customers
- ------------ ------------ ------------- ------------------ -----------------
Contract Three months $ 941,239 $ 725,543 $ 215,696
Manufacture ended March
31, 2006
------------ ------------- ------------------ -----------------
Three months 2,124,844 1,339,957 784,887
ended March
31, 2005
------------ ------------- ------------------ -----------------
Year ended 9,865,023 5,266,812 4,598,211
December 31,
2005
------------ ------------- ------------------ -----------------
Year ended 5,458,944 0 5,458,944
December 31,
2004
- ------------ ------------ ------------- ------------------ -----------------
45
- ------------ ------------ ------------- ------------------ -----------------
Electronics Three months 774,359 768,105 6,254
Assembly ended March
31, 2006
------------ ------------- ------------------ -----------------
Three months 773,013 5,562 767,451
ended March
31, 2005
------------ ------------- ------------------ -----------------
Year ended 3,002,038 2,831,534 170,504
December 31,
2005
------------ ------------- ------------------ -----------------
Year ended 3,354,057 2,796,720 557,337
December 31,
2004
- ------------ ------------ ------------- ------------------ -----------------
Ethernet Three months 22,226 19,361 2,865
Technology ended March
31, 2006
------------ ------------- ------------------ -----------------
Three months 22,608 18,645 3,963
ended March
31, 2005
------------ ------------- ------------------ -----------------
Year ended 125,451 101,004 24,447
December 31,
2005
------------ ------------- ------------------ -----------------
Year ended 49,714 30,257 19,457
December 31,
2004
- ------------ ------------ ------------- ------------------ -----------------
(1) Includes the write-down of carrying value of inventories of $13,000
(2) Includes the write-down of carrying value of inventories of $17,364
(3) Includes the write-down of carrying value of inventories of $20,725
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 March 31, 2006, was $2,203,537, as
compared to $2,271,604 at December 31, 2005. The decrease in inventory is
nominal.
Inventory at December 31, 2005 was $2,271,604, as compared to $1,453,754 at
December 31, 2004. The increase in inventory is due to the repossession of ABS
finished goods inventory.
46
Selling, General and Administrative Expenses
During the three months ended March 31, 2006, selling, general and
administrative expenses were $837,520 versus $959,891 for the same period in
2005, a 12.7% decrease. The decrease in selling, general and administrative
expenses is nominal.
During the year ended December 31, 2005, selling, general and administrative
expenses were $5,923,075 versus $3,362,933 for 2004, a 76.1% increase. The
increase was due to expenses related to the CirTran-Asia division, along with
our efforts to aggressively market our products. Selling, general and
administrative expenses as a percentage of sales as of December 30, 2005 were
45.6% as compared to 37.9% during 2004. This increase is due to expenses related
to the CirTran-Asia division, along with our efforts to aggressively market our
products
Other Income and Expense
Interest expense for three months ended March 31, 2006, was $1,086,253 as
compared to $143,770 for the same period in 2005, an increase of 655.5%. The
increase is primarily due to the derivative treatment of the convertible
debenture, discussed below. The estimated fair value of the derivative liability
decreased for the three months ended March 31, 2006. This decrease resulted in a
gain on derivative valuation of $893,651.
The Company determined that the features of the Debentures fell under derivative
accounting treatment. Accordingly, the Company recognizes these derivatives as
liabilities on its balance sheet and measures them at their estimated fair value
and recognizes the change in the estimated fair value as a gain or (loss) in the
period of the change. The Company estimates the fair value of theses embedded
derivatives using the Black-Scholes Model, which is based on a sophisticated
analysis of historical factors that affect the value of the company's common
stock. The fair value of the derivatives instruments is measured each quarter
and the resultant change in value is; recorded as an adjustment to the
derivative's carrying value and the attendant gain or loss is recognized for the
period. During the 1st quarter of 2006, the estimated value of the derivatives
decreased by $893,561 which is reported as a "Gain on derivative valuation" for
the period.
As a result of the above factors, we had net loss of $277,998 for the quarter
ended March 31, 2006, as compared to $201,728 for the quarter ended March 31,
2005. This net loss is attributed to a substantial decrease in sales.
Interest expense for 2005 was $1,225,252 as compared to $495,637 for 2004, a
increase of 147.2%. The increase is primarily due to the increase in interest
expense related the convertible debentures, accretion expense and interest
accrued. Also, included are the settlement of various notes payable and interest
income charged to delinquent accounts receivable accounts. As of December 31,
2005 and 2004, the amount of our liability for delinquent state and federal
payroll taxes and estimated penalties and interest thereon was $98,316 and
$723,660, respectively. We had a gain on forgiveness of debt related to
previously unpaid liabilities in the amount of $337,761 and a gain on derivative
valuation of $169,570.
Our overall net loss decreased 19.8% to $527,708 for the year ended December 31,
2005, as compared to $658,322 for the year ended December 31, 2004.
Details of the ABS transaction
- ------------------------------
In connection with the Advanced Beauty Solutions, LLC ("ABS") bankruptcy
proceedings, the Company acquired all of the assets of ABS for an aggregate
purchase price of $2,310,000. The assets purchased included inventory of a
product which had been the subject of an agreement between the Company and ABS,
the True Ceramic Pro flat iron. Pursuant to the asset purchase agreement, the
Company must pay a royalty to the ABS bankruptcy estate in connection with the
sale by the Company of the True Ceramic Pro units. The royalty portion of the
purchase price is contingent, based on sales of each True Ceramic Pro flat iron
unit. The amount of the royalty to be paid is $3 per unit and is limited to
total of $4,135,000. The minimum guaranteed royalty payment of $435,000,
guaranteed by the Company, is due within two years of the date of the asset
purchase agreement. Pursuant to the bankruptcy court's orders, the initial
$435,000 amount of royalty payments paid into the ABS estate will be disbursed
47
to other individuals and entities with claims against ABS's estate. After the
guaranteed payment of $435,000 has been made, the royalty payments into the
estate shall be prorated among five individuals and entities with claims against
ABS's bankruptcy estate who have an aggregate claim against the ABS estate of
$2,100,000 (constituting approximately 56.7% of the remaining claims against the
estate) and the Company, which has an aggregate claim against the ABS estate of
$1,600,000 (constituting approximately 43.3% of the remaining claims against the
estate). Following the payment of an aggregate of $4,135,000 in royalty payments
to the ABS estate, the Company shall have no further royalty obligations to the
estate.
The purchase price of $2,310,000 for the ABS assets will be allocated as
follows: to the assets acquired, which include a contractually agreed-upon
estimated inventory value of $376,000, which is subject to adjustment for any
decrease in the actual inventory value, with that adjustment being applied
against the purchase price; the ABS website, with an estimated value of $10,000;
and intangible assets, including registered trademarks, copyrights, infomercial
master tapes, and patents, the aggregate value of which is $1,924,000.
Purchase of Assets
- ------------------
In connection with agreements between the Company and ABS, the Company had an
approved claim against the ABS estate of $2,350,000. The Company and ABS agreed
upon, and the bankruptcy court approved, the purchase by the Company of assets
of ABS. The aggregate purchase price paid was $2,310,000, consisting of the
following: $1,125,000 in cash, which was paid at the time of the finalization of
the purchase of the assets; a reduction of the Company's approved claim against
the ABS estate in the amount of $750,000; and a guaranteed royalty payment to
the ABS estate of $435,000. The cash portion of the purchase price funded with
the proceeds of sales of the Company's restricted stock and from operations. The
Company's approved claim was reduced by $750,000, which went from being an
account receivable to being part of the carrying value of the assets purchased,
leaving an approved claim against the ABS estate of $1,600,000. The guaranteed
royalty payment of $435,000 is discussed above.
A summary of the ABS asset purchase transaction is as follows:
Purchase of Assets by CirTran Corporation
Cash $ 1,125,000
Reduction of ABS Accounts Receivable 750,000
Guaranteed Royalty Payment 435,000
Total Purchase Price $ 2,310,000
A summary of the treatment of the account receivable from ABS is as follows:
Allocation of Accounts Receivable from ABS
Assets Purchased w/ Accts. Rec. $ 750,000
Note Receivable from Bankruptcy Estate 1,600,000
Total Allocation of Accounts Receivable Balance $ 2,350,000
Funds for the payment of the ABS asset purchase consisted of $1,000,000 that the
Company raised through a private placement of 14,285,715 shares of the Company's
common stock, and $125,000 which was obtained from Company operations. The
shares in the private offering were purchased by and issued to ANAHOP, Inc. The
Company disclosed the sale of the shares and accompanying warrants in a Current
Report on Form 8-K filed with the SEC on May 30, 2006.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses preceeding this quarter, and our accumulated deficit increased to
$19,605,311 at March 31, 2006, compared to $19,327,310 at December 31, 2005. Our
48
net loss for the quarter ending March 31, 2006, was $277,998, compared to
$201,728 for the quarter ended March 31, 2005. Our current assets exceeded our
current liabilities by $300,528 as of March 31, 2006, and our current
liabilities exceeded our current assets by $1,142,874 as of December 31, 2005.
The change was mostly attributable to settlements of notes payable. For the
three months ended March 31, 2006 and 2005, we had negative cash flows from
operations of $719,698 and $385,701 respectively.
Through July 20, 2006, Highgate had converted $750,000 of the Convertible
Debentures, into 24,193,548 shares of our restricted common stock in accordance
with the terms of the Convertible Debenture agreement.
On June 1, 2006 the company, through its newly formed subsidiary Diverse Media
Group ("Diverse Media"), signed an exclusive services agreement with the Diverse
Talent Group, Inc. ("DTG") and DTG's CEO, Christopher Nassif. The agreement
covers a five-year period that commenced on April 1, 2006. Included in the terms
of the agreement, Diverse Media will provide DTG with a $200,000 line of credit.
The line will be available to DTG in increments of $20,000 per week, which DTG
will use to cover operating expenses during its seasonally slow periods from
June until August, which coincides with the lull in industry production prior to
the new fall programming releases. Diverse Media will initially fund the line of
credit with proceeds from operations of CirTran Corporation, its parent company.
As of July 20, 2006, DTG had not drawn any funds on the line of credit.
Our accumulated deficit was $19,327,310 at December 31, 2005, and $18,799,602 at
December 31, 2004. Our net loss for the year ending December 31, 2005 was
$527,708, compared to $658,322 for the year ending December 31, 2004. Our
current liabilities exceeded our current assets by $1,142,874 as of December 31,
2005, and $3,558,826 as of December 31, 2004. The decrease in the difference is
due to the settlement of notes payable and the agreement with the Internal
Revenue Service. Also, in the difference is an increase in cash, net inventory
and trade accounts payable. For the years ended December 31, 2005 and 2004, we
recorded negative cash flows from operations of $1,751,744 and $1,680,054,
respectively.
Cash
We had cash on hand of $443,637 at March 31, 2006, and $1,427,865 at December
31, 2005.
Net cash used in operating activities was $719,898 for the three months ended
March 31, 2006. Cash received from customers of $2,076,845 was not sufficient to
offset cash paid to vendors, suppliers, and employees of $2,128,964.
The non-cash charges were for depreciation and amortization of $114,939 and
accretion expense of $965,512. Because the Company has negative cash flows from
operations, it must rely on sources of cash other than customers to support its
operations. It is anticipated that various methods of equity financing will be
required to support operations until cash flows from operations are positive.
Net cash used in investing activities during the three months ended March 31,
2006, consisted of equipment and furniture purchases of $166,730. Net cash used
by financing activities was $97,600 during the three months ended March 31, 2006
and was primarily related to payments on notes payable to stockholders of
$95,806.
We had cash on hand of $1,427,865 at December 31, 2005, compared to $81,101 at
December 31, 2004. The increase in cash on hand is due to a new cash management
system that was established during 2003, and cash proceeds from the Cornell
convertible debenture.
Net cash used in operating activities was $1,751,744 for the fiscal year ended
December 31, 2005. During 2005, net cash used in operations was primarily
attributable to $527,708 in net losses from operations, a gain on forgiveness of
debt of $337,761, an increase in accounts receivable of $2,126,097, and a
decrease in accrued liabilities of $446,452, partially offset by increases in
accounts payable of $291,143 and in accrued prepaid expenses of $277,987. The
non-cash charge was for depreciation and amortization of $324,955.
Net cash used in investing activities during the fiscal year ended December 31,
49
2005, consisted of the property and equipment purchases of $295,346.
Net cash provided by financing activities was $3,354,523 during the fiscal year
ended December 31, 2005. Principal sources of cash were proceeds from
stockholder notes payable of $123,220, proceeds of $3,102,067 from convertible
debentures, net of cash paid for offering costs; proceeds from the exercise of
options and warrants to purchase common stock of $33,000, and proceeds from
notes payable to related parties of $95,586.
Accounts Receivable
At March 31, 2006, we had receivables of $3,019,960, net of a reserve for
doubtful accounts of $158,374, as compared to $3,358,981 at December 31, 2005,
net of a reserve of $158,374. This decrease was primarily attributed to
decreased sales in the last two months of the first quarter as compared to the
last two months in 2005. Receivables include the unpaid balance from ABS. (See
ABS discussion immediately following this paragraph.) The Company has
implemented an aggressive process to collect past due accounts over the past two
years. Individual accounts are continually monitored for collectibilty. As part
of monitoring individual customer accounts, the Company evaluates the adequacy
of its allowance for doubtful accounts. Since the implementation of the new
collection process, very few accounts have been deemed uncollectible.
ABS
We did not reserve for doubtful accounts on the amount of $2,350,000 for the ABS
receivable while awaiting the outcome of the settlement offer we had submitted
the to the bankruptcy court adjudicating ABS's bankruptcy (the "ABS Bankruptcy
Court"). The ABS Bankruptcy Court ultimately accepted our offer, and the amount
will be removed from the account receivable as part of the settlement.
As discussed below in the "Legal Proceedings" section, we entered into an
agreement with ABS, which was approved by the ABS Bankruptcy Court, to purchase
certain assets of ABS pursuant to an asset purchase agreement (the "Asset
Purchase Agreement"). Under the Asset Purchase Agreement, we agreed to purchase
substantially all of ABS's assets in exchange for:
i) a cash payment in the amount of $1,125,000;
ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
iii) the assumption of any assumed liabilities; and
iv) the obligation to pay ABS a royalty equal to $3.00 per True
Ceramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
For further details, see the "Legal Proceedings" Section.
At December 31, 2005, we had receivables of $3,358,981, net of a reserve for
doubtful accounts of $158,374, as compared to $1,288,719 at December 31, 2004,
net of a reserve of $41,143.
This increase was primarily attributed to sales having substantially increased
in the last months of the year as compared to the last two months in 2005. Also
included is the unpaid balance of accounts receivable from ABS. (See ABS history
beginning on page 13). The Company has implemented an aggressive process to
collect past due accounts over the past two years. Individual accounts are
continually monitored for collectibilty. As part of monitoring individual
customer accounts, the Company evaluates the adequacy of its allowance for
doubtful accounts. Since the implementation of the new collection process, very
few accounts have been deemed uncollectible.
50
Accounts Payable
Accounts payable were $528,963 at March 31, 2006, as compared to $1,239,519 at
December 31, 2005. The decrease is related to a drop in sales and paying vendors
in a timely manner.
Accounts payable were $1,239,519 at December 31, 2005, as compared to $1,104,392
at December 31, 2004. This increase is due to an increase in sales.
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather than
providing cash in operations. We had an accumulated deficit of $19,605,311 and a
total stockholders' equity of $3,165,931 at March 31, 2006. As of March 31,
2006, our monthly operating costs and interest expenses averaged approximately
$640,000 per month.
We had an accumulated deficit of $19,327,310 and a total stockholders' equity of
$1,268,054 at December 31, 2005. In addition, during 2005 and 2004, we have
used, rather than provided, cash in our operations. As of December 31, 2005, our
monthly operating costs and interest expenses averaged approximately $607,000
per month.
Since February 2000, we have operated without a line of credit. Abacas Ventures,
Inc., an entity whose shareholders include the Saliba Private Annuity Trust, one
of our major shareholders (see "Item 11 - Security Ownership of Certain
Beneficial Owners and Management") and a related entity, the Saliba Living
Trust, purchased our line of credit of $2,792,609, and this amount was converted
into a note payable to Abacas bearing an interest rate of 10%. As of December
31, 2001, a total of $2,405,507, plus $380,927 in accrued interest, was owed to
Abacas pursuant to this note payable. During 2002, we entered into agreements
with the Saliba Private Annuity Trust and the Saliba Living Trust to exchange
19,987,853 shares of our common stock for $1,499,090 in principal amount of this
debt and to issue an additional 6,666,667 shares to these trusts for $500,000
cash which was used for working capital for the Company. During December 2002,
an additional $1,020,154 of principal and $479,846 of accrued interest owed to
Abacas was converted to 30,000,000 shares of our common stock. We issued no
common stock to Abacas during 2003. During 2003 and 2002, the Company received
$350,000 and $845,000 of cash proceeds under the terms of a bridge loan from
Abacas. The Company made principal payments of $875,000 and 156,268 during 2003
and 2002, respectively, on the bridge loan. At December 31, 2003, the balance
owed on the bridge loan was $163,742. See "Item 12 - Certain Relationships and
Related Transactions."
During 2003 and 2002, we converted approximately $34,049 and $316,762,
respectively of trade payables into notes and stock. During January 2002, in
addition to the above-described transactions with the Saliba trusts, we issued
16,666,666 shares of restricted common stock at a price of $0.075 per share in
exchange for the cancellation of $1,250,000 of notes payable to various
stockholders. See "Item 12 - Certain Relationships and Related Transactions." We
continue to work with vendors in an effort to convert other trade payables into
long-term notes and common stock and to cure defaults with lenders with
forbearance agreements that we are able to service.
Despite our efforts to make our debt-load more serviceable, significant amounts
of additional cash will be needed to reduce our debt and fund our losses until
such time as we are able to become profitable.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable
(see Note 7). The total of these obligations was $1,263,713. The Company has
recorded this transaction as a $1,263,713 non-cash increase to the note payable
owed to Abacas, pursuant to the terms of the Abacas agreement.
The total principal amount owed to Abacas between the note payable and the
bridge loan was zero and $1,530,587 as of December 31, 2005 and 2004,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was zero and $430,828 as of December 31, 2005 and 2004,
respectively, and is included in accrued liabilities.
51
In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 to
principal and accrued interest in return for the Company's issuing 51,250,000
shares of our restricted common stock to the shareholders of Abacas. No
registration rights were granted.
As of December 31, 2004, the Company had accrued liabilities in the amount of
$500,000 for delinquent payroll taxes, including interest and penalties, owed to
the Internal Revenue Service. The Company, in response to collection notices,
filed a due process appeal with the Internal Revenue Service's Appeals Office.
The appeal was resolved by an agreement with the Appeals Office that allowed the
Company to file an offer in compromise of all federal tax liabilities owed by
the Company based on its ability to pay. The Company filed its offer in
compromise with the IRS in November 2003, and after meeting with IRS personnel,
filed a revised offer in compromise on August 31, 2004. The Company was notified
in November 2004 that the IRS had accepted the offer in compromise. Under the
offer, the Company was required to pay an aggregate amount of $500,000
(representing payments of $350,000 by Circuit Technology, Inc., $100,000 by
CirTran Corporation, and $50,000 by Racore Technology, Inc.), not later than
February 3, 2005. These amounts were paid. Additionally, the Company must remain
current in its payment of taxes for 5 years, and may not claim any NOLs for the
years 2001 through 2015, or until the three companies pay taxes in an amount
equal to the taxes waived by the offer in compromise.
Management believes that each of the related party transactions were as fair to
the Company as could have been made with unaffiliated third parties.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors and are
seeking to replace our operating line of credit. It is unlikely that we will be
able, in our current financial condition, to obtain additional debt financing;
and if we did acquire more debt, we would have to devote additional cash flow to
paying the debt and securing the debt with assets. We may therefore have to rely
on equity financing to meet our anticipated capital needs. There can be no
assurances that we will be successful in obtaining such capital. If we issue
additional shares for debt and/or equity, this will dilute the value of our
common stock and existing shareholders' positions.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
Company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock on the Over the Counter Electronic Bulletin Board was obtained in July
2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short or the long term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
Notes Payable to Equity Line Investor - During 2003, we borrowed a total of
$1,830,000 from Cornell Capital Partners, LP, pursuant to nine unsecured
promissory notes. The loans were made and the notes were issued from June 2003
through December 2003. In lieu of interest, we paid fees to the lender, ranging
from 5% to 10%, of the amount of the loan. These fees have been recorded as
interest expense. The fees were negotiated in each instance and agreed upon by
us and by the lender and its affiliate. The notes were repayable over periods
ranging from 70 days to 131 days. Each of the notes stated that if we did not
repay the notes when due, a default interest rate of 24% would apply to the
unpaid balance. Through December 31, 2003, we directed the repayment of
$1,180,000 of these notes from proceeds generated under the Equity Line
Agreement, as discussed below. At December 31, 2003, the balance owing on these
notes was $650,000. All notes were paid when due or before, and at no time did
we incur the 24% penalty interest rate.
During the year ended December 31, 2004, Cornell loaned us an additional
$3,200,000 pursuant to four additional unsecured promissory notes, $1,700,000 of
which remained outstanding at December 31, 2004. The loans were made and the
52
notes were issued in January through June 2004, bringing the total aggregate
loans from Cornell to $5,030,000. As before, in lieu of interest, we paid fees
to the lender, ranging from 4% to 5%, of the amount of the loan. The fees were
negotiated in each instance and agreed upon by us and by the lender and its
affiliate. The notes were repayable over periods of 88 days and 193 days. Each
of the notes stated that if we did not repay the notes when due, a default
interest rate of 24% would apply to the unpaid balance.
As noted above, we received proceeds of $5,030,000 from notes payable to
Cornell. We used the proceeds from these notes to fund operating losses of
approximately $2,938,000, pay down accounts payable, notes payable and other
settlements of approximately $1,401,000, purchase equipment and tooling in the
amount of $391,000, and to invest in Broadata in the amount of $300,000. During
January 2005, the Company received proceeds of $565,000 from an additional note
payable to Cornell to fund the settlement with the Internal Revenue Service
With the sale of the Convertible Debenture in May 2005 to Highgate, $2,265,000
of the proceeds were paid to Cornell to repay promissory notes in the amount of
$1,700,000 and $565,000.
Prior Equity Line of Credit Agreement - In conjunction with efforts to improve
the results of our operations, discussed above, on November 5, 2002, we entered
into an Equity Line of Credit Agreement with Cornell. We subsequently terminated
that agreement, and on April 8, 2003, we entered into an amended equity line
agreement (the "Equity Line Agreement") with Cornell. Under the Equity Line
Agreement, we had the right to draw up to $5,000,000 from Cornell against an
equity line of credit (the "Equity Line"), and to put to Cornell shares of our
common stock in lieu of repayment of the draw. The number of shares to be issued
was determined by dividing the amount of the draw by the lowest closing bid
price of our common stock over the five trading days after the advance notice
was tendered. Cornell was required under the Equity Line Agreement to tender the
funds requested by us within two trading days after the five-trading-day period
used to determine the market price.
During the year ended December 31, 2004, we drew an aggregate amount of
$2,150,000 under the Equity Line Agreement, pursuant to draws on the Equity
Line, net of fees of $86,000, and issued a total of 57,464,386 shares of common
stock to Cornell under the Equity Line Agreement. At our direction, Cornell
retained the proceeds of the draws under the Equity Line Agreement and applied
them as payments on the notes to Cornell, discussed above.
Pursuant to the Equity Line Agreement, in connection with each draw, we agreed
to pay a fee of 4% of the amount of the draw to Cornell as consideration for its
providing the Equity Line. Total fees paid for the year ended December 31, 2004
were $128,000. Of these payments, $86,000 was offset against additional paid-in
capital as shares were issued under the Equity Line Agreement and $68,000 was
recorded as deferred offering costs for total deferred offering costs of $68,000
at December 31, 2004. These deferred offering costs were expensed as the Equity
Line Agreement was terminated in conjunction with the sale of the Convertible
Debenture in May 2005.
Standby Equity Distribution Agreement - We entered into a Standby Equity
Distribution Agreement (the "Agreement") dated May 21, 2004, with Cornell. Under
the Agreement, we had the right, at our sole discretion, to sell periodically to
Cornell shares of our common stock for an aggregate purchase price of up to $20
million. The purchase price for the shares sold to Cornell was to be equal to
the lowest volume-weighted average price of our common stock during the pricing
period consisting of the five consecutive trading days after we gave an advance
notice. The periodic sale of shares was known as an advance. We could request an
advance, by giving a written advance notice to Cornell, and could not request
advances more frequently than every seven trading days. A closing was to be held
on the first trading day after the end of the pricing period. The maximum
advance amount was one million dollars ($1,000,000) per advance, with a minimum
of seven trading days between advances. In addition, we could not request
advances if the shares to be issued in connection with such advances would
result in Cornell owning more than 9.9% of our outstanding common stock.
Cornell was to retain a commitment fee of 5% of the amount of each advance under
the Agreement.
With the sale of the Convertible Debenture in May 2005, the Standby Equity
Distribution Agreement and related agreements were terminated.
53
Convertible Debenture - On May 26, 2005, we entered into a securities purchase
agreement (the "Purchase Agreement") with Highgate, relating to the issuance of
a 5% Secured Convertible Debenture, due December 31, 2007, in the aggregate
principal amount of $3,750,000 (the "Convertible Debenture").
In connection with the issuance of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to
Highgate, and legal fees of $5,668. As such, of the total purchase amount of
$3,750,000, the net proceeds to us were $1,228,567, which we received following
the closing of the issuance of the Convertible Debenture. We used these proceeds
for general corporate and working capital purposes.
The Convertible Debenture bears interest at a rate of 5%. Highgate is entitled
to convert, at its option, all or part of the principal amount owing under the
Convertible Debenture into shares of our common stock at a conversion price
equal to the lesser of (a) $0.10 per share, or (b) an amount equal to the lowest
closing bid price of the Common Stock as listed on the OTC Bulletin Board, as
quoted by Bloomberg L.P. for the twenty (20) trading days immediately preceding
the conversion date. Except as otherwise set forth in the Convertible Debenture,
Highgate's right to convert principal amounts owing under the Convertible
Debenture into shares of our common stock is limited as follows:
1. Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the market price of our
stock is $0.10 per share or less at the time of conversion;
2. Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Convertible Debenture in
any consecutive 30-day period when the price of our stock is
greater than $0.10 per share at the time of conversion,
provided, however, that Highgate may convert in excess of the
foregoing amounts if we and Highgate mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), Highgate may, in its sole discretion,
accelerate full repayment of all debentures outstanding and
accrued interest thereon or may, notwithstanding any
limitations contained in the Convertible Debenture and/or the
Purchase Agreement, convert the Convertible Debenture and
accrued interest thereon into shares of our common stock
pursuant to the Convertible Debenture.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
The Company granted Highgate registration rights, pursuant to which the Company
agreed to file, within 120 days of the closing of the purchase of the debenture,
a registration statement to register the resale of shares of the Company's
common stock issuable upon conversion of the principal amount of the Convertible
Debenture. The Company agreed to register the resale of up to 100,000,000
shares, and to keep such registration statement effective until all of the
shares issuable upon conversion of the principal of the Convertible Debenture
have been sold. In the event that the Company issues more than 100,000,000
shares of its common stock, it will file additional registration statements as
necessary.
54
On June 15, 2006, we entered into an agreement with Highgate to amend the
registration rights agreement, pursuant to which we agreed to use our best
efforts to have the registration statement declared effective by July 31, 2006.
Under the amendment, if the registration statement has not been declared
effective by July 31, 2006, Highgate may declare us in default under the
Convertible Debenture.
As noted above, through July 20, 2006, Highgate had converted $750,000 of the
Convertible Debentures, into 24,193,548 shares of our restricted common stock in
accordance with the terms of the Convertible Debenture agreement.
Additional Convertible Debenture Transaction - On December 30, 2005, we entered
into a securities purchase with Cornell Capital, relating to the issuance of a
5% Secured Convertible Debenture, due July 30, 2008, in the aggregate principal
amount of $1,500,000 (the "Cornell Debenture").
We also paid a commitment fee of $120,000 and a structuring fee of $10,000 to
Cornell Capital. As such, of the total amount of $1,500,000, the net proceeds to
us were $1,370,000. We will use these proceeds for general corporate and working
capital purposes, at our discretion.
The Cornell Debenture bears interest at a rate of 5%. Cornell Capital is
entitled to convert, at its option, all or part of the principal amount owing
under the Debenture into shares of the Company's common stock at a conversion
price equal one hundred percent (100%) of the lowest closing bid price of the
Common Stock as listed on the OTC Bulletin Board, as quoted by Bloomberg L.P.
for the twenty (20) trading days immediately preceding the Conversion Date,
subject to certain restrictions and limitations set forth in the Cornell
Debenture.
Under the terms of the Cornell Debenture, except upon an event of default as
defined in the Cornell Debenture, Cornell Capital may not convert the Cornell
Debenture for a number of shares of common stock in excess of that number of
shares of common stock which, upon giving effect to such conversion, would cause
the aggregate number of shares of Common Stock beneficially owned by Cornell
Capital and its affiliates to exceed 4.99% of the outstanding shares of the
common stock following such conversion.
Pursuant to the Cornell Debenture, interest is to be paid at the time of
maturity or conversion. We may, at our option, pay accrued interest in cash or
in shares of our common stock. If paid in stock, the conversion price shall be
the closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Also pursuant to the Cornell Debenture, we have the right to redeem, by giving 3
days' written notice to Cornell Capital, a portion or all of the Cornell
Debenture then outstanding by paying an amount equal to one hundred five percent
(105%) of the amount redeemed plus interest accrued thereon. In the event that
we redeem only a portion of the outstanding principal amount of the Cornell
Debenture, Cornell Capital may convert all or any portion of the unpaid
principal or interest of the Cornell Debenture not being redeemed by us.
Additionally, if after the earlier to occur of (x) fifteen (15) months following
the date of the purchase of the Cornell Debenture or (y) twelve (12) months
following the date on which the initial registration statement is declared
effective, all or any portion of the Cornell Debenture remains outstanding, then
we, at the request of Cornell Capital, are required to redeem such amount
outstanding at the rate of five hundred thousand dollars ($500,000) per each
30-day period. Finally, upon the occurrence of an event of default as defined in
the Cornell Debenture, Cornell Capital can convert all outstanding principal and
accrued interest under the Cornell Debenture irrespective of any of the
limitations set forth in the Cornell Debenture and/or the Purchase Agreement,
and in such event, all such principal and interest shall become immediately due
and payable.
In connection with the Purchase Agreement, we also agreed to grant to Cornell
Capital warrants (the "Warrants") to purchase up to an additional 10,000,000
shares of our common stock. The Warrants have an exercise price of $0.09 per
share, and expire three years from the date of issuance. The Warrants also
provide for cashless exercise if at the time of exercise there is not an
effective registration statement or if an event of default has occurred.
55
Additionally, we entered into an investor registration rights agreement (the
"Registration Rights Agreement") with Cornell Capital, pursuant to which we
agreed to file, within 120 days of the closing of the purchase of the Cornell
Debenture, a registration statement to register the resale of shares of our
common stock issuable to Cornell Capital upon conversion of the Cornell
Debenture. We agreed to register the resale of up to 42,608,696 shares,
consisting of 32,608,696 shares underlying the Cornell Debenture, and 10,000,000
shares underlying the Warrants. We agreed to keep such registration statement
effective until all of the shares issuable upon conversion of the Cornell
Debenture have been sold. In the event that we issue more than 32,608,696 shares
of its common stock upon conversion of the Cornell Debenture, we will file
additional registration statements as necessary.
On June 15, 2006, we entered into an agreement with Cornell to amend the
registration rights agreement, pursuant to which we agreed to file the
registration statement not later than August 15, 2006, instead of 120 days
following the closing of the issuance of the Cornell Debenture. Under the
amendment, if the registration statement has not been filed by August 15, 2006,
Cornell may declare us in default under the Cornell Debenture.
We also entered into a security agreement (the "Security Agreement") with
Cornell Capital, pursuant to which we granted a second position security
interest in all of our property, including goods; inventory; contract rights and
general intangibles; documents, receipts, and chattel paper; accounts and other
receivables; products and proceeds; and any interest in any subsidiary, joint
venture, or other investment interest to secure our obligation under the Cornell
Debenture and the related agreements.
We also entered into an escrow agreement (the "Escrow Agreement") with Cornell
Capital relating to the holding and disbursement of payment of the purchase
price of the Cornell Debenture and cash payments made by us in payment of the
obligations owing under the Cornell Debenture. We agreed with Cornell Capital to
appoint David Gonzalez as the Escrow Agent under the Escrow Agreement.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
23.
Through July 20, 2006, Cornell had not converted any principal amount of the
Cornell Convertible Debenture. On July 20, 2006, we entered into an agreement
with Cornell (the "Cornell Agreement"). Pursuant to the Cornell Agreement,
Cornell agreed that it would not convert any of the principal or interest on the
Cornell Debenture or exercise any of the Warrants granted to Cornell until we
had taken the steps necessary to increase our authorized capital.
By way of background, we have previously entered into financing transactions
with Cornell Capital. In April 2003, we had entered into an equity line of
credit agreement with Cornell Capital. Between December 2003 and March 2004, we
drew a total of $2,150,000 on the equity line, and issued a total of 57,464,386
shares of common stock to Cornell Capital. In May 2004, we entered into a
standby equity distribution agreement with Cornell Capital, but the agreement
was terminated before any funds were drawn or any shares were issued. Between
June 2003 and January 2005, Cornell Capital loaned to us an aggregate of
$5,595,000 pursuant to promissory notes issued to Cornell Capital. These notes
were paid in full by May 2005.
Highgate and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers. Additionally, the escrow agent appointed in
connection with the purchase and sale of both the Cornell Capital debenture
transaction and the Highgate debenture transaction is David Gonzalez, who is an
officer of Cornell Capital.
The Company does not anticipate that it will use any of the proceeds of the sale
of the Cornell Debenture to Cornell Capital to repay the debenture sold to
Highgate.
56
Purchase of ABS Assets
Funds for the payment of the cash portion of the purchase of the ABS assets
consisted of $1,000,000 that the Company raised through a private offering of
14,285,715 shares of the Company's common stock, and $125,000 which was obtained
from Company operations. The shares in the private offering were issued to
ANAHOP, Inc. The Company disclosed the sale of the shares and accompanying
warrants in a Current Report on Form 8-K filed with the SEC on May 30, 2006.
In connection with the Advanced Beauty Solutions, LLC ("ABS") bankruptcy
proceedings, the Company acquired all of the assets of ABS for an aggregate
purchase price of $2,310,000. The assets purchased included inventory of a
product which had been the subject of an agreement between the Company and ABS,
the True Ceramic Pro flat iron. Pursuant to the asset purchase agreement and the
orders of the bankruptcy court, the Company is required to make royalty payments
to the ABS estate of $3 per unit of the True Ceramic Pro sold. Pursuant to the
bankruptcy court's orders, the initial $435,000 amount of royalty payments paid
into the ABS estate will be disbursed to other individuals and entities with
claims against ABS's estate. After the guaranteed payment of $435,000 has been
made, the royalty payments into the ABS estate will be prorated among five
individuals and entities with claims against ABS's bankruptcy estate who have an
aggregate claim against the ABS estate of $2,100,000 and the Company, which has
an aggregate claim against the ABS estate of $1,600,000.
In connection with its efforts to sell the True Ceramic Pro units, the Company
recently entered into a marketing and distribution contract (the "MD Agreement")
with Media Syndication Global, LLC ("MSG"), granting worldwide exclusive rights
to MSG to advertise, promote, market, sell and otherwise distribute the True
Ceramic Pro units. The Company disclosed the MD Agreement in a Current Report
filed on Form 8-K, filed July 10, 2006.
Under the terms of the agreement with MSG, the initial minimum sales quantity is
10,000 units and the minimum subsequent orders is 50,000 units in any three
month period, which can be prorated, but not less than 400,000 units in any 12
month period. The initial term of the MD Agreement is for three years, after
which the agreement will renew for terms of one year each, provided that MSG has
purchased the minimum requirements under the MD Agreement.
Based on the terms of the MD Agreement and the terms of the bankruptcy court's
orders, the Company anticipates that it will need to sell at least 1,378,333
units to generate enough royalty income to repay (A) the guaranteed royalty
payment of $435,000 (which is the equivalent of 145,000 units), and (B) the
$3,700,000 in royalty payments consisting of (i) $2,100,000 (the equivalent of
700,000 units) to five individuals and entities with claims against the ABS
estate, and (ii) $1,600,000 (the equivalent of 533,333 units) to the Company as
payment of the Company's claim against the ABS estate. Based on minimum sales
quantity included in the terms of the MD Agreement with MSG, the Company
anticipates that it would take the Company approximately forty-two months to
achieve the necessary unit sales to make the full $4,135,000 payment.
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. We disclaim any
obligation or intention to update any forward-looking statement.
5% Convertible Debenture
On May 26, 2005, we entered into a securities purchase agreement (the "Purchase
Agreement") with Highgate House Funds, Ltd., a Cayman Island exempted company
("Highgate" or the "Selling Shareholder"), relating to the issuance by us of a
57
5% Secured Convertible Debenture, due December 31, 2007, in the aggregate
principal amount of $3,750,000 (the "Convertible Debenture").
In connection with the issuance of the Convertible Debenture, we used $2,265,000
to repay two promissory notes to Cornell Capital Partners, LP ("Cornell"), one
in the amount of $1,700,000, and the other in the amount of $565,000. Highgate
and Cornell have the same general partner, Yorkville Advisors, but have
different portfolio managers.
We also paid a commitment fee of $240,765, a structuring fee of $10,000 to the
Selling Shareholder, and legal fees of $5,668. As such, of the total purchase
amount of $3,750,000, the net proceeds to us were $1,228,567, which we received
following the closing of the purchase of the Convertible Debenture. We used
these proceeds for general corporate and working capital purposes.
The Convertible Debenture bears interest at a rate of 5%. The Selling
Shareholder is entitled to convert, at its option, all or part of the principal
amount owing under the Convertible Debenture into shares of our common stock at
a conversion price equal to the lesser of (a) $0.10 per share, or (b) an amount
equal to the lowest closing bid price of the Common Stock as listed on the OTC
Bulletin Board, as quoted by Bloomberg L.P. for the twenty (20) trading days
immediately preceding the conversion date. Except as otherwise set forth in the
Convertible Debenture, the Selling Shareholder's right to convert principal
amounts owing under the Convertible Debenture into shares of our common stock is
limited as follows:
1. The Selling Shareholder may convert up to $250,000 worth of
the principal amount plus accrued interest of the Convertible
Debenture in any consecutive 30-day period when the market
price of our stock is $0.10 per share or less at the time of
conversion;
2. The Selling Shareholder may convert up to $500,000 worth of
the principal amount plus accrued interest of the Convertible
Debenture in any consecutive 30-day period when the price of
our stock is greater than $0.10 per share at the time of
conversion, provided, however, that the Selling Shareholder
may convert in excess of the foregoing amounts if we and the
Selling Shareholder mutually agree; and
3. Upon the occurrence of an event of default (as defined in the
Convertible Debenture), the Selling Shareholder may, in its
sole discretion, accelerate full repayment of all debentures
outstanding and accrued interest thereon or may,
notwithstanding any limitations contained in the Convertible
Debenture and/or the Purchase Agreement, convert the
Convertible Debenture and accrued interest thereon into shares
of our common stock pursuant to the Convertible Debenture.
A chart showing the number of shares issuable upon hypothetical conversions at
particular conversion prices is set forth in the "Risk Factors" section on page
16.
Pursuant to the Convertible Debenture, interest is to be paid at the time of
maturity or conversion. We may, in our option, pay accrued interest in cash or
in shares of common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either (i) the date the interest
payment is due; or (ii) if the interest payment is not made when due, the date
on which the interest payment is made.
Under the terms of the Convertible Debenture, except upon an event of default as
defined in the Convertible Debenture, the Selling Shareholder may not convert
the Convertible Debenture for a number of shares of common stock in excess of
that number of shares of common stock which, upon giving effect to such
conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by the Selling Shareholder and its affiliates to exceed 4.99%
of the outstanding shares of the common stock following such conversion.
Also pursuant to the Convertible Debenture, we have the right to redeem, by
giving 3 days' written notice to the Selling Shareholder, a portion or all of
the Convertible Debenture then outstanding by paying an amount equal to one
58
hundred five percent (105%) of the amount redeemed plus interest accrued
thereon. In the event that we redeem only a portion of the outstanding principal
amount of the Convertible Debenture, the Selling Shareholder may convert all or
any portion of the unpaid principal or interest of the Convertible Debenture not
being redeemed. Additionally, if after the earlier to occur of (x) fifteen (15)
months following the date of the purchase of the Convertible Debenture or (y)
twelve (12) months following the date on which the initial registration
statement is declared effective, all or any portion of the Convertible Debenture
remains outstanding, then we, at the request of the Selling Shareholder, shall
redeem such amount outstanding at the rate of five hundred thousand dollars
($500,000) per each 30-day period. Finally, upon the occurrence of an event of
default as defined in the Convertible Debenture, the Selling Shareholder can
convert all outstanding principal and accrued interest under the Convertible
Debenture irrespective of any of the limitations set forth in the Convertible
Debenture and/or the Purchase Agreement, and in such event, all such principal
and interest shall become immediately due and payable.
In connection with the Purchase Agreement, we entered into an investor
registration rights agreement (the "Registration Rights Agreement") with the
Selling Shareholder, pursuant to which, we agreed to file, within 120 days of
the closing of the purchase of the Convertible Debenture, a registration
statement to register the resale of shares of the Company's common stock
issuable to the Selling Shareholder upon conversion of the principal or interest
on the Convertible Debenture. We agreed to register the resale of up to
100,000,000 shares, and to keep such registration statement effective until all
of the shares issuable upon conversion of the principal or accrued interest on
the Convertible Debenture have been sold. In the event that we issue more than
100,000,000 shares of common stock upon conversion of the Convertible Debenture,
we will file additional registration statements as necessary.
This registration statement does not register the resale of any shares issued to
Highgate as payment of interest accrued on the Convertible Debenture, and
neither this registration statement nor the prospectus may be used to sell
shares issued to Highgate as payment of interest accrued on the Convertible
Debenture. The number of shares issuable in connection with this registration
statement is also limited by our authorized capital, which as of July 20, 2006,
was 750,000,000 shares. In other words, we are not authorized to issue more than
750,000,000 shares of our common stock, irrespective of how many shares are
covered by this registration statement and prospectus, unless we increase our
authorized capital, as discussed above in the "Risk Factors" section on page 22.
We also entered into a security agreement (the "Security Agreement") with the
Selling Shareholder, pursuant to which we pledged all of our property, including
goods; inventory; contract rights and general intangibles; documents, receipts,
and chattel paper; accounts and other receivables; products and proceeds; and
any interest in any subsidiary, joint venture, or other investment interest to
secure our obligation under the Convertible Debenture and the related
agreements.
We also entered into an escrow agreement (the "Escrow Agreement") with the
Selling Shareholder relating to the holding and disbursement of payment of the
purchase price of the Convertible Debenture and cash payments made by us in
payment of the obligations owing under the Convertible Debenture. David Gonzalez
was appointed as the Escrow Agent under the Escrow Agreement.
We sold the Convertible Debenture without registration under the Securities Act
of 1933, as amended (the "1933 Act") in reliance on Section 4(2) of the 1933
Act, and the rules and regulations promulgated thereunder. Upon future
conversions, if any, of the Convertible Debenture into shares of our common
stock, we intend to issue the shares without registration under the 1933 Act in
reliance on Section 4(2) of the 1933 Act, and the rules and regulations
promulgated thereunder. As noted above, we anticipate that any resales by the
Selling Shareholder of the shares issued upon conversion of the Convertible
Debenture will be made pursuant to this registration statement.
Through July 20, 2006, Highgate had converted $750,000 of the Convertible
Debentures, for 24,193,548 shares of our restricted common stock. Once this
registration statement has been declared effective by the SEC, Highgate may sell
those shares under this registration statement, although there is no guarantee
that Highgate will sell any or all of the shares.
59
Selling shareholder
One of our investors, Highgate House Funds, Ltd., a Cayman Island exempted
company, is the Selling Shareholder in connection with this prospectus and the
registration statement of which it is a part. Highgate is not affiliated in any
way with CirTran or any of our affiliates, except that the escrow agent
appointed in connection with the Purchase Agreement and the Escrow Agreement,
David Gonzalez, is an officer of Cornell Capital Partners, LLP ("Cornell"), an
entity with which we previously entered into two transactions, an equity line of
credit agreement and a standby equity distribution agreement. Highgate and
Cornell have the same general partner, Yorkville Advisors, but have different
portfolio managers. Both the equity line of credit agreement and the standby
equity distribution agreement have been terminated. Additionally, as described
above, prior to our entering into the Purchase Agreement with Highgate, Cornell
had previously made loans to us in the aggregate amounts of $5,595,000, all of
which have been repaid, including two notes for $1,700,000 and $565,000,
respectively, which loans we repaid with part of the proceeds of the sale of the
Convertible Debenture.
This prospectus, and the registration statement of which it is a part, cover the
resales of the shares to be issued to Highgate, the Selling Shareholder, in
connection with conversions of the Convertible Debenture.
Through July 20, 2006, Highgate had converted $750,000 of the Convertible
Debentures, for 24,193,548 shares of our restricted common stock. Once this
registration statement has been declared effective by the SEC, Highgate may sell
those shares under this registration statement, although there is no guarantee
that Highgate will sell any or all of the shares.
The following table provides information about the actual and potential
ownership of shares of our common stock by Highgate in connection with the
Convertible Debenture as of July 20, 2006, and the number of our shares
registered for sale in this prospectus. The number of shares of common stock
issuable to Highgate in connection with conversions of the Convertible Debenture
varies according to the market price at and immediately preceding the date of a
conversion by Highgate. Solely for purposes of estimating the number of shares
of common stock that would be issuable to Highgate as set forth in the table
below, we have assumed a hypothetical conversion by Highgate on July 20, 2006,
of the full remaining amount of $3,000,000 principal amount of the Convertible
Debenture (with no interest accrued) at a per share price of $0.03. The actual
per share price and the number of shares issuable upon actual conversions by
Highgate could differ substantially. This prospectus and the registration
statement of which it is a part covers the resale of up to 100,000,000 shares of
our common stock issuable to Highgate in connection with conversions of the
principal or interest on the Convertible Debenture. The number of shares
issuable in connection with this registration statement is also limited by our
authorized capital, which as of July 20, 2006, was 750,000,000 shares. In other
words, we are not authorized to issue more than 750,000,000 shares of our common
stock, irrespective of how many shares are covered by this registration
statement and prospectus, unless we increase our authorized capital.
Under the terms and conditions of the Convertible Debenture and the Purchase
Agreement, Highgate is prohibited from converting amounts under the Convertible
Debenture that would cause Highgate to beneficially own more than 4.99% of the
then-outstanding shares of our common stock following such issuance. This
restriction does not prevent Highgate from receiving and selling shares and
thereafter receiving additional shares. In this way, Highgate could sell more
than 4.99% of our outstanding common stock in a relatively short time frame
while never beneficially owning more than 4.99% of the outstanding CirTran
common stock at any one time. For purposes of calculating the number of shares
of common stock issuable to Highgate assuming a conversion of the full amount of
the Convertible Debenture, as set forth below, the effect of such 4.99%
limitation has been disregarded. The number of shares issuable to Highgate as
described in the table below therefore may exceed the actual number of shares
Highgate may be entitled to beneficially own under the Convertible Debenture.
The following information is not determinative of Highgate'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.
60
- --------------- ---------- -------------- ----------- ----------- --------- -------------
Percentage
Shares Shares of of Common
of Common Stock Percentage
Common Stock Issuable to of
Stock Issuable Selling Number of Number of Common
Owned by to Selling Shareholder Shares of Shares of Stock
Selling Shareholder in Common Common Beneficially
Share-hold in Connection Stock Stock Owned
Prior to Connection with Registered Owned After
Name of Selling Offering with Debenture Hereunder After the
Shareholder (1) Debenture (2) (3) Offering Offering
- --------------- ---------- -------------- ----------- ----------- --------- -------------
Highgate House
Funds, Ltd. 0 124,193,548(4) 16.90% 100,000,000 0(5) 0%(5)
- --------------- ---------- -------------- ----------- ----------- --------- -------------
- ---------------------
(1) To our knowledge, and based on representations from Highgate's
management, Highgate owned 24,193,548 shares of our common stock as of July 20,
2006. Highgate House Funds, Ltd., is an entity managed by Yorkville Advisors,
LLC. Adam Gottbetter is the co-portfolio manager of Yorkville Advisors, LLC.
(2) As noted above, Highgate is prohibited by the terms of the
Convertible Debenture from converting amounts of the Convertible Debenture that
would cause it to beneficially own more than 4.99% 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.
(3) The registration statement of which this prospectus is a part
covers up to 100,000,000 shares of common stock issuable in connection with the
Convertible Debenture. Because the specific circumstances of the issuances under
the Convertible Debenture are within the discretion of Highgate and are
therefore 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 100,000,000 unless we file additional registration
statements registering the resale of the additional shares. The amount set forth
in the table 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
conversion of the full principal amount of the Convertible Debenture (excluding
any interest accrued thereon) as of December 12, 2005. The actual number of
shares of our common stock offered hereby may differ according to the actual
number of shares issued upon such conversions.
(4) Includes:
24,193,548 shares of common stock issued upon
conversion by Highgate of $750,000 principal
amount of the Debenture as of July 20, 2006;
and
100,000,000 shares of common stock issuable upon a
hypothetical conversion of the remaining
$3,000,000 principal amount of the
Convertible Debenture as of July 20, 2006.
This prospectus registers only up to
100,000,000 shares of common stock issuable
in connection with the Convertible
Debenture. Accordingly, we may not issue
shares in excess of 100,000,000 unless we
file additional registration statements
registering the resale of the additional
shares.
(5) Assumes a hypothetical conversion of the remaining $3,000,000
principal amount of the Convertible Debenture as of July 20, 2006, and the
issuance of 100,000,000 shares of our common stock, in addition to the
24,193,548 shares previously issued to Highgate upon conversion of $750,000
principal amount of the Debenture, together with the sale by Highgate of all
such shares. There is no assurance that Highgate will sell any or all of the
shares offered hereby. However, Highgate is contractually prohibited from
converting amounts of the Convertible Debenture that would cause it to hold
shares in excess of 4.99% of the then-issued and shares of our common stock.
61
This number and percentage may change based on Highgate's decision to sell or
hold the Shares. There is no assurance that Highgate will sell any or all of the
shares offered hereby. If Highgate sells all of the shares issued to it in
connection with the Convertible Debenture, the number of shares held following
such sales would be 0 and the percentage of ownership would be 0%. Additionally,
as noted, this registration statement registers the resale of up to 100,000,000
shares by Highgate. In the event that we issue more than 100,000,000 shares to
Highgate in connection with conversions of the Debenture, we will be required to
file additional registration statements to cover the resale of such shares. As
noted above, the number of shares issuable in connection with this registration
statement is also limited by our authorized capital, which as of July 20, 2006,
was 750,000,000 shares. In other words, we are not authorized to issue more than
750,000,000 shares of our common stock, irrespective of how many shares are
covered by this registration statement and prospectus, unless we increase our
authorized capital.
Plan of Distribution
The Selling Shareholder, its pledgees, donees, transferees or other successors
in interest, may from time to time sell the Shares of our Common Stock directly
to purchasers or indirectly to or through underwriters, broker-dealers or
agents. The Selling Shareholder may sell all or part of its shares in one or
more transactions at fixed prices, varying prices, prices at or related to the
then-current market price or at negotiated prices. The Selling Shareholder will
determine the specific offering price of the Shares from time to time that, at
that time, may be higher or lower than the market price of our Common Stock
quoted on the OTC Bulletin Board.
The Selling Shareholder and any underwriters, broker-dealers or agents
participating in the distribution of the Shares of our Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and any profit from the sale of such shares by the Selling Shareholder and any
compensation received by any underwriter, broker-dealer or agent may be deemed
to be underwriting discounts under the Securities Act. The Selling Shareholder
may agree to indemnify any underwriter, broker-dealer or agent that participates
in transactions involving sales of the Warrants or shares against certain
liabilities, including liabilities arising under the Securities Act.
Because the Selling Shareholder may be deemed to be an "underwriter" within the
meaning of the Securities Act, the Selling Shareholder will be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
Selling Shareholder that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to its sales in the market. With
certain exceptions, Regulation M precludes the Selling Shareholder, any
affiliated purchasers, and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security.
The method by which the Selling Shareholder, or its pledgees, donees,
transferees or other successors in interest, may offer and sell their Shares may
include, but are not limited to, the following:
* sales on the over-the-counter market, or other securities
exchange on which the Common Stock is listed at the time of
sale, at prices and terms then prevailing or at prices related
to the then-current market price;
* sales in privately negotiated transactions;
* sales for their own account pursuant to this prospectus;
* through the writing of options, whether such options are
listed on an options exchange or otherwise through the
settlement of short sales;
* cross or block trades in which broker-dealers will attempt to
sell the shares as agent, but may position and resell a
portion of the block as a principal in order to facilitate the
transaction;
* purchases by broker-dealers who then resell the shares for
their own account;
* brokerage transactions in which a broker solicits purchasers;
* any combination of these methods of sale; and
62
* any other method permitted pursuant to applicable law.
Any Shares of Common Stock covered by this prospectus that qualify for sale
under Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or
Rule 144A rather than under this prospectus. The Shares of our Common Stock may
be sold in some states only through registered or licensed brokers or dealers.
In addition, in some states, the Shares of our Common Stock may not be sold
unless they have been registered or qualified for sale or the sale is entitled
to an exemption from registration.
The Selling Shareholder may enter into hedging transactions with broker-dealers
or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
securities in the course of hedging the positions they assume with the Selling
Shareholder. The Selling Shareholder may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of the
securities offered hereby, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
To our knowledge, there are currently no plans, arrangements or understandings
between the Selling Shareholder and any underwriter, broker-dealer or agent
regarding the sale of Shares of our Common Stock by the Selling Shareholder.
The Selling Shareholder will pay all fees, discounts and brokerage commissions
in connection with any sales, including any fees to finders. We will pay all
expenses of preparing and reproducing this prospectus, including expenses or
compliance with state securities laws and filing fees with the SEC.
Under applicable rules and regulations under Regulation M under the Exchange
Act, any person engaged in the distribution of securities may not simultaneously
engage in market making activities, subject to certain exceptions, with respect
to the securities for a specified period set forth in Regulation M prior to the
commencement of such distribution and until its completion. In addition and with
limiting the foregoing, the Selling Shareholder will be subject to the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of the securities by
Selling Shareholder. The foregoing may affect the marketability of the
securities offered hereby.
The Selling Shareholder may be deemed to be an "underwriter" as such term is
defined in the Securities Act, and any commissions paid or discounts or
concessions allowed to any such person and any profits received on resale of the
securities offered hereby may be deemed to be underwriting compensation under
the Securities Act.
Prior History and Dealings with Selling Shareholder and Related
Entities
As noted above in the "Recent Developments" section, Highgate House Funds, Ltd.,
the Selling Shareholder under this registration statement, and Cornell Capital
have the same general partner, Yorkville Advisors, but have different portfolio
managers. In addition to the Convertible Debentures issued to Cornell in
December 2005, we have entered into prior financing transactions with Cornell in
the past four years.
- In April 2003, we entered into an equity line of credit
agreement with Cornell, pursuant to which we drew a total of
$3,330,000 on the equity line, and issued a total of
121,717,894 shares of common stock to Cornell Capital. We
registered the resale by Cornell of those shares into the
market on a registration statement on Form SB-2.
- In May 2004, we entered into a standby equity distribution
agreement with Cornell Capital, but the agreement was
terminated before any funds were drawn or any shares were
issued.
63
- Between June 2003 and January 2005, Cornell Capital loaned to
us an aggregate of $5,595,000 pursuant to promissory notes
issued to Cornell Capital. These notes were paid in full by
May 2005.
In the prior financing deals with Cornell, specifically the Equity Line
of Credit transaction, Cornell sold all of the shares of our common stock that
were issued in connection with the Equity Line. Although we do not have a
history of dealing with Highgate, there is a strong possibility that Highgate
will also sell all of the shares that we issue to it in connection with the
conversions of the Convertible Debentures, rather than holding any of the shares
for any extended period of time. Such sales could result in substantial
dilution.
As noted immediately above in the "Selling Shareholder" section,
through July 20, 2006, Highgate had converted $750,000 of the Convertible
Debenture, for 24,193,548 shares of our restricted common stock. Once this
registration statement has been declared effective by the SEC, Highgate may sell
those shares under this registration statement, although there is no guarantee
that Highgate will sell any or all of the shares.
Additionally, with respect to sales by Highgate, the following factors
should be considered:
- We have limited funds to use to repay the Convertible
Debentures issued both to Highgate and to Cornell, and as
such, it is likely that we will rely on the conversions of the
Convertible Debentures into shares of our common stock for
repayment, which will result in dilution to the positions of
our current shareholders;
- The Convertible Debentures issued to Highgate include a
conversion cap, pursuant to which Highgate cannot convert
principal amounts of the Convertible Debentures that would
result in its owning more than 4.99% of our issued and
outstanding common stock. These restrictions, however, do not
prevent Highgate from selling shares of common stock received
in connection with a conversion, and then receiving additional
shares of common stock in connection with a subsequent
conversion. In this way, Highgate could sell more than 4.99%
of the outstanding common stock in a relatively short time
frame while never holding more than 4.99% at one time. As a
result, existing shareholders and new investors could
experience substantial dilution in the value of their shares
of our common stock.
- Our average daily trading volume as of July 20, 2006, as
reported by the OTC Bulletin Board, was approximately
2,089,000 shares. As such, there can be no assurance that
there will be sufficient volume to support the sales by
Highgate of a substantial number of shares issued or issuable
to it upon conversion of the Convertible Debentures. To the
extent that Highgate is unable to sell sufficient shares and
to reduce the principal amount of the Debentures, we will be
required to continue to pay interest on the outstanding
principal balance.
- The Convertible Debentures mature on December 31, 2007. As
such, assuming that we make no principal payments on the
Convertible Debentures, as of July 20, 2006, the remaining
outstanding balance of $3,000,000 would convert into
approximately 100,000,000 shares of our common stock, which
Highgate would need to sell into the market. Although there
can be no way to accurately determine the effect of such sales
on our share price, it is likely that the introduction of such
a large volume of shares could significantly depress the share
price, which would result in our obligation to issue more
shares, in light of the floating conversion price.
- Each of the factors listed above could be worsened by the
actions of Cornell Capital in selling shares issuable upon
conversion of the convertible debentures issued to Cornell
Capital in December 2005. Although the resale by Cornell
Capital is not covered by this prospectus or the registration
statement of which it is a part, we have contractually agreed
with Cornell Capital that we will file a registration
statement to register its resales into the market. If both
64
Highgate and Cornell are selling into the market at the same
time, such sales could have a material adverse impact on our
sales price.
- Although we are permitted under the Convertible Debentures
issued both to Highgate and to Cornell Capital to pay the
principal amounts due in cash, we may not be in a financial
position to do so, and as such, we may rely on conversions by
Highgate and Cornell Capital of outstanding principal amounts
to reduce our obligations under the Convertible Debentures.
As noted above, we are not selling any shares under this prospectus or
the registration statement of which it is a part. Highgate is the sole selling
shareholder hereunder. As such, any decisions with respect to whether or when to
sell any shares issued or issuable to Highgate upon conversion of principal
amounts of the Convertible Debentures are completely within Highgate's
discretion, and we will not participate or be involved in any such sales.
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.
We also have advised the Selling Shareholders that they should be aware that the
anti-manipulation provisions of Regulation M under the Exchange Act will apply
to purchases and sales of shares of common stock by the Selling Shareholders,
and that there are restrictions on market-making activities by persons engaged
in the distribution of the shares. Under Regulation M, the Selling Shareholders
or their agents may not bid for, purchase, or attempt to induce any person to
bid for or purchase, shares of our common stock while such Selling Shareholders
are distributing shares covered by this prospectus. Regulation M may prohibit
the Selling Shareholders from covering short sales by purchasing shares while
the distribution is taking place, despite any contractual rights to do so under
the Agreement. We have advised the Selling Shareholders that they should consult
with their own legal counsel to ensure compliance with Regulation M.
Legal Proceedings
We assumed certain liabilities of Circuit Technology, Inc., in connection with
our transactions with that entity in the year 2000, and as a result we are
defendant in a number of legal actions involving nonpayment of vendors for goods
and services rendered. We have accrued these payables and have negotiated
settlements with respect to some of the liabilities, including those detailed
below, and are currently negotiating settlements with other vendors. As of July
20, 2006, the only remaining liability of Circuit Technology is C/S Utilities,
discussed below.
C/S Utilities notified the Company that (as successor to Circuit Technology,
Inc.) it believes it has a claim against the Company in the amount of $32,472
regarding utilities services. The claim was assigned to BC Services, Inc., which
obtained a judgment against Circuit Technology, Inc., for $37,966 in El Paso
County, Colorado, District Court on February 13, 2003. The Company is reviewing
its records in an effort to confirm the validity of the claims and is evaluating
its options.
65
CirTran Asia v. Mindstorm Civil No. 050902290, Third Judicial District Court,
Salt Lake County, State of Utah. In February, 2005, CirTran Asia brought suit
against Mindstorm Technologies, LLC, for nonpayment for goods provided. On April
22, 2005, the defendant filed its answer and counterclaim, following which
defendant's counsel withdrew from representation. CirTran Asia notified
defendant that under governing rules it was required to appoint successor
counsel. The defendant failed to do so, and failed to prosecute its claim.
CirTran Asia moved for default judgment, which was granted. CirTran Asia
submitted a proposed order of default judgment in the amount of $288,529 to the
court in September 2005, which has been signed.
CirTran Asia v. Robinson, Civil No. 050915272, Third Judicial District Court,
Salt Lake County, State of Utah. On August 30, 2005, CirTran Asia brought suit
against Glenn Robinson, one of the principals of Mindstorm Technologies, LLC,
for nonpayment for goods provided. Mr. Robinson filed an answer and subsequently
filed for personal bankruptcy. CirTran Asia is reviewing its options and intends
to vigorously pursue this action. On March 30, 2006, CirTran Asia filed a
complaint against Mr. Robinson under Section 523 of the U.S. Bankruptcy Code
seeking a determination that any debts owed by Mr. Robinson to CirTran Asia is
excepted from any discharge granted to Mr. Robinson. As of the date of this
Report, the case was proceeding in discovery.
CirTran Asia, et al. v. International Edge, et al., Civil No. 2:05 CV 413BSJ,
U.S. District Court, District of Utah. On May 11, 2005, CirTran Asia, UKING
System Industry Co., Ltd., and Charles Ho filed suit against International Edge,
Inc., Michael Casey Enterprises, Inc., Michael Casey, David Hayek, and HIPMG,
Inc., for breach of contract, breach of the implied covenant of good faith and
fair dealing, interference with economic relationships, and fraud in relation to
certain licensing issues relating to the Ab King Pro. The defendants
counterclaimed, alleging breach of contract, fraud, defamation and related
claims, all related to the Ab King Pro, seeking damages in the amount of
$10,000,000. CirTran Asia and the other plaintiffs filed their reply to the
counterclaim, disputing all of the allegations and claims. International Edge
filed a motion to dismiss for lack of jurisdiction, which was denied. The case
is presently in the discovery stage. Sales from this product in the year ended
December 31, 2004 were approximately $3,510,000, and in the year ended December
31, 2005, were approximately $960,000. CirTran Asia intends to vigorously pursue
this action.
CirTran Corporation vs. Advanced Beauty Solutions, LLC, and Jason Dodo, Civil
No. 060900332, Third Judicial District Court, Salt Lake County, State of Utah.
On January 9, 2006, CirTran Corporation brought suit against Advanced Beauty
Solutions ("ABS") and Jason Dodo, asserting claims including breach of contract,
breach of the implied covenant of good faith and fair dealing, interference with
economic relations, fraud and unjust enrichment.
On January 24, 2006, ABS filed a voluntary petition for relief under chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the "ABS
Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
settlement were read into the ABS Bankruptcy Court's record at the Hearing on
the Settlement Motion and the March 24, 2006 hearing on the Sale Motion
("Proposed Modifications"). Written notice of the Proposed Modifications was
provided to creditors and parties in interests on March 27, 2006, and the
Declaration of James C. Bastian, Jr., attesting that no objections to the
Proposed Modifications have been received by ABS, was filed with the ABS
Bankruptcy Court.
On June 6, 2006, the Company and ABS signed an agreement (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
66
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS.
Pursuant to the settlement of ABS's bankruptcy proceedings and the Asset
Purchase Agreement, the Company has an allowed claim against the ABS's estate in
the amount of $2,350,000, of which $750,000 is to be credited to the purchase of
substantially all of ABS's assets. Under the settlement, the Company shall be
allowed to participate as a general unsecured creditor of ABS's estate in the
amount of $1,600,000 on a pari passu basis with the $2,100,000 general unsecured
claim of certain insiders of ABS and subject to the prior payment of certain
secured, priority, and non-insider claims in the amount of approximately
$1,507,011.
Under the Asset Purchase Agreement, the Company agreed to purchase substantially
all of ABS's assets in exchange for:
i) a cash payment in the amount of $1,125,000;
ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
iii) the assumption of any assumed liabilities; and
iv) the obligation to pay ABS a royalty equal to $3.00 per True
Ceramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
The Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings (collectively, the "Assets").
Under the Asset Purchase Agreement, the Royalty Obligation is capped at
$4,135,000. To the extent the amounts paid to ABS on account of the Royalty
Obligation equal less than $435,000 on the 2 year anniversary of the Closing,
then, within 30 days of such anniversary, the Company agreed to pay ABS an
amount equal to $435,000 less the royalty payments made to date. As part of the
settlement, the Company agreed to exchange general releases with, among others,
ABS, Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolved a related dispute with
ICG in which ICG assigned $65,000 of its secured claim against ABS to the
Company.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
a) The Royalty Obligation payments will be made exclusively to
ICG and MFC (collectively, the "Secured Parties") until (i)
the Secured Parties have been paid in full on account of their
$1,243,208.44 secured claim, or (ii) the Secured Parties have
been paid $100,000 in payments under the Royalty Obligation,
whichever comes first.
b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
c) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation
payments will be used for distribution to allowed general
unsecured claims not including those of the Company and
certain insiders with unpaid notes (the "Insider
Noteholders").
d) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among
the Insider Noteholders (with a total allowed aggregate claim
of $2,100,000), and the Company (with a general unsecured
claim in the amount of $1,600,000), until paid in full.
67
The total claims against ABS's estate that must be paid before the
Company begins to share in the Royalty Obligation payments is $435,000.
CirTran v. Guthy-Renker Corporation and Ben Van De Bunt, Civil No.
20060980298, Third Judicial District Court, Salt Lake County, State of Utah. In
May 2006, the Company filed suit against Guthy-Renker Corporation and one of its
officers, claiming breach of contract, breach of the implied covenant of good
faith and fair dealing, interference with economic relationships,
misrepresentation, and punitive damages. The suit seeks damages in an amount to
be proven at trial. The defendants filed a motion to stay litigation and compel
arbitration in the matter. As of July 20, 2006, the Company had not filed a
response to the motion.
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 subsidiaries, CirTran Corporation
(Utah) and CirTran Asia, along with their dates of service in such capacities.
Name Age Positions
Iehab J. Hawatmeh 39 President, Chief Executive Officer,
Secretary and Director of CirTran
Corporation; President of CirTran
Corporation
(Utah).
Served since July 2000.
Trevor Saliba 32 Director since June 2001. Senior
Vice-President, Sales and Marketing.
Served since January 2002.
Shaher Hawatmeh 40 Chief Operating Officer
Served since June 2004
Charles Ho 51 President, CirTran-Asia
Served since June 2004
Richard T. Ferrone 58 Chief Financial Officer
Served since May 2006
Iehab J. Hawatmeh, MBA
Chairman, President & CEO
Mr. Iehab Hawatmeh founded CirTran Corporation in 1993 and has been its
Chairman, President and CEO since its inception. He also served previously as
the Company's Chief Financial Officer until the hiring of Richard T. Ferrone in
May 2006. Mr. Hawatmeh oversees all daily operation including financial,
technical, operational and sales functions for the company. Under Mr. Hawatmeh's
direction, the company has seen its annual sales exceed $20 million, its
employment exceed 360 and completed two strategic acquisitions. Prior to forming
the company, Mr. Hawatmeh was the Processing Engineering Manager for Tandy
Corporation overseeing the company's entire contract manufacturing printed
circuit board assembly division. In addition, Mr. Hawatmeh was responsible for
developing and implementing Tandy's facility Quality Control and Processing Plan
model which is used by CirTran today. Mr. Hawatmeh received his Master's of
Business Administration from University of Phoenix and his Bachelor's of Science
in Electrical and Computer Engineering from Brigham Young University. Iehab and
Shaher Hawatmeh are brothers.
68
Raed Hawatmeh.
Mr. Raed Hawatmeh resigned as a Director as of May 10, 2006.
Trevor M. Saliba, MS
Senior Vice President,
Worldwide Business Development
Mr. Saliba is responsible for sales and marketing activities worldwide and is
responsible for overseeing all worldwide business development strategies for the
company. Mr. Saliba was elected to the Board of Directors in 2001. From 1997 -
2001 he was President and CEO of Saliba Corp., a privately held contracting firm
he founded. From 1995-1997 he was an Associate with Morgan Stanley. From 1992 -
1995 he was Vice President of Sales and Marketing for SNJ Industries. Mr. Saliba
holds a Bachelors Degree in Business Administration and a Masters Degree in
Finance from La Salle University and has completed an Advanced Graduate Program
in Engineering and Management at the University of California, Berkeley.
In June 2002 Mr. Saliba filed for personal bankruptcy in the U.S. Bankruptcy
Court in Los Angeles, California, which has not yet been discharged. The
bankruptcy was unrelated to Mr. Saliba's involvement in CirTran.
James Snow
Vice President,
Product Development
President - Racore Technology Corporation
Mr. Snow is the Vice President of Product Development for CirTran Corporation
and also President of Racore Technology Corp., a wholly owned subsidiary of the
company. Mr. Snow directly oversees the design, planning and management of
Racore's proprietary Local Area Network (LAN) products and provides network
consulting services to clients. Mr. Snow held the position of Director of
Forward Planning and Project Engineering for Phillips Telecommunications and
Data Systems (a Division of N.V. Phillips) from 1982 - 1992. In addition he was
a Principle Engineer for Digital Equipment Corp. from 1992 - 1994. Mr. Snow
holds a Bachelor's degree in Electrical Engineering from Brigham Young
University and Business Management from Brookhaven College.
Shaher Hawatmeh
Chief Operating Officer
Mr. Shaher Hawatmeh joined the company in 1993 as its Controller shortly after
its founding. Today, Mr. Hawatmeh directly oversees all daily manufacturing
production, customer service, budgeting and forecasting for the company.
Following the companies acquisition of Pro Cable Manufacturing in 1996, Mr.
Hawatmeh directly managed the entire company, supervising all operations for
approximately two years and successfully oversaw the integration of this new
division into the company. Prior to joining CirTran, Mr. Hawatmeh worked for the
Utah State Tax Commission. Mr. Hawatmeh earned his Master's of Business
Administration with an emphasis in Finance from the University of Phoenix and
his Bachelor's of Science in Business Administration and a Minor in Accounting.
Iehab and Shaher Hawatmeh are brothers.
69
Charles Ho
President, CirTran-Asia
Mr. Ho, who became the President of our CirTran-Asia division on June 15, 2004,
served for six years as the chairman of Meicer Semiconductor Co., Ltd., one of
the leading semiconductor manufacturers located in China, and was a co-founder
of two of the leading design and manufacturing firms of DVD and CD players: Lead
Data Co., Ltd., and Media Group. Mr. Ho has served as CEO for Uking System Inc.
since 1986 and is still holds that position. Mr. Ho has a Master of Business
Administration Degree from the University of South Australia and Bachelor of
Science degree in Industrial Design from National Taipei University of
Technology.
Richard T. Ferrone
Chief Financial Officer
Prior to joining the Company, Mr. Ferrone had headed his own accounting firm,
Ferrone & Associates, which he established in Salt Lake City in 1994.
Previously, he was vice president and CFO for then-publicly-held GCI Industries,
Inc./Golf Card International for seven years, and served as CFO of Huntsman,
Christensen Real Estate & Development Co. Mr. Ferrone had also served as vice
president and chief financial officer for BSD Medical Corporation after he
started his career with a regional CPA firm in Salt Lake City. Mr. Ferrone has a
B.S. in Accounting from the University of Utah, where he also studied for a
Master of Professional Accountancy with a tax emphasis.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
Commission's Position on Indemnification for Securities Act Liabilities
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers or controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
70
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of the 634,853,832
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of July 20, 2006, by (i) each person
who is currently a director, (ii) each executive officer, (iii) all current
directors and executive officers as a group and (iv) each person who, to our
knowledge, is the beneficial owner of more than 5% of our outstanding common
stock.
Except as otherwise indicated, the persons named in the table have sole voting
and dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable. Beneficial ownership is determined
according to the rules of the Securities and Exchange Commission, and generally
means that person has beneficial ownership of a security if he or she possesses
sole or shared voting or investment power over that security. Each director,
officer, or 5% or more shareholder, as the case may be, has furnished us
information with respect to beneficial ownership. Except as otherwise indicated,
we believe that the beneficial owners of the common stock listed below, based on
the information each of them has given to us, have sole investment and voting
power with respect to their shares, except where community property laws may
apply.
- --------------------------------------------------------------------------------
Name and Common Percent of
Address Relationship Shares Class
- --------------------------------------------------------------------------------
Saliba Private Annuity Trust (1) 5% 75,698,990 11.92%
115 S. Valley Street Shareholder
Burbank, CA 91505
- --------------------------------------------------------------------------------
Iehab J. Hawatmeh Director, 62,288,465 9.81%
4125 South 6000 West Officer
West Valley City, Utah 84128 & 5%
Shareholder
- --------------------------------------------------------------------------------
Raed Hawatmeh (3) 5% 31,007,530 4.84%
10989 Bluffside Drive Shareholder
Studio City, CA 91604
- --------------------------------------------------------------------------------
Trevor Saliba (2) Director 13,275,000 2.09%
13848 Valleyheart Drive
Sherman Oaks, CA 91423
- --------------------------------------------------------------------------------
Charles Ho Officer of 0 0.00%
4125 South 6000 West Subsidiary of
West Valley City, Utah 84128 Company
- --------------------------------------------------------------------------------
Shaher Hawatmeh Chief Operating 6,107,079 0.96%
4125 South 6000 West Officer
West Valley City, Utah 84128
- --------------------------------------------------------------------------------
Richard T. Ferrone Chief Financial 0 0.00%
4125 South 6000 West Officer
West Valley City, Utah 84128
- --------------------------------------------------------------------------------
All Officers and Directors as a Group 81,670,544 12.84%
(4 persons)
- --------------------------------------------------------------------------------
- -------------------
71
(1) Includes 13,189,620 shares held by the Saliba Living Trust. Thomas L.
Saliba and Betty R. Saliba are the trustees of The Saliba Living Trust and
Thomas L. Saliba is the sole trustee of The Saliba Private Annuity Trust. These
persons control the voting and investment decisions of the shares held by the
respective trusts. Mr. Thomas L. Saliba is a nephew of the grandfather of Mr.
Trevor Saliba, one of our directors and officers. Mr. Trevor Saliba is one of
five passive beneficiaries of Saliba Private Annuity Trust and has no control
over its operations or management. Mr. Saliba disclaims beneficial control over
the shares indicated.
(2) Includes options to purchase up to 1,000,000 shares each that can be
exercised anytime at exercise prices of $0.027 per share.
(3) Includes options to purchase up to 6,250,000 shares that can be
exercised anytime at exercise prices of $0.02 - $0.03 per share.
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
July 20, 2006, 636,874,906 (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.
Our obligations to issue shares of our common stock include the following:
- Highgate Convertible Debenture: Assuming a hypothetical
conversion of the remaining $3,000,000, at a hypothetical
conversion price of $0.03 per share, we would issue
100,000,000 shares of our common stock.
- Cornell Convertible Debenture: Assuming a hypothetical
conversion of the remaining $1,500,000, at a hypothetical
conversion price of $0.03 per share, we would issue 50,000,000
shares of our common stock.
- ANAHOP, Inc.: Pursuant to a private offering in June 2006, we
agreed to issue an aggregate of 28,571,428 shares of our
common stock in two tranches. The first tranche involved the
payment by ANAHOP of $500,000 and our issuance of 7,142,857
shares of common stock, and the second tranche involving the
payment by ANAHOP of an additional $1,500,000 and our issuance
of 21,428,571 shares of common stock. As of July 20, 2006,
ANAHOP had paid $300,000 of the amount due for the first
tranche, and we had not issued the 7,142,857 shares of common
stock. Also, as of July 20, 2006, ANAHOP had not made the
payment for the second tranche, and we had not issued the
21,428,571 shares of common stock.
- Warrants: As of July 20, 2006, we had warrants outstanding to
issue 110,000,000 shares of our common stock.
- Options: As of July 20, 2006, we had options outstanding to
issue 11,250,500 shares of our common stock.
72
On July 20, 2006, we entered into lock down agreements with Cornell Capital
(with respect to the 50,000,000 shares underlying the Cornell Debenture and
10,000,000 shares underlying a warrant held by Cornell) and with ANAHOP and its
designees (with respect to 93,000,000 shares underlying warrants and the
21,428,571 shares in the second tranche). Under the agreements, Cornell agreed
not to convert any of the Cornell Debenture or exercise any of its warrants, and
ANAHOP and its designees agreed not to exercise any of the 93,000,000 warrants
or to make the second tranche payment, until we have taken the steps necessary
to amend our articles of incorporation and increase our authorized capital.
We have never declared or paid a cash dividend on our capital stock, nor do we
expect to pay cash dividends on our common stock in the foreseeable future. We
currently intend to retain our earnings, if any, for use in our business. Any
dividends declared in the future will be at the discretion of our board of
directors and subject to any restrictions that may be imposed by our lenders.
We have elected not to be governed by the terms and provisions of the Nevada
Private Corporations Law that are designed to delay, defer or prevent a change
in control of the Company.
Registration Rights and Related Matters
Pursuant to an agreement dated November 3, 2000, and as part of our debt
settlement with Future Electronics Corporation ("Future"), we granted certain
registration rights to Future with respect to 5,281,050 (352,070 pre-forward
split) shares of our common stock. These rights provide Future with the
opportunity, subject to certain terms and conditions, to include up to 50% of
our common stock that it holds in any registration statement filed by us. Among
other things, we have agreed to pay any costs incurred with the registration of
such stock and to keep any registration statement we file active for a period of
180 days or until the distribution contemplated in the registration statement
has been completed. Future's registration rights are assignable and transferable
to any individual or entity that does not directly compete with us. These
registration rights are not exercisable, however, with respect to registration
statements relating solely to the sale of securities to participants in a
company stock plan or relating solely to corporate reorganizations. In addition,
the rights would not be fully exercisable if an underwriter managing a public
offering determined in good faith that market factors required a limitation on
the number of shares that Future (or its assignee) would otherwise be entitled
to have registered.
In connection with our debt settlement with Future, our three largest
shareholders, Iehab Hawatmeh, Raed Hawatmeh and Roger Kokozyon (see "Security
Ownership of Certain Beneficial Owners and Management"), entered into lock-up
agreements with Future, whereby they agreed not to sell to the public any shares
of our common stock held by them. Such lock-up agreements expired of their
terms, were not renewed, and are no longer in effect.
73
In May 2005, in connection with our issuance of the Convertible Debenture, we
granted to Highgate registration rights, pursuant to which we agreed to file,
within 120 days of the closing of the purchase of the Convertible Debenture, a
registration statement to register the resale of shares of our common stock
issued or issuable upon conversion of the debenture. We also agreed to use our
best efforts to have the registration statement declared effective within 270
days after filing the registration statement. We agreed to register the resale
of up to 100,000,000 shares, and to keep such registration statement effective
until all of the shares issued or issuable upon conversion of the Convertible
Debenture have been sold.
In December 2005, in connection with our issuance of the Cornell Debenture, we
granted to Cornell registration rights, pursuant to which we agreed to file,
within 120 days of the closing of the purchase of the Cornell Debenture, a
registration statement to register the resale of shares of our common stock
issued or issuable upon conversion of the Cornell Debenture. We also agreed to
use our best efforts to have the registration statement declared effective
within 270 days after filing the registration statement. We agreed to register
the resale of up to 32,608,696 shares and 10,000,000 shares underlying warrants,
and to keep such registration statement effective until all of the shares issued
or issuable upon conversion of the Cornell Debenture have been sold.
In connection with the settlement of litigation with Salamon Brothers, an
investment firm, we issued of 4 million restricted shares and a warrant to
purchase an additional 7 million shares exercisable at $.05 per share, and
agreed to register the resale by the investment firm of the shares issued and
those underlying the warrants.
In connection with the offerings to ANAHOP, we granted registration rights with
respect to the resale of shares issuable upon conversion of the warrants held by
ANAHOP's designees. The rights granted were piggyback rights, and state that
upon the exercise by a holder of all of the warrants with a particular exercise
price, we agreed to include the resale of such shares in the next registration
statement filed by the Company following such exercise.
Certain Relationships and Related Transactions
An explanation of the relationship between CirTran and Abacas Ventures, Inc., is
as follows:
Two trusts, the Saliba Living Trust and the Saliba Private Annuity Trust
(collectively, the "Saliba Trusts"), were investors in Circuit Technology, a
Utah corporation and predecessor entity of the Company. The trustees of the
trusts are Tom and Betty Saliba, and Tom Saliba, respectively. (Tom Saliba is
the nephew of the grandfather of Trevor Saliba, one of the directors of
CirTran.) In July 2000, CirTran Corporation merged with Circuit Technology.
Through that merger, the Saliba Trusts became shareholders of CirTran. The
Saliba Trusts are also two of the shareholders of an entity named Abacas
Ventures, Inc. ("Abacas"). At the time of the merger, CirTran was in default on
several of its obligations, including an obligation to Imperial Bank. The Saliba
Trusts, through Abacas, purchased the bank's claim against CirTran to protect
their investment in CirTran. Since that time, Abacas has continued to settle
debts of CirTran to improve Abacas's position and to take advantage of certain
discounts that creditors of CirTran offered to settle their claims. On two
occasions, the Abacas shareholders have agreed to convert outstanding debt owed
by CirTran to Abacas into shares of CirTran common stock (discussed below).
Abacas continues to work with the company to settle claims by creditors against
CirTran, and, on occasion, to provide funding. There can be no assurance that
Abacus will agree to convert its existing debt, or any debt it acquires in the
future, into shares of CirTran, or that conversions will occur at a price and on
terms that are favorable to CirTran. If Abacus and CirTran cannot agree on
acceptable conversion terms, Abacus may demand payment of some or all of the
debt. If CirTran does not have sufficient cash or credit facilities to pay the
amount then due and owing by CirTran to Abacus, Abacus may exercise its rights
as a senior secured lender and commence foreclosure or other proceedings against
the assets of CirTran. Such actions by Abacus could have a material adverse
effect upon CirTran and its ability to continue in business.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,499,090 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.075 per share, for the aggregate
amount of $1,500,000.
74
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock to four of
Abacas's shareholders in exchange for cancellation by Abacas of an aggregate
amount of $1,500,000 in senior debt owed to the creditors by the Company. The
shares were issued with an exchange price of $0.05 per share, for the aggregate
amount of $1,500,000.
During 2002, the Company entered into a verbal bridge loan agreement with
Abacas. This agreement allows the Company to request funds from Abacas to
finance the build-up of inventory relating to specific sales. The loan bears
interest at 24% and is payable on demand. There are no required monthly
payments. During the years ended December 31, 2004 and 2003, the Company was
advanced $3,128,281 and $350,000, respectively, and made cash payments of
$3,025,149 and $875,000, respectively.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable
(see Note 6). The total of these obligations was $1,263,713. The Company has
recorded this transaction as a $1,263,713 non-cash increase to the note payable
owed to Abacas, pursuant to the terms of the Abacas agreement.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $1,530,587 and $163,742 as of December 31, 2004 and 2003,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $430,828 and $230,484 as of December 31, 2004 and 2003,
respectively, and is included in accrued liabilities.
In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 of
principal and accrued interest in return for the Company's issuing 51,250,000
shares of our restricted common stock to certain shareholders of Abacas. No
registration rights were granted. As of July 20, 2006, Abacas had no claims
against us.
Additional Information
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. Pursuant to the Saliba agreements, the
trusts were issued a total of 26,654,520 shares of common stock in exchange for
$500,000 cash and the cancellation of $1,499,090 of debt. We used the $500,000
cash from the sale of the shares for working capital. As a result of this
transaction, the percentage of our common stock owned by the Saliba Private
Annuity Trust and the Saliba Living Trust increased from approximately 6.73% to
approximately 17.76%. Mr. Trevor Saliba, one of our directors and officers, is a
passive beneficiary of the Saliba Private Annuity Trust. Pursuant to the other
two agreements made in January 2002, we issued an aggregate of 16,666,666 shares
of restricted common stock at a price of $0.075 per share in exchange for the
cancellation of $1,250,000 of notes payable by two shareholders, Mr. Iehab
Hawatmeh (our president, a director and our principal shareholder) and Mr. Rajai
Hawatmeh. Of these shares, 15,333,333 were issued to Iehab Hawatmeh in exchange
for the cancellation of $1,150,000 in debt. As a result of this transaction, the
percentage of our common stock owned by Mr. Hawatmeh increased from 19.9% to
approximately 22.18%.
In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a
public company, Circuit Technology, Inc., while still a private entity, redeemed
680,145 shares (as presently constituted) of common stock held by Raed Hawatmeh,
who was a director of Circuit Technology, Inc. at that time, in exchange for
$80,000 of expenses paid on behalf of the director. No other stated or unstated
rights, privileges, or agreements existed in conjunction with this redemption.
This transaction was consistent with other transactions where shares were
offered for cash.
75
In 1999, Circuit entered into an agreement with Cogent Capital Corp., or
"Cogent," a financial consulting firm, whereby Cogent agreed to assist and
provide consulting services to Circuit in connection with a possible merger or
acquisition. Pursuant to the terms of this agreement, we issued 800,000
(pre-forward split) restricted shares (12,000,000 post-forward split shares) of
our common stock to Cogent in July 2000 in connection with our acquisition of
the assets and certain liabilities of Circuit. The principal of Cogent was
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
Also, as of December 31, 2004 the company owed I&R Properties, LLC, the previous
owner of our principal office and manufacturing facility for unpaid accrued rent
and accrued interest. The Company settled with owed I&R Properties, LLC., on
accrued rent and interest of $400,000 by issuing 10,000,000 shares of
unregistered common stock in March 2005. I&R Properties, LLC, is an entity that
is owned as follows: 40% by Iehab Hawatmeh, our President, CEO, and Chairman;
10% by Shaher Hawatmeh, Chief Operating Officer of CirTran and the brother of
Iehab Hawatmeh; and 50% by Raed Hawatmeh, a director of CirTran, but who is not
related to Iehab or Shaher Hawatmeh.
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.
Purchase of Interests in Landlord
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with a fair value of $800,000 on the date of issuance.
No registration rights were granted. The shares were issued without registration
under the 1933 Act in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"), and the rules and regulations promulgated thereunder.
The primary asset of PFE is its rights, titles and interests in and to a parcel
of real property, together with any improvements, rents and profits thereon or
associated therewith, located at 4125 S. 6000 W., West Valley City, Utah, 84128,
where the Company presently has its headquarters and manufacturing facility.
Prior to the purchase of the membership interests, on December 17, 2003, the
Company had entered into a ten-year lease with PFE for the property. The lease
payments were $16,974. Following the acquisition of the PFE interests, PFE will
continue to own the building, and the Company will continue to make lease
payments under the 2003 lease.
Market for Common Equity and Related Stockholder Matters
Our common stock traded sporadically on the Pink Sheets under the symbol "CIRT"
from July 2000 to July 2002. Effective July 15, 2002, the NASD approved our
shares of common stock for quotation on the NASD Over-the-Counter Electronic
Bulletin Board. The following table sets forth, for the calendar years ending
December 31, 2004, 2003, and 2002, the prices of our common stock as reported
and summarized on the Pink Sheets. These prices are based on inter-dealer bid
and asked prices, without markup, markdown, commissions, or adjustments and may
not represent actual transactions.
76
Calendar Quarter Ended High Bid Low Bid
---------------------- -------- -------
March 31, 2006 $0.04 $0.04
December 31, 2005 $0.03 $0.02
September 30, 2005 $0.04 $0.03
June 30, 2005 $0.05 $0.03
March 31, 2005 $0.05 $0.03
December 31, 2004 $0.04 $0.02
September 30, 2004 $0.06 $0.03
June 30, 2004 $0.09 $0.04
March 31, 2004 $0.08 $0.01
December 31, 2003 $0.03 $0.02
September 30, 2003 $0.03 $0.01
June 30, 2003 $0.04 $0.01
March 31, 2003 $0.04 $0.01
December 31, 2002 $0.12 $0.03
September 30, 2002 $0.16 $0.03
June 30, 2002 $0.07 $0.02
March 31, 2002 $0.08 $0.02
As of July 20, 2006, we had approximately 526 shareholders of record holding
636,874,906 shares of common stock.
We have not paid, nor declared, any dividends on our common stock since our
inception and do not intend to declare any such dividends in the foreseeable
future. Our ability to pay dividends is subject to limitations imposed by Nevada
law. Under Nevada law, dividends may be paid to the extent the corporation's
assets exceed its liabilities and it is able to pay its debts as they become due
in the usual course of business.
Recent Sales of Unregistered Securities
On June 30, 2006, we closed a second private placement of shares of our common
stock and warrants (the "June Private Offering"). Pursuant to a securities
purchase agreement (the "June Agreement"), the Company agreed to sell
Twenty-Eight Million, Five Hundred Seventy-One Thousand, Four Hundred
Twenty-Eight (28,571,428) shares of its Common Stock (the "June Shares") to
ANAHOP, Inc., a California corporation. The total consideration to be paid for
the Shares will be Two Million Dollars ($2,000,000) if all tranches of the sale
close. We also issued warrants (the "June Warrants") to purchase up to an
additional 63,000,000 shares of our common stock to designees of ANAHOP.
With respect to the shares underlying the June Warrants, we granted piggyback
registration rights as follows: (A) once all of the warrants with an exercise
price of $0.15 (the "Fifteen Cent Warrants") have been exercised, we agreed to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifteen Cent Warrants; (B) once all of
the warrants with an exercise price of $0.25 (the "Twenty-five Cent Warrants")
have been exercised, we agreed to include in the next registration statement
that is filed by us the resales of the shares issued upon exercise of the
Twenty-five Cent Warrants; and (C) once all of the warrants with an exercise
price of $0.50 (the "Fifty Cent Warrants") have been exercised, we agreee to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifty Cent Warrants. We did not grant any
registration rights with respect to the Shares sold in the June private
placement.
The Shares and the June Warrants sold in the June 2006 private placement were
issued without registration under the 1933 Act in reliance on Section 4(2) of
the 1933 Act and the rules and regulations promulgated thereunder. We intend to
use the proceeds from the Private Offering for working capital and general
business purposes.
On May 24, 2006, we closed a private placement of shares of our common stock and
warrants in which we sold Fourteen Million, Two Hundred Eighty-five Thousand,
77
Seven Hundred Fifteen (14,285,715) shares of our Common Stock (the "Shares") to
ANAHOP, and issued warrants to purchase up to an additional 30,000,000 shares of
our common stock to designees of ANAHOP. The consideration paid for the Shares
was One Million Dollars ($1,000,000).
With respect to the shares underlying the Warrants, we granted piggyback
registration rights as follows: (A) once all of the warrants with an exercise
price of $0.15 (the "Fifteen Cent Warrants") have been exercised, we agreed to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifteen Cent Warrants; (B) once all of
the warrants with an exercise price of $0.25 (the "Twenty-five Cent Warrants")
have been exercised, we agreed to include in the next registration statement
that is filed by us the resales of the shares issued upon exercise of the
Twenty-five Cent Warrants; and (C) once all of the warrants with an exercise
price of $0.50 (the "Fifty Cent Warrants") have been exercised, we agreee to
include in the next registration statement that is filed by us the resales of
the shares issued upon exercise of the Fifty Cent Warrants. We did not grant any
registration rights with respect to the Shares.
The Shares and the Warrants were issued without registration under the 1933 Act
in reliance on Section 4(2) of the 1933 Act and the rules and regulations
promulgated thereunder. We used the proceeds from the Private Offering for
working capital and general business purposes, including the purchase of the
assets of ABS (discussed above in the "Recent Developments" section).
78
In January 2006, Highgate converted $750,000 of its convertible debenture into
24,193,548 shares of the Company's restricted common stock at a conversion rate
of $0.031 per share, which was the lower of $0.10 or 100% of the lowest closing
bid price of the Company's commons stock over the 20 trading days preceding the
conversion.
In February 2006, we issued 4,000,000 shares of our restricted common stock and
a warrant to purchase an additional 7,000,000 shares with an exercise price of
$0.06 per share in settlement of litigation.
In each case the securities were issued in connection with private transactions
with accredited investors pursuant to Section 4(2) of the Securities Act of 1933
and the regulations promulgated thereunder.
In December 2005, we entered into a securities purchase agreement with Cornell
Capital Partners ("Cornell"), concerning the issuance of an aggregate principal
amount of $1,500,000 of Convertible Debentures. The issuance of the Convertible
Debentures to Cornell was made in reliance on Section 4(2) of the Securities Act
of 1933, as amended (the "1933 Act") and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in offering the securities, and the
Convertible Debenture was issued to only one investor which represented that it
is an "accredited investor" as that term is defined in Regulation D promulgated
pursuant to the Securities Act of 1933. Through April 17, 2006, we had issued no
shares of our common stock in connection with any conversions of the Convertible
Debentures, and we had received notice of no conversions from Cornell.
In May 2005, we entered into a securities purchase agreement with Highgate
concerning the issuance of the Convertible Debenture. The issuance of the
Convertible Debenture to Highgate was made in reliance on Section 4(2) of the
1933 Act, and rules and regulations promulgated thereunder, as a transaction not
involving any public offering. No advertising or general solicitation was
employed in offering the securities, and the Convertible Debenture was issued to
only one investor which represented that it is an "accredited investor" as that
term is defined in Regulation D promulgated pursuant to the Securities Act of
1933. Through April 17, 2006, we had issued 24,193,548 shares of our restricted
common stock in connection with conversions of $750,000 of the Convertible
Debentures, and we had received notice of the conversion from Highgate. This
registration statement is filed to register the resale of shares into the market
that Highgate will receive upon conversion of the Convertible Debenture, and our
issuances of shares to Highgate will be made without registration under the 1933
Act in reliance on Section 4(2) of the 1933 Act, and the rules and regulations
promulgated thereunder.
In March 2005, the Company entered into agreements with eight individuals or
entities (collectively, the "Lenders") to whom the Company was indebted, in an
aggregate amount of $2,450,000, pursuant to which, the Company agreed to issue
an aggregate of 61,250,000 shares of its restricted common stock in exchange for
the Lenders' agreeing to cancel the debt obligations owed by the Company. With
respect to $2,050,000 of the indebtedness, that amount was owed to Abacas
Ventures, Inc. ("Abacas"), a company that had purchased certain of the Company's
obligations. Abacas agreed to the cancellation of the Company's obligation to
Abacas in return for the Company's issuing shares to certain of Abacas's
shareholders and the other named individuals. Trevor Saliba, who is a
beneficiary of the Saliba Private Annuity Trust, has been a director of the
Company since June 2001. The remaining $400,000 was due to I&R Properties in
connection with past rent on the Company's headquarters building. I&R Properties
is a company owned and controlled by individuals who are officers, directors and
principal stockholders. The issuances of shares to the Lenders were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in the issuance of the securities.
On March 31, 2005, the Company entered into a Membership Acquisition Agreement
(the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the
purchase of one hundred percent (100%) of the membership interests in PFE
Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition
Agreement, the Company agreed to issue twenty million (20,000,000) shares of its
restricted common stock, with an estimated value of $800,000. No registration
rights were granted. The shares were issued without registration under the 1933
Act in reliance on Section 4(2) of the Securities Act of 1933, as amended (the
79
"1933 Act"), and the rules and regulations promulgated thereunder, as a
transaction not involving any public offering. No advertising or general
solicitation was employed in the issuance of the securities
Pursuant to the Equity Line of Credit Agreement, we were entitled to put to the
Equity Line Investor, in lieu of repayment of amounts drawn on the Equity Line,
shares of the Company's common stock. Although the Company filed a registration
statement to register the resale by the Equity Line Investor of the shares put
to it by the Company, the issuances of shares to the Company were made in
reliance on Section 4(2) of the 1933 Act, and rules and regulations promulgated
thereunder, as a transaction not involving any public offering. No advertising
or general solicitation was employed in offering the securities, and the shares
were issued to only one investor which represented that it is an "accredited
investor" as that term is defined in Regulation D promulgated pursuant to the
Securities Act of 1933. Through December 31, 2003, we issued 64,253,508 shares
of common stock to the Equity Line Investor in connection with draws on the
Equity Line. Subsequent to December 31, 2003, and through August 31, 2004, we
issued an aggregate of 57,464,386 shares of Common Stock to the Equity Line
Investor in connection with draws on the Equity Line. We used the proceeds of
the draws on the Equity Line to pay outstanding liabilities, including notes to
Cornell, the Equity Line Investor, discussed above. As noted above, the Company
has terminated the Equity Line of Credit Agreement.
In December, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 30,000,000 shares of common stock in exchange
for cancellation of an aggregate amount of $1,500,000 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of $0.05
per share, for the aggregate amount of $1,500,000. The Company did not grant
registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act, as
amended (the "1933 Act"), and the rules and regulations promulgated thereunder.
In January, 2002, the Company entered into an agreement with Abacas under which
the Company issued an aggregate of 19,987,853 shares of common stock in exchange
for cancellation of an aggregate amount of $1,499,090 in senior debt owed to the
creditors by the Company. The shares were issued with an exchange price of
$0.075 per share, for the aggregate amount of $1,500,000. The Company did not
grant registration rights to the four creditors. The shares were issued without
registration under the 1933 Act in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"), and the rules and regulations
promulgated thereunder.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
80
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Executive Compensation
The following table sets forth certain information regarding the annual and
long-term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2005, 2004,
and 2003, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
- ------------------------ ------------------------- --------------------- ------------
Long-Term
Annual Compensation Compensation Awards
- ------------------------ ------------------------- --------------------- ------------
Restricted
Bonus/ Stock Stock All
Name and Salary Commission Awards Options Other
Principal Position Year ($) ($) ($) (#) Compensation
- ------------------------ ---- ------- ---------- ---------- --------- ------------
Iehab J. Hawatmeh 2005 225,000 114,219 - 6,000,000 -
President, Secretary, 2004 200,000 - - 3,500,000 -
Treasurer and Director 2003 175,000 - - 6,500,000 -
2002 175,000 - - 1,850,000 -
- ------------------------ ---- ------- ---------- ---------- --------- ------------
Trevor M. Saliba 2005 120,000 31,895 - 5,000,000 -
Sr. Vice President 2004 108,000 - - 4,250,000 -
and Director of 2003 127,000 - - 3,000,000 -
CirTran Corporation 2002 118,000 - - 500,000 -
- ------------------------ ---- ------- ---------- ---------- --------- ------------
Raed S. Hawatmeh 2005 - - - 4,000,000 -
Resigned as Director 2004 - - - 2,500,000 -
of CirTran 2003 - - - 3,000,000 -
Corporation 2002 - - - 500,000 -
May 10, 2006.
- ------------------------ ---- ------- ---------- ---------- --------- ------------
Charles Ho 2005 - 460,126 - 500,000 -
President of 2004 - 157,389 - - -
CirTran Asia 2003 - - - - -
2002 - - - - -
- ------------------------ ---- ------- ---------- ---------- --------- ------------
There have not been any employee options or stock appreciation rights granted to
executives from January 1, 2006 to July 20, 2006.
Option/SAR Grants in the Year Ended December 31, 2005
- -------------- ------------ --------------- ---------------- ---------------
Number of % of Total
Securities Options Granted
Underlying to Employees
Options/SARs in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Sh) Expiration Date
- -------------- ------------ --------------- ---------------- ---------------
Iehab Hawatmeh 6,000,000 30.00% $0.022 - $0.027 Jan - Dec 2010
- -------------- ------------ --------------- ---------------- ---------------
Trevor Saliba 5,000,000 25.00% $0.022 - $0.027 Jan - Dec 2010
- -------------- ------------ --------------- ---------------- ---------------
Raed Hawatmeh 4,000,000 20.00% $0.022 - $0.027 Jan - Dec 2010
- -------------- ------------ --------------- ---------------- ---------------
Charles Ho 500,000 2.00% $0.06 Jan 2006
- -------------- ------------ --------------- ---------------- ---------------
81
Option/SAR Grants in the Year Ended December 31, 2004
- -------------- ------------ --------------- ---------------- ---------------
Number of % of Total
Securities Options Granted
Underlying to Employees
Options/SARs in Fiscal Exercise or Base
Name Granted (#) Year Price ($/Sh) Expiration Date
- -------------- ------------ --------------- ---------------- ---------------
Iehab Hawatmeh 3,500,000 14.58% $0.015 - $0.03 Jan - Dec 2009
- -------------- ------------ --------------- ---------------- ---------------
Trevor Saliba 4,250,000 17.71% $0.015 - $0.03 Jan - Dec 2009
- -------------- ------------ --------------- ---------------- ---------------
Raed Hawatmeh 3,500,000 14.58% $0.015 - $0.03 Jan - Dec 2009
- -------------- ------------ --------------- ---------------- ---------------
Aggregated Option/SAR Exercises in the Year Ended December 31, 2005 and December
31, 2005 Option/SAR Values
- -------------- ------------ ------------ ------------------ ---------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs at FY Options/SARs at
Acquired End (#) FY-End ($)
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------- ------------ ------------ ------------------ ---------------
Iehab Hawatmeh 8,000,000 $198,000 - $ -
- -------------- ------------ ------------ ------------------ ---------------
Trevor Saliba 4,000,000 $100,000 3,000,000/0 $ 71,000/0
- -------------- ------------ ------------ ------------------ ---------------
Raed Hawatmeh 3,000,000 $73,000 5,250,000/0 $123,500/0
- -------------- ------------ ------------ ------------------ ---------------
Charles Ho - - 500,000/0 -
- -------------- ------------ ------------ ------------------ ---------------
Aggregated Option/SAR Exercises in the Year Ended December 31, 2004 and December
31, 2004 Option/SAR Values
- -------------- ------------ ------------ ------------------ ---------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs at FY Options/SARs at
Acquired End (#) FY-End ($)
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------- ------------ ------------ ------------------ ---------------
Iehab Hawatmeh 1,500,000 $33,750 - $ -
- -------------- ------------ ------------ ------------------ ---------------
Trevor Saliba 2,250,000 $56,250 - $ -
- -------------- ------------ ------------ ------------------ ---------------
Raed Hawatmeh 750,000 $11,250 2,250,000/0 $52,500/0
- -------------- ------------ ------------ ------------------ ---------------
Options issuable in connection with Manufacturing Agreement -- On June 10, 2004,
we entered into an exclusive manufacturing agreement with certain Developers,
including Charles Ho, the President of CirTran-Asia. Under the terms of the
agreement, we, through our wholly owned subsidiary CirTran-Asia, have the
exclusive right to manufacture certain products developed by the Developers or
any of their affiliates. In connection with this agreement, through January 17,
2006, we had identified seven products, in connection with which we agreed to
issue options to purchase shares common stock to the Developers upon the sale,
shipment and payment for specified amounts of units of a the identified
products, as set forth below. The options will be exercisable at $0.06 per
82
share, vest on the grant date and expire one year after issuance. The schedule
of units and potential options that will be issued follows:
- --------------------- ------- ----------- ----------- -------- -------------
Each Options Options
Options for Multiple of for Each Issued
Initial Units Above Multiple Through
Initial Units Initial of July 20,
Product Units Sold(1) Units Units 2006
- --------------------- ------- ----------- ----------- -------- -------------
Ab King Pro 500,000 500,000 100,000 100,000 1,500,000 (3)
- --------------------- ------- ----------- ----------- -------- -------------
Ab Roller 500,000 500,000 200,000 100,000 -
- --------------------- ------- ----------- ----------- -------- -------------
Ab Trainer Club Pro 25,000 500,000 15,000 100,000 -
- --------------------- ------- ----------- ----------- -------- -------------
Instant Abs 100,000 500,000 50,000 100,000 -
- --------------------- ------- ----------- ----------- -------- -------------
Hot Dog Express (2) 300,000 1,000,000 100,000 200,000 -
- --------------------- ------- ----------- ----------- -------- -------------
Condiment Caddy 200,000 250,000 100,000 100,000 -
- --------------------- ------- ----------- ----------- -------- -------------
Denise Austin Pilates 200,000 500,000 100,000 100,000 -
- --------------------- ------- ----------- ----------- -------- -------------
(1) Except as set forth in Notes (2) and (3), the options set forth in this
table are issuable to Charles Ho, President of our subsidiary CirTran-Asia.
(2) Of the options for initial units sold for this product, Mr. Ho,
President of CirTran-Asia, is entitled to receive 700,000, with the remaining
300,000 going to the other developer. For each multiple of units above the
initial units, Mr. Ho and the other developers are each entitled to receive an
additional 100,000 options, for an aggregate of 200,000 options.
(3) Of the options issued in connection with this product, Mr. Ho received
500,000, and two other developers each received 500,000 options.
As of July 20, 2006, we had issued a total of 1,500,000 options pursuant to the
agreement relating to the Ab King Pro, but had not received sufficient orders or
shipped sufficient quantities of the other products listed in the table to
trigger the issuance of additional options. Of the 1,500,000 options issued, Mr.
Ho received 500,000 options. The 1,500,000 options were issued with an exercise
price of $0.06 per share, and all 1,500,000 options expired in January 2006
pursuant to their terms.
During 2004, Mr. Ho received approximately $157,400 in commissions in connection
with the manufacturing agreement. During 2005, Mr. Ho received approximately
$460,200 in commissions in connection with the manufacturing agreement. As of
July 20, 2006, Mr. Ho had received approximately $112,000 in commissions in
connection with the manufacturing agreement.
Mr. Ho's commissions are calculated by predetermined percentages from
manufacturing agreements and/or appendixes. Most of the commissions are
calculated using the sales price less freight and cost of sales to the factory,
that amount is then multiplied by the contract percentage, per unit for each
product, after the payment has been received.
83
Employment Agreements
On July 1, 2004, CirTran Corporation entered into an employment agreement with
Iehab Hawatmeh, dated as of June 26, 2004. The agreement, which is for a term of
five years and renews automatically on a year-to year basis, provides for a base
salary of $225,000, plus a bonus of 5% of our earnings before interest, taxes,
depreciation, and amortization, payable quarterly, as well as any other bonus
our board of directors may approve. Under the Agreement, Mr. Hawatmeh agreed to
serve as our Chief Executive Officer and President and to perform such other
duties as delegated by our board of directors. The agreement provides for
benefits including health insurance coverage, cell phone, car allowance, life
insurance, and D&O insurance. Under the Agreement, Mr. Hawatmeh's employment may
be terminated for cause, or upon his death or disability. In the event that Mr.
Hawatmeh is terminated without cause, we are obligated to pay him, as a
severance payment, an amount equal to five full years of his then-current annual
base compensation, half upon such termination and half one year later, together
with a continuation of insurance benefits for a period of five years.
Additionally, on July 1, 2004, CirTran Corporation entered into an employment
agreement with Trevor Saliba, dated as of June 26, 2004. The agreement, which is
for a term of three years and renews automatically on a year-to year basis,
provides for a base salary of $120,000, plus a bonus of 1% of our gross sales
generated directly by Mr. Saliba, a bonus of 5% of all gross investments made
into CirTran which are directly generated and arranged by Mr. Saliba, a bonus of
1% of the net purchase price of any acquisitions completed by us which are
directly generated and arranged by Mr. Saliba (payable in CirTran common stock),
as well as any other bonus our board of directors may approve. Under the
Agreement, Mr. Saliba agreed to serve as our Executive Vice President of Sales
and Marketing, and to perform such other duties as delegated by our board of
directors. The agreement provides for benefits including health insurance
coverage, cell phone, car allowance, life insurance, and D&O insurance. Under
the Agreement, Mr. Saliba's employment may be terminated for cause, or upon his
death or disability. In the event that Mr. Saliba is terminated without cause,
we are obligated to pay him, as a severance payment, an amount equal to one
years' salary. If the Agreement expires of its terms or is terminated for any
reason, Mr. Saliba may not compete with us for a period of one year from the
date of termination of the agreement. Mr. Saliba also agreed not to solicit our
employees or customers, or attempt to induce anyone to cease doing business with
us for a period of two years after the termination of the agreement.
On July 1, 2004, we also entered into an employment agreement, dated as of June
26, 2004, with Shaher Hawatmeh, the brother of Iehab Hawatmeh. The agreement,
which is for a term of three years and renews automatically on a year-to year
basis, provides for a base salary of $150,000, plus a bonus of 1% of our
earnings before interest, taxes, depreciation, and amortization, payable
quarterly, as well as any other bonus our board of directors may approve. Under
the Agreement, Mr. Shaher Hawatmeh agreed to serve as our Chief Operating
Officer, and to perform such other duties as delegated by our board of
directors. The agreement provides for benefits including health insurance
coverage, cell phone, life insurance, and D&O insurance. Under the Agreement,
Mr. Shaher Hawatmeh's employment may be terminated for cause, or upon his death
or disability. In the event that Mr. Shaher Hawatmeh is terminated without
cause, we are obligated to pay him, as a severance payment, an amount equal to
one years' salary. If the Agreement expires of its terms or is terminated for
any reason, Mr. Shaher Hawatmeh may not compete with us for a period of one year
from the date of termination of the agreement. Mr. Shaher Hawatmeh also agreed
not to solicit our employees or customers, or attempt to induce anyone to cease
doing business with us for a period of two years after the termination of the
agreement.
On June 15, 2004, our subsidiary, CirTran-Asia, entered into an employment
agreement with Charles Ho. The agreement, which is for a term of three years and
renews automatically on a year-to year basis, provides that for each additional
product that Mr. Ho procures pursuant to the agreement between CirTran-Asia and
Michael Casey Enterprises, LTD., Mr. Ho shall be entitled to receive such
compensation as provided for in that agreement in the form of options to
purchase shares of CirTran common stock. Under the Agreement, CirTran-Asia will
not provide benefits to Mr. Ho., and his employment may be terminated for cause,
or upon his death or disability. If the Agreement expires of its terms or is
terminated for any reason, Mr. Ho may not compete with us for a period of one
year from the date of termination of the agreement. Mr. Ho also agreed not to
solicit our employees or customers, or attempt to induce anyone to cease doing
business with us for a period of two years after the termination of the
agreement.
84
On May 15, 2006, Richard T. Ferrone entered into a three-year employment
contract with the Company to serve as the Chief Financial Officer of the Company
to perform those duties delegated by the Board of Directors and the President of
the Company and all other duties consistent with such description. The term of
his employment started on May 15, 2006, and will continue for three years
thereafter, unless sooner terminated by either party as provided in the
agreement. Thereafter, the agreement will be automatically renewed on a
year-to-year basis after the expiration of the initial or any subsequent term of
the Agreement unless terminated by either party as provided in the agreement.
Mr. Ferrone will receive, commencing on May 15, 2006, a base salary of $120,000
per year. The base salary shall be reviewed by the Board annually and may be
increased as determined by the Board. The Board's determination of salary will
be based primarily on Mr. Ferrone's ability to meet, and to cause the Company to
meet, annually established goals. He is also entitled to a bonus of $30,000 per
year, payable in quarterly increments. In addition, he may be granted options to
purchase shares of the Company's common stock as determined from time to time by
the Board or the Committee established pursuant to the Company's Stock Option
Plan.
2001 Stock Plan
The 2001 Stock Plan has been fully distributed.
2002 Stock Plan
The 2002 Stock Plan has been fully distributed.
2003 Stock Plan
In November 2003, our board approved and adopted our 2003 Stock Plan, or the
2003 Plan, subject to shareholder approval. An aggregate of 35,000,000 shares of
our common stock are subject to the 2003 Plan, which provides for grants to
employees, officers, directors and consultants of both non-qualified (or
non-statutory) stock options and "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended). The 2003 Plan
also provides for the grant of certain stock purchase rights, which are subject
to a purchase agreement between us and the recipient. The purpose of the 2003
Plan is to enable us to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to such
persons, and to promote the success of our business.
The 2003 Plan is administered by our board of directors, which designates from
time to time the individuals to whom awards are made under the 2003 Plan, the
amount of any such award and the price and other terms and conditions of any
such award. The 2003 Plan shall continue in effect until the date which is ten
years from the date of its adoption by the board of directors, subject to
earlier termination by our board. The board may suspend or terminate the 2003
Plan at any time.
The board determines the persons to whom options are granted, the option price,
the number of shares to be covered by each option, the period of each option,
the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the 2003 Plan for more than an aggregate of 15,000,000
shares in any given fiscal year. We do not receive any monetary consideration
upon the granting of options. Options are exercisable in accordance with the
terms of an option agreement entered into at the time of grant.
The board may also award our shares of common stock under the 2003 Plan as stock
purchase rights. The board determines the persons to receive awards, the number
of shares to be awarded and the time of the award. Shares received pursuant to a
stock purchase right are subject to the terms, conditions and restrictions
determined by the board at the time the award is made, as evidenced by a
restricted stock purchase agreement.
As of April 8, 2005, 35,000,000 options to purchase shares of common stock and
no stock purchase rights had been granted under the 2003 Plan. Therefore, the
2003 Plan had been fully distributed.
85
2004 Stock Plan
In December 2004, our board approved and adopted our 2004 Stock Plan, or the
2004 Plan, subject to shareholder approval. An aggregate of 40,000,000 shares of
our common stock are subject to the 2003 Plan, which provides for grants to
employees, officers, directors and consultants of both non-qualified (or
non-statutory) stock options and "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended). The 2004 Plan
also provides for the grant of certain stock purchase rights, which are subject
to a purchase agreement between us and the recipient. The purpose of the 2004
Plan is to enable us to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to such
persons, and to promote the success of our business.
The 2004 Plan is administered by our board of directors, which designates from
time to time the individuals to whom awards are made under the 2004 Plan, the
amount of any such award and the price and other terms and conditions of any
such award. The 2004 Plan shall continue in effect until the date which is ten
years from the date of its adoption by the board of directors, subject to
earlier termination by our board. The board may suspend or terminate the 2004
Plan at any time.
The board determines the persons to whom options are granted, the option price,
the number of shares to be covered by each option, the period of each option,
the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the 2004 Plan for more than an aggregate of 15,000,000
shares in any given fiscal year. We do not receive any monetary consideration
upon the granting of options. Options are exercisable in accordance with the
terms of an option agreement entered into at the time of grant.
The board may also award our shares of common stock under the 2004 Plan as stock
purchase rights. The board determines the persons to receive awards, the number
of shares to be awarded and the time of the award. Shares received pursuant to a
stock purchase right are subject to the terms, conditions and restrictions
determined by the board at the time the award is made, as evidenced by a
restricted stock purchase agreement.
As of July 20, 2006, 40,000,000 options to purchase shares of common stock and
no stock purchase rights had been granted under the 2004 Plan.
The following table sets forth information about the Company's equity
compensation plans, including the number of securities to be issued upon the
exercise of outstanding options, warrants, and rights; the weighted average
exercise price of the outstanding options, warrants, and rights; and the number
of securities remaining available for issuance under the specified plan through
July 20, 2006.
86
- ------------------------- -------------------------- ------------------------- -------------------------
Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants, and future issuance under
Plan Category warrants, and rights rights equity compensation plans
- ------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
approved by shareholders
0 0 0
- ------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans 2002 Plan: 500 2002 Plan: $0.0001/share 2002 Plan: 0 options
not approved by options
shareholders 2003 Plan: 3,750,000 2003 Plan: $0.01/share 2003 Plan: 0 options
options
2004 Plan: 5,500,000 2004 Plan: $0.03/share 2004 Plan: 0 options
options
- ------------------------- -------------------------- ------------------------- -------------------------
Total 9,250,500 $0.03/share 0
- ------------------------- -------------------------- ------------------------- -------------------------
Changes in and disagreements with accountants on accounting and financial
disclosure
None.
Index to Financial Statements
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 F-4
Consolidated Statement of Stockholders' Deficit for the Years
Ended December 31, 2004 and 2005 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-8
Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005 Q-2
Consolidated Statements of Operations for the Three Months
Ended March 31, 2006 and 2005 Q-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 Q-4
Notes to Consolidated Financial Statements Q-6
Experts
Our consolidated balance sheets as of December 31, 2005 and 2004, and the
consolidated statements of operations, stockholders' deficit, and cash flows,
for the years then ended, have been included in the registration statement on
Form SB-2 of which this prospectus forms a part, in reliance on the report of
Hansen, Barnett & Maxwell, independent certified public accountants, given on
the authority of that firm as experts in auditing and accounting.
Legal matters
The validity of the Shares offered hereby will be passed upon for us by Durham
Jones & Pinegar, P.C., 111 East Broadway, Suite 900, Salt Lake City, Utah 84111.
87
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of CirTran Corporation and related notes
thereto and auditors' report thereon are filed as part of this Form 10-KSB:
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 F-4
Consolidated Statement of Stockholders' Equity (Deficit) for
the Years Ended December 31, 2004 and 2005 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS Registered with the Public Company
AND Accounting Oversight Board
BUSINESS CONSULTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CirTran Corporation
and Subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit, has
suffered losses from operations and has negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 29, 2006
F-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 2004
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,427,865 $ 81,101
Trade accounts receivable, net of
allowance for doubtful accounts
of $158,374 and $41,143, respectively 3,358,981 1,288,719
Inventory, Net of reserve of
$751,296 and $547,405, respectively 2,271,604 1,453,754
Prepaid Deposits 142,188 -
Other 252,941 153,062
- --------------------------------------------------------------------------------
Total Current Assets 7,453,579 2,976,636
Property and Equipment, Net 2,686,737 840,793
Investment in Securities, at Cost 300,000 300,000
Other Assets, Net 361,581 8,000
Deposits 100,000 100,000
Deferred Offering Costs - 68,000
- --------------------------------------------------------------------------------
Total Assets $ 10,901,897 $ 4,293,429
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 1,239,519 $ 1,104,392
Accrued liabilities 1,222,018 2,066,022
Deferred revenue 119,945 -
Derivative liability 4,910,303 -
Convertible Debenture 996,252 -
Current maturities of long-term notes payable 12,610 1,815,875
Notes payable to stockholders 95,806 18,586
Notes payable to related parties - 1,530,587
- --------------------------------------------------------------------------------
Total Current Liabilities 8,596,453 6,535,462
- --------------------------------------------------------------------------------
Long-Term Notes Payable, Less Current Maturities 1,037,390 -
- --------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, par value $0.001; authorized
750,000,000 shares; issued and outstanding
shares: 583,368,569 and 474,118,569 net of
0 and 3,000,000 shares held in treasury at
no cost at December 31, 2005 and 2004,
respectively 583,364 474,114
Additional paid-in capital 20,012,000 16,083,455
Accumulated deficit (19,327,310) (18,799,602)
- --------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) 1,268,054 (2,242,033)
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity (Deficit) $ 10,901,897 $ 4,293,429
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Net Sales $ 12,992,512 $ 8,862,715
Cost of Sales (6,706,135) (7,030,934)
Writedown of carrying value of inventories (38,089) (13,000)
- --------------------------------------------------------------------------------
Gross Profit 6,248,288 1,818,781
- --------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative expenses 5,923,075 3,362,933
Non-cash employee compensation expense 135,000 332,181
- --------------------------------------------------------------------------------
Total Operating Expenses 6,058,075 3,695,114
- --------------------------------------------------------------------------------
Loss From Operations 190,213 (1,876,333)
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest (1,225,252) (495,637)
Gain on forgiveness of debt 337,761 1,713,648
Gain on derivative valuation 169,570 -
- --------------------------------------------------------------------------------
Total Other Expense, Net (717,921) 1,218,011
- --------------------------------------------------------------------------------
Net Loss $ (527,708) $ (658,322)
- --------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.00) $ (0.00)
- --------------------------------------------------------------------------------
Basic and diluted weighted-average
common shares outstanding 554,085,007 451,620,617
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2005
Common Stock
-------------------------- Additional
Number Paid-in Accumulated
of Shares Amount Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------
Balance - December 31, 2003 349,087,699 $ 349,088 $ 12,876,941 $(18,141,280) $ (4,915,251)
Shares issued for conversion
of notes payable to equity
line investor 57,464,386 57,460 2,006,540 - 2,064,000
Shares issued for settlement
of notes payable 1,542,495 1,542 53,458 - 55,000
Shares issued for
settlement expense 1,000,000 1,000 59,000 - 60,000
Shares issued as settlement
of salaries, accrued salaries
and related interest 45,273,989 45,274 498,014 - 543,288
Options granted to employees,
consultants and attorneys - - 334,952 - 334,952
Exercise of stock options
by directors and employees 14,250,000 14,250 259,500 - 273,750
Exercise of stock options by
consultants and attorneys 5,500,000 5,500 (4,950) - 550
Net loss - - - (658,322) (658,322)
- ---------------------------------------------------------------------------------------------------------------
Balance - December 31, 2004 474,118,569 474,114 16,083,455 (18,799,602) (2,242,033)
Shares issued for purchase of
PFE 20,000,000 20,000 780,000 - 800,000
Shares issued for settlement
of notes payable & accrued
interest 51,250,000 51,250 2,004,694 - 2,055,944
Shares issued for
settlement expense 13,000,000 13,000 491,371 - 504,371
Options granted to employees,
consultants and attorneys - - 229,330 - 229,330
Exercise of stock options
by directors and employees 18,500,000 18,500 429,000 - 447,500
Exercise of stock options by
consultants and attorneys 6,500,000 6,500 (5,850) - 650
Net loss - - - (527,708) (527,708)
- ---------------------------------------------------------------------------------------------------------------
Balance - December 31, 2005 583,368,569 $ 583,364 $ 20,012,000 $(19,327,310) $ 1,268,054
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (527,708) $ (658,322)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 324,955 249,395
Accretion expense 826,124 -
Provision for doubtful accounts 117,231 12,267
Provision for obsolete inventory 38,090 13,000
Loss on disposal of property and equipment - 33,238
Gain on forgiveness of debt (337,761) (1,713,881)
Non-cash compensation expense 135,000 226,250
Abandoned offering costs expensed 68,000 -
Amortization of loan discount and loan costs 108,719 -
Intrinsic value of options issued to employees 12,000 -
Loan costs and interest witheld from loan proceeds 67,168 145,000
Stock issued for employee compensation - 105,931
Stock and warrants issued for settlement expense 654,153 60,000
Options issued to attorneys and consultants for
services 217,330 209,952
Change in valuation of derivative (169,569)
Accrued Interest Expense 111,986 -
Changes in assets and liabilities:
Trade accounts receivable (2,128,289) (1,211,799)
Prepaid Deposits (99,879) -
Inventories (855,940) (219,326)
Prepaid expenses and other assets (277,987) 14,419
Accounts payable 291,143 515,690
Accrued liabilities (446,455) 538,132
Deferred revenue 119,945 -
- --------------------------------------------------------------------------------
Total adjustments (1,224,036) (1,021,732)
- --------------------------------------------------------------------------------
Net cash used in operating activities (1,751,744) (1,680,054)
- --------------------------------------------------------------------------------
Cash flows from investing activities
Cash aquired with PFE acquisition 39,331 -
Purchase of investment - (300,000)
Net change in deposits - (100,000)
Purchase of property and equipment (295,346) (545,824)
- --------------------------------------------------------------------------------
Net cash used in investing activities (256,015) (945,824)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank - (9,623)
Proceeds from notes payable to stockholders 123,220 18,500
Payments on notes payable to stockholders - (31,752)
Proceeds from notes payable, net of cash paid for
offering costs 3,102,067 2,927,000
Principal payments on notes payable - (466,463)
Proceeds from notes payable to related parties 95,586 3,128,281
Payment on notes payable to related parties - (3,025,149)
Proceeds from exercise of options and warrants to
purchase common stock 33,000 111,500
Exercise of options issued to attorneys and
consultants for services 650 550
- --------------------------------------------------------------------------------
Net cash provided by financing activities 3,354,523 2,652,844
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,346,764 26,966
Cash and cash equivalents at beginning of year 81,101 54,135
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,427,865 $ 81,101
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2005 2004
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 173,300 $ 298,542
Noncash investing and financing activities
Notes issued for accounts payable and capital lease
obligations $ - $ 711,894
Acquisition of PFE Properties, LLC for stock and
assumption of note payable 1,868,974 -
Common stock issued for settlement of note payable
and accrued interest 2,148,913 2,204,999
Deposit applied to purchase of property and equipment 100,000 -
Common stock issued for accrued rent and interest 411,402 -
Accrued interest converted to notes payable - 9,158
Stock options exercised for settlement of accrued
interest and accrued compensation 233,500 61,000
Note issued for settlement of notes payable and
accrued interest - 551,819
Fees withheld from notes payable for Equity Line
Agreement - 86,000
Loan costs included in notes payable 50,850 -
Deferred offering costs withheld from notes payable
proceeds - 128,000
Shares issued as settlement of salaries, accrued
salaries and related interest - 437,357
Stock options exercised for settlement of notes
payable to stockholders 46,000 -
Loan fees incurred as part of convertible debenture
(derivative) 380,765 -
Convertible debenture proceeds used to settle
notes payable outstanding 2,315,850 -
Initial recognition of derivative liability 5,079,872 -
The accompanying notes are an integral part of these financial statements.
F-7
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Nature of Operations -- CirTran Corporation (the "Company") provides turnkey
manufacturing services using surface mount technology, ball-grid array assembly,
pin-through-hole, and custom injection molded cabling for leading electronics
original equipment manufacturers ("OEMs") in the communications, networking,
peripherals, gaming, consumer products, telecommunications, automotive, medical,
and semiconductor industries. The Company also designs, develops, manufactures,
and markets a full line of local area network products, with emphasis on token
ring and Ethernet connectivity.
In June 2004, the Company incorporated CirTran-Asia, Inc., a Utah corporation,
as a wholly owned subsidiary. CirTran-Asia was formed to manufacture, either
directly or through foreign subcontractors, certain products under exclusive
manufacturing agreements.
On March 31, 2005, Cirtran Corporation acquired a 100% ownership interest in PFE
Properties, LLC (see Note 6). Following the acquisition of the PFE interests,
PFE will continue to own the building. PFE will remain a separate LLC due to
liability issues and the Company will continue to make intercompany lease
payments under the 2003 lease.
In December 2005, the Company incorporated CirTran Products, Inc., a Utah
corporation, as a wholly owned subsidiary. CirTran Products was formed to offer
products for sale at retail. The new division will be run from the Company's Los
Angeles Office. The Company anticipates that consumer products built by the
Company's wholly owned subsidiary CirTran Asia, as well as other products to be
acquired, will be available for retail sale in 2006.
Principles of Consolidation -- The consolidated financial statements include the
accounts of CirTran Corporation, and its wholly owned subsidiaries, Racore
Technology Corporation, CirTran-Asia Inc, CirTran Products, Inc. and PFE
Properties, LLC. All significant intercompany transactions have been eliminated
in consolidation.
Revenue Recognition -- Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses experienced with such returns have not been
significant and have been recognized as incurred.
Shipping and handling fees are included as part of net sales. The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of goods sold.
Cash and Cash Equivalents -- The Company considers all highly-liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable -- Accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. Specific reserves are estimated by
management based on certain assumptions and variables, including the customer's
financial condition, age of the customer's receivables and changes in payment
histories. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when
received.
F-8
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Inventories -- Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead costs. Overhead costs are
based on indirect costs allocated among cost of sales, work-in-process inventory
and finished goods inventory. Indirect overhead costs have been charged to cost
of sales or capitalized as inventory based on management's estimate of the
benefit of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled.
Preproduction Design and Development Costs -- The Company incurs certain costs
associated with the design and development of molds and dies for its contract
manufacturing segment. These costs are held as deposits on the balance sheet
until the molds or dies are finished and ready for use. At that point the costs
are included as part of production equipment in property and equipment and
amortized over their useful lives. The company holds title to all molds and
dies. At December 31, 2005 and 2004 the company held $100,000 and $100,000,
respectively in deposits. Capitalized costs associated with molds and dies
included in property and equipment for the years ended December 31, 2005 and
2004 was $761,200 and $412,200, respectively.
Property and Equipment -- Depreciation is provided in amounts sufficient to
relate the cost of depreciable assets to operations over the estimated service
lives. Leasehold improvements are amortized over the shorter of the life of the
lease or the service life of the improvements. The straight-line method of
depreciation and amortization is followed for financial reporting purposes.
Maintenance, repairs, and renewals which neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in operating results.
Depreciation and amortization expense for the years ended December 31, 2005 and
2004 was $324,955 and $249,395, respectively.
Patents -- Legal fees and other direct costs incurred in obtaining patents in
the United States and other countries are capitalized. Patents costs are
amortized over the estimated useful life of the patent. During the year ended
December 31, 2005, the Company capitalized $35,799 in patent related legal
costs. The Company is amortizing this patent over its 7 year life. Amortization
expense was $5,114 during the year ended December 31, 2005.
Impairment of Long-Lived Assets -- The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
occurred that indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
over their remaining life in measuring whether the assets are recoverable. As of
December 31, 2005, the Company does not consider any of its long-lived assets to
be impaired.
Financial Instruments with Derivative Features -- The Company does not hold or
issue derivative instruments for trading purposes. However, the Company has
convertible debentures that contain embedded derivatives that require separate
valuation from the convertible debentures. The Company recognizes these
F-9
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
derivatives as liabilities in its balance sheet and measures them at their
estimated fair value, and recognizes changes in their estimated fair value in
earnings (losses) in the period of change. The Company has estimated the fair
value of these embedded derivatives using the Black-Scholes model based on the
historical volatility of its common stock. The fair value of derivative
instruments are re-measured each quarter.
Advertising Costs -- The Company expenses advertising costs as incurred.
Advertising expenses for the years ended December 31, 2005 and 2004 were $33,111
and $26,801, respectively.
Stock-Based Compensation -- At December 31, 2005, the Company has one
stock-based employee compensation plan, which is described more fully in Note
15. The Company accounts for the plan under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. During the years ended
December 31, 2005 and 2004, the Company recognized compensation expense relating
to stock options and warrants of $364,330 and $226,250, respectively. During the
years ended December 31, 2005 and 2004, the Company recognized compensation
expense relating to the issuance of common stock of $0, and $105,931,
respectively. The following table illustrates the effect on net loss and basic
and diluted loss per common share as if the Company had applied the fair value
recognition provisions of Financial Accounting Standards Board ("FASB")
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation:
Years Ended December 31,
-----------------------
2005 2004
- --------------------------------------------------------------------------------
Net loss, as reported $(527,708) $(658,322)
Add: Stock-based employee compensation expense
included in net loss 364,330 332,181
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (211,247) (517,924)
- --------------------------------------------------------------------------------
Pro forma net loss $(374,625) $(844,065)
- --------------------------------------------------------------------------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.00)
- --------------------------------------------------------------------------------
Basic and diluted loss per common share pro forma $ (0.00) $ (0.00)
- --------------------------------------------------------------------------------
Income Taxes -- The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and the carryforward of operating losses and tax credits
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. An allowance against deferred tax
assets is recorded when it is more likely than not that such tax benefits will
not be realized. Research tax credits are recognized as utilized.
Use of Estimates -- In preparing the Company's financial statements in
accordance with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
F-10
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Risk -- Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist primarily of trade accounts
receivable. The Company sells substantially to recurring customers, wherein the
customer's ability to pay has previously been evaluated. The Company generally
does not require collateral. Allowances are maintained for potential credit
losses, and such losses have been within management's expectations. At December
31, 2005 and 2004, this allowance was $158,374 and $41,143, respectively.
During the year ended December 2005, sales to two customers accounted for 27
percent and 10 percent of net sales, respectively. Sales from both of these
customers were part of the contract manufacturing segment. Account receivables
from one customer equaled 71% of consolidated accounts receivable at December
31, 2005, which created a concentration of credit risk.
During the year ended December 2004, sales to two customers accounted for 52
percent and 14 percent of net sales, respectively. Sales from these customers
were from the contract manufacturing segment and the electronics assembly
segment, respectively. No individual customer account receivable balance at
December 31, 2004, created a concentration of credit risk.
Fair Value of Financial Instruments -- The carrying amounts reported in the
accompanying consolidated financial statements for cash, accounts receivable,
notes payable and accounts payable approximate fair values because of the
immediate or short-term maturities of these financial instruments. The carrying
amounts of the Company's debt obligations approximate fair value.
Reclassifications -- Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
Loss Per Share -- Basic loss per share is calculated by dividing loss available
to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted loss per share is similarly calculated,
except that the weighted-average number of common shares outstanding would
include common shares that may be issued subject to existing rights with
dilutive potential when applicable. The Company had 228,673,577 and 14,250,500
in potentially issuable common shares at December 31, 2005 and 2004,
respectively. The potentially issuable common shares at December 31, 2005 and
2004 were excluded from the calculation of diluted loss per share because the
effects are anti-dilutive.
New Accounting Standards -- In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is
an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation." This
new standard eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and requires such transactions to be
accounted for using a fair-value-based method and the resulting cost recognized
in the Company's financial statements. This new standard is effective for
interim and annual periods beginning after December 15, 2005. The Company is
currently evaluating SFAS No. 123 as revised and intends to implement it in the
first quarter of 2006. At December 31, 2005, all employee options were fully
vested. Therefore, the implementation of this standard will not initially have a
material impact on the Company's financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). The Company will be required to
apply this statement to inventory costs incurred after December 31, 2005. The
Company is currently evaluating what effect this statement will have on the
Company's financial position and results of operations.
F-11
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary
Assets." SFAS No. 153 amends APB Opinion No. 29, "Accounting for Non-monetary
Transactions," to eliminate the exception for non-monetary exchanges of similar
productive assets. The Company will be required to apply this statement to
non-monetary exchanges after December 31, 2005. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections-A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. The Company will be required to apply this
statement for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected
to have a material effect on the Company's financial position or results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments -- an amendment of FASB Statements No. 133 and 140 (SFAS
155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities and related interpretations.
SFAS 155 permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation
and clarifies which interest-only strips and principal-only strips are not
subject to recognition as liabilities. SFAS 155 eliminates the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective for the Company for all financial instruments
acquired or issued beginning January 1, 2007. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156
amends SFAS 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset. It
also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable. SFAS 156
permits an entity to use either the amortization method or the fair value
measurement method for each class of separately recognized servicing assets and
servicing liabilities. SFAS 156 is effective for the Company as of January 1,
2007. The adoption of this standard is not expected to have a material effect on
the Company's financial position or results of operations.
NOTE 2 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company sustained losses of $527,708 and $658,322 for the years
ended December 31, 2005 and 2004, respectively. As of December 31, 2005 and
2004, the Company had an accumulated deficit of $19,327,310 and $18,799,602,
respectively, and a total stockholders' equity (deficit) of $1,268,054 and
($2,242,033), respectively. In addition, the Company used, rather than provided,
cash in its operations in the amounts of $1,751,744 and $1,680,054 for the years
ended December 31, 2005 and 2004, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraphs, recoverability of
F-12
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
As discussed in Note 13, the Company had entered into an equity line of credit
agreement and a standby equity distribution agreement with a private investor.
With the sale by the Company of the Convertible Debenture in May 2005, this and
all other agreements relating to the equity line and the standby equity
distribution agreement were terminated.
NOTE 3 - INVESTMENT IN SECURITIES AT COST
On April 13, 2004, the Company entered into a stock purchase agreement with an
unrelated party under which the Company purchased 400,000 shares of the
investee's Series B Preferred Stock (the "Preferred Shares") for an aggregate
purchase price of $300,000 cash. This purchase was made at fair value. The
Preferred Shares are convertible, at the Company's option, into an equivalent
number of shares of investee common stock, subject to adjustment. The Preferred
Shares are not redeemable by the investee. As a holder of the Preferred Shares,
the Company has the right to vote the number of shares of investee common stock
into which the Preferred Shares are convertible at the time of the vote. The
investment represents less than a 5% interest in the investee. The investment
does not have a readily determinable fair value and is stated at historical
cost, less an allowance for impairment when circumstances indicate an investment
has been impaired. The Company periodically evaluates its investments as to
whether events and circumstances have occurred which indicate possible
impairment. No indicators of impairment were noted for the year ended December
31, 2005.
Separate from the purchase of the Preferred Shares, the Company and the investee
also entered into a Preferred Manufacturing Agreement. Under this agreement, the
Company will perform exclusive "turn-key" manufacturing services handling most
of the investee's manufacturing operations from material procurement to complete
finished box-build of all of investee products. The initial term of the
agreement is three years, continuing month to month thereafter unless terminated
by either party. Sales under this agreement totaled $163,473 and $538,233 for
the periods ended December 31, 2005, and December 31, 2004, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
2005 2004
-------------------------------------------------------------------
Raw materials $ 924,101 $ 895,723
Work-in process 144,993 356,160
Finished goods 1,202,510 201,871
-------------------------------------------------------------------
$ 2,271,604 $ 1,453,754
-------------------------------------------------------------------
F-13
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
During 2005 and 2004, write downs of $38,090 and $13,000, respectively, were
recorded to reduce items considered obsolete or slow moving to their market
value.
NOTE 5 - ACQUISITION OF PFE PROPERTIES, LLC
On March 31, 2005, the Company purchased a 100% interest in PFE Properties LLC
(PFE). PFE was previously owned by a relative of the President and CEO. PFE owns
the land and building in which the Company's manufacturing facilities and
administrative offices are located. The liabilities of PFE on the date of
acquisition include a mortgage note payable of $1,050,000, secured by the
building. The Company acquired PFE by issuing 20,000,000 shares of the Company's
restricted common stock with a fair value of $800,000 on the date of acquisition
and assuming the mortgage note payable of $1,050,000 and accounts payable of
$18,974. The results of operations for PFE have been included beginning March
31, 2005. The additional $800,000 for the purchase of PFE was allocated between
the land and building value.
The balance sheet of PFE as of March 31, 2005, is presented as follows:
Current Assets $ 98,535
Property and Equipment 1,770,439
----------------
Total Assets Acquired 1,868,974
----------------
Accounts Payable 18,974
Mortgage Note Payable 1,050,000
----------------
Total Liabilities Assumed 1,068,974
----------------
Net Assets Acquired $ 800,000
================
The pro forma information is presented as if the Company had acquired
PFE on January 1, 2004, as follows:
Year Ended December 31,
2005 2004
- --------------------------------------------------------------------------------
Net Sales $ 12,992,512 $ 8,862,715
Net Loss $ (539,722) $ (613,378)
Basic loss per share $ - $ -
Diluted loss per share $ - $ -
F-14
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2005 2004 in Years
- ----------------------------------------------------------------- -------------
Land $ 360,000 $ - N/A
Building 1,410,439 - 39
Production equipment 3,584,140 3,220,847 5-10
Leasehold improvements 997,714 992,018 7-10
Office equipment 185,556 159,199 5-10
Other 47,789 47,789 3-7
- -----------------------------------------------------------------
6,585,638 4,419,853
Less accumulated depreciation
and amortization 3,898,901 3,579,060
- -----------------------------------------------------------------
$ 2,686,737 $ 840,793
- -----------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders -- The Company had amounts due to stockholders
from three separate notes. The balance due to stockholders at December 31, 2005
and 2004, was $95,806 and $18,586, respectively. Interest associated with
amounts due to stockholders is accrued at 10 percent. Unpaid accrued interest
was $0 and $7,976 at December 31, 2005 and 2004, respectively, and is included
in accrued liabilities. These notes are due on demand.
During the year ended December 31, 2005, in lieu of a cash exercise price of
$23,000, the stockholders forgave $23,000 of notes payable owed to them by the
Company to exercise 1,000,000 options to purchase shares of the Company's common
stock.
Notes Payable to Related Party -- During 2002, the Company entered into a verbal
bridge loan agreement with Abacas Ventures, Inc. (Abacas). This agreement
allowed the Company to request funds from Abacas to finance the build-up of
inventory relating to specific sales. The loan bore interest at 24% and was
payable on demand. There were no required monthly payments. During the years
ended December 31, 2005 and 2004, the Company was advanced $95,586 and
$3,128,281, respectively, and made cash payments of $0 and $3,025,149,
respectively.
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of the Company, whereby Abacas purchased various past due
amounts for goods and services provided by vendors, as well as notes payable.
The total of these obligations was $1,263,713. The Company recorded this
transaction as a $1,263,713 non-cash increase to the note payable owed to
Abacas, pursuant to the terms of the Abacas agreement.
During March 2005, the Company issued 51,250,000 shares of the Company's
restricted common stock for payment of $2,055,944 in principal and accrued
interest on the note. Because Abacas is a related party, no gain or loss on
forgiveness of debt was recognized.
F-15
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
The total principal amount owed to Abacas between the note payable and the
bridge loan was $0 and $1,530,587 as of December 31, 2005, and 2004,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $0 and $430,828 as of December 31, 2005 and 2004,
respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation -- During January 2002, the Company settled a lawsuit
that had alleged a breach of facilities sublease agreement involving facilities
located in Colorado. The Company's liability in this action was originally
estimated to range up to $2.5 million. The Company had filed a counter suit in
the same court for an amount exceeding $500,000 for missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which were held in escrow and were treated as treasury stock recorded at
no cost. The fair value of the 3,000,000 shares was less than the carrying
amount of the note payable. Because 75 percent of the balance had not been paid
by May 18, 2002, the Company was required to prepare and file with the
Securities & Exchange Commission, at its own expense, a registration statement
with respect to the escrowed shares.
As of December 31, 2005, the Company was in default of its obligations under the
settlement agreement and the total payment due thereunder had not been made. A
registration statement with respect to the escrowed shares was not filed and the
Company did not replace the escrowed shares with registered, free-trading shares
as per the terms of the agreement. The plaintiff filed a Confession of Judgment
and proceeded with execution thereon. The shares in escrow were released and
issued as partial settlement of $92,969 on the note payable outstanding.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which was recorded as other income. The Company did not receive
cash from this settlement, but certain obligations of the Company were paid
directly. $109,125 of the principal balance of the note related to the
settlement mentioned above was paid. Also, $7,000 was paid to the Company's
legal counsel as a retainer for future services. The remaining $36,375 was paid
to the above mentioned plaintiff as a settlement of rent expense.
During September 2002, the plaintiff filed a claim that the $109,125 portion of
the payment was to be applied as additional rent expense rather than a principal
payment on the note payable. The Company estimated that the probability of the
$109,125 being considered additional rent expense was remote and disputed the
claim. This lawsuit was settled in 2006. (See Note 17)
Litigation - During 2003 and 2004, an investment firm filed suits in the U.S.
District Court for the District of Utah seeking payment of a commission
consisting of common stock valued at 1,750,000 for allegedly introducing the
Company to the Equity Line Investor (See Note 10). The case was previously
dismissed in a New York court. The Company estimated that the risk of loss was
remote; therefore no accrual had been made prior to December 31, 2005. These
suits were settled in 2006. (See Note 17)
F-16
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Various vendors have notified the Company that they believe they have claims
against the Company totaling $18,810. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued for these claims, and they
are included in accounts payable. During the year ended December 31, 2005, the
Company determined that the statute of limitations had expired for various
vendors. Amounts of $174,990 were written off and recorded as a gain on
forgiveness of debt. However, there can be no assurance that any or all of these
vendors will agree with the Company's determination, and the Company may be
subject to claims or litigation in the future.
In addition, various vendors have notified the Company that they believe they
have claims against the Company totaling $164,802. The Company has determined
the probability of realizing any loss on these claims is remote. The Company has
made no accrual for these claims and is currently in the process of negotiating
the dismissal of these claims with the various vendors.
Registration Rights - In connection with the Company's entering into an Equity
Line of Credit Agreement, the Company granted to the equity line investor (the
"Equity Line Investor") registration rights, in connection with which the
Company was required to file a registration statement covering the resale of
shares put to the Equity Line Investor under the equity line. The Company was
also required to keep the registration statement effective until two years
following the date of the last advance under the equity line.
Also, in connection with the Company's entering into a standby equity
distribution agreement, the Company granted to the investor registration rights,
in connection with which the Company was required to file a registration
statement covering the resale of shares put to the investor under the standby
equity distribution agreement. The Company was also required to keep the
registration statement effective until two years following the date of the last
advance under the standby equity distribution agreement.
In connection with the Company's issuance of a convertible debenture (discussed
below), the Equity Line of Credit Agreement and the Standby Equity Distribution
Agreement, together with all associated registration rights, were terminated.
In May 2005, in connection with the Company's issuance of a convertible
debenture (discussed below), the Company granted to the debenture holder
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
100,000,000 shares, and to keep such registration statement effective until all
of the shares issuable upon conversion of the debenture have been sold. The
Company filed the registration statement on September 23, 2005. As of the date
of this report, the registration statement had not been declared effective.
In December 2005, in connection with the Company's issuance of a convertible
debenture (discussed below), the Company granted to the debenture holder
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
32,608,696 shares and 10,000,000 warrants, and to keep such registration
statement effective until all of the shares issuable upon conversion of the
debenture have been sold.
F-17
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Accrued Payroll Tax Liabilities -- In November 2004, the Internal Revenue
Service (IRS) accepted the Company's Amended Offer in Compromise (Offer) to
settle delinquent payroll taxes, interest and penalties. The acceptance of the
Offer required the Company to pay $500,000 by February 3, 2005. The Company made
the required payment on February 2, 2005. Additionally, the Offer requires the
Company to remain current in its payment of taxes for 5 years, and the Company
may not claim any net operating losses for the years 2001 through 2015, or until
the Company pays taxes in an amount equal to the taxes waived by the offer in
compromise. The outstanding balance of delinquent payroll taxes, interest and
penalties was $1,955,767 on the settlement date. The future cash payments
specified by the Offer, including interest and principal, were less than the
carrying amount of the payable; therefore the Company reduced the carrying
amount of the liability to the total future cash payments of $500,000 and
recorded a gain of $1,455,767 during the year ended December 31, 2004. The
payments to the IRS were made according to the settlement agreement during
January 2005.
Further, the Utah State Tax Commission has entered into an agreement to allow
the Company to pay the tax liability owing to the State of Utah in equal monthly
installments of $4,000. Through December 2005, the Company had made the required
payments. The balance owed to the State of Utah as of December 31, 2005, and
December 31, 2004, was $98,316 and $223,660, respectively, including taxes,
penalties and interest. See Note 17 for the settlement of the remaining balance.
Manufacturing Agreement -- On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain Developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
has the exclusive right to manufacture the certain products developed by the
Developers or any of their affiliates. The Developers will continue to provide
marketing and consulting services related to the products under the agreement.
Should the Developers terminate the agreement early, they must pay the Company
$150,000. Revenue is recognized when products are shipped. Title passes to the
customer or independent sales representative at the time of shipment.
In connection with this agreement the Company agreed to issue options to
purchase 1,500,000 shares common stock to the Developers upon the sale, shipment
and payment for 200,000 units of a fitness product. In addition, the Company
agreed to issue options to purchase 300,000 shares of common stock to the
Developers for each multiple of 100,000 units of the fitness product sold in
excess of the initial 200,000 units within twenty-four months of the agreement
(June 2004). The options will be exercisable at $0.06 per share, vest on the
grant date and expire one year after issuance. As of December 31, 2005, the
Company had sold, shipped and received payment for, 257,577 units of the fitness
product. In January 2005, the Company issued 1,500,000 options under the terms
of the agreement. See Note 14.
F-18
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
In connection with the above manufacturing agreement, the Company agreed to
issue various options to purchase shares of common stock to the Developers upon
the sale, shipment, and payment of certain quantities of the additional
products. In addition, the Company agreed to issue additional options to
purchase common stock to the developers for each multiple of units sold in
excess of the initial units within the first twenty-four months of the
agreements. The schedule of units and potential options that will be issued
follows:
Options Each Multiple of Options for
Initial for Initial Units above Each Multiple
Product Units Units Sold Initial Units of Units
- --------------------------------------------------------------------------------
1 500,000 500,000 200,000 200,000
2 25,000 500,000 15,000 100,000
3 100,000 500,000 50,000 100,000
4 300,000 1,000,000 100,000 200,000
5 200,000 250,000 100,000 100,000
6 200,000 500,000 100,000 100,000
As of December 31, 2005, the Company had not sold, shipped and received payment
for enough units to require the issuance of options related to the additional
products under these agreements. Because the Developers must provide future
services for the options to vest, the options are treated as unissued for
accounting purposes. The cost of these options will be recognized when the
options are earned.
NOTE 9 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 2005 and 2004:
2005 2004
- --------------------------------------------------------------------------------
Notes payable to Equity Line Investor,
no periodic interest, matures 70 to 131
days after issuance $ - $ 1,700,000
Note payable to a company, interest at
8.00%, matured August 2002, collateralized
by 3,000,000 shares of the Company's common
stock held in escrow - 115,875
Mortgage payable to a bank, interest at 12.50%,
monthly payments of $10,938 to $12,699 through
November 2008, unpaid principal due in full
December 2008, secured by building 1,050,000 -
- --------------------------------------------------------------------------------
Total Notes Payable $ 1,050,000 $ 1,815,875
Less current maturities (12,610) (1,815,875)
- --------------------------------------------------------------------------------
Long-Term Portion of Notes Payable $ 1,037,390 $ -
- --------------------------------------------------------------------------------
F-19
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2004, the Company converted five notes
payable and accrued interest of $551,819 into notes with Abacus (see Note 2).
Accrued interest of $27,020 associated with these notes payable was not
converted to the note payable with Abacus; therefore, a gain on forgiveness of
debt was recorded for $27,020 for the year ended December 31, 2004.
In March 2004, the Company settled a note payable with a financial institution.
The outstanding loan balance and accrued interest at the time of settlement was
$189,663. The balance was settled for $90,000 in cash and 542,495 shares of
common stock valued at $30,000. A gain on forgiveness of debt of $61,370 was
recorded on this transaction.
In April 2004, the Company settled three notes payable with a financing company.
The outstanding loan balances and accrued interest at the time of settlement was
$192,043. The balance was settled for $75,000 in cash. A gain on forgiveness of
debt of $117,043 was recorded on this transaction.
In November 2004, the Company settled a note payable with a corporation. The
outstanding loan balance and accrued interest at the time of settlement was
$75,000. The balance was settled for $50,000 in cash and 1,000,000 shares of
common stock valued at $25,000.
In December 2004, the Company settled a note payable with a financial
institution. The outstanding loan balance and accrued interest at the time of
settlement was $36,902. The balance was settled for $10,000 in cash. A gain on
forgiveness of debt of $26,902 was recorded on this transaction.
In December 2004, the Company settled a note payable with an individual. The
outstanding loan balance and accrued interest at the time of settlement was
$145,779. The balance was settled for $120,000 in cash. A gain on forgiveness of
debt of $25,779 was recorded on this transaction.
Certain of the Company's notes payable contain various covenants and
restrictions, including providing for the acceleration of principal payments in
the event of a covenant violation or a material adverse change in the operations
of the Company. During the year ended December 31, 2005 the Company was out of
compliance on several notes payable, primarily due to a failure to make monthly
payments. In instances where the Company was out of compliance, the amounts were
shown as current. Additionally, all default provisions were accrued as part of
the principal balance of the related notes payable.
Notes Payable to Equity Line Investor -- At December 31, 2004, the Company owed
$1.7 million to Cornell Capital Partners, LP ("Cornell"), pursuant to an
unsecured promissory note. The note was repayable over 193 days and was past due
as of March 31, 2005. The note stated that if the Company did not repay the note
when due, a default interest rate of 24% would apply to the unpaid balance. The
Company recorded accrued interest of $105,074 on the note.
In January 2005, the Company entered into an additional promissory note with
Cornell for $565,000. The Company received proceeds of $503,500, net of loan
costs of $61,500. The terms of the note included a 9% premium or $50,850,
resulting in a total note payable of $615,850. The premium was amortized to
interest expense over the life of the loan. The terms of the loan stated that
interest only payments would be made for the first six months. The Company would
repay the principal, interest, and premium over the next six months. The loan
was due January 2006. The Company amortized $11,057 of the premium as interest
expense prior to settling the loan as discussed below.
F-20
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
All notes to Cornell were paid on May 27, 2005, with funds acquired from
Highgate House Funds, Ltd. ("Highgate"), in connection with the issuance of a
convertible debenture. (See Note 11) Payment of accrued interest was not
required as part of the repayment. In connection with the repayment, the
remaining premium of $39,793 was immediately amortized as interest expense. The
gain from forgiveness of debt on both Cornell notes totaled $162,774.
In December 2005, the Company entered into a transaction for the issuance of an
additional convertible debenture to Cornell for $1,500,000. (See Note 11.)
The total principal amount owed to Cornell Capital Partners, LP was $1,500,000
and $1,700,000 as of December 31, 2005, and 2004, respectively.
Mortgage Note Payable -- In conjunction with the acquisition of PFE, the Company
assumed a mortgage note payable for $1,050,000. The note bears interest at 12.5%
per annum. Interest only payments are required through January 2006. Starting in
February 2006, principal and interest payments will be required based on a
twenty-year amortization of the note. The entire balance of principal and unpaid
interest will be due in December 2008.
The following is a schedule of future maturities on notes payable:
Year Ending December 31,
------------------------------------------------
2006 12,610
2007 14,280
2008 16,170
2009 1,006,940
------------------------------------------------
Total $ 1,050,000
------------------------------------------------
NOTE 10 - LEASES
During 2005, the Company leased a satellite office in Los Angeles, CA. This
office is used for sales and promotions. The Company entered into a two-year
sublease agreement with an unrelated party on of October 24, 2005. Additionally,
the Company has a lease for a facility in China that expires in 2006.
The following is a schedule of future minimum lease payments under the operating
leases:
Year Ending December 31,
------------------------------------------------
2006 65,944
2007 44,878
------------------------------------------------
Total $ 110,822
------------------------------------------------
The building lease provides for payment of property taxes, insurance, and
maintenance costs by the Company. Rental expense for operating leases totaled
$55,410 and $213,688 for the years ended December 31, 2005 and 2004,
respectively.
F-21
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONVERTIBLE DEBENTURES
Highgate - On May 26, 2005, the Company entered into an agreement with Highgate
to issue to Highgate a $3,750,000, 5% Secured Convertible Debenture (the
"Debenture"). The Debenture is due December 2007 and is secured by all of the
Company's property.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at December 31, 2005 was $111,986.
At any time, Highgate may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of the Company's common stock for the twenty trading days immediately
preceding the conversion date. The Company has the right to redeem a portion or
the entire Debenture then outstanding by paying 105% of the principal amount
redeemed plus accrued interest thereon.
Highgate's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Highgate may convert up to $250,000 worth of the principal amount
plus accrued interest of the Debenture in any consecutive 30-day
period when the market price of the Company's stock is $0.10 per
share or less at the time of conversion;
(ii) Highgate may convert up to $500,000 worth of the principal amount
plus accrued interest of the Debenture in any consecutive 30-day
period when the price of the Company's stock is greater than $0.10
per share at the time of conversion; provided, however, that
Highgate may convert in excess of the foregoing amounts if the
Company and Highgate mutually agree; and
(iii) Upon the occurrence of an event of default, Highgate may, in its
sole discretion, accelerate full repayment of all debentures
outstanding and accrued interest thereon or may convert the
Debentures and accrued interest thereon into shares of the
Company's common stock.
Except in the event of default, Highgate may not convert the Debenture for a
number of shares that would result in Highgate owning more than 4.99% of the
Company's outstanding common stock.
As discussed in Note 8, the Company granted Highgate registration rights related
to the issuance of the debenture.
The Company determined that the features of the Debenture fell under derivative
accounting treatment. As of December 31, 2005 the carrying value of the
Debenture was $996,252. The carrying value will be accreted each quarter over
the life of the Debenture until the carrying value equals the face value of
$3,750,000. The fair value of the derivative liability as of December 31, 2005
was $3,175,287.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were paid to Cornell to repay promissory notes. Fees of $256,433 were withheld
from the proceeds, were capitalized, and are being amortized over the life of
the note. As such, of the total Debenture of $3,750,000, the net proceeds to the
F-22
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Company were $1,228,567. The proceeds were used for general corporate and
working capital purposes, at the Company's discretion.
Cornell - On December 30, 2005, the Company entered into an agreement with
Cornell to sell to Cornell a $1,500,000, 5% Secured Convertible Debenture (the
"Cornell Debenture"). The Cornell Debenture is due July 30, 2008 and has a
security interest of all the Company's property, junior to the Highgate security
interest.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of the Company's common stock at a conversion price equal
to an amount equal to the lowest closing bid price of the Company's common stock
for the twenty trading days immediately preceding the conversion date. The
Company has the right to redeem a portion or the entire Cornell Debenture then
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts into shares of the Company's common
stock is limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal amount
plus accrued interest of the Cornell Debenture in any consecutive
30-day period when the market price of the Company's stock is
$0.10 per share or less at the time of conversion;
(ii) Cornell may convert up to $500,000 worth of the principal amount
plus accrued interest of the Cornell Debenture in any consecutive
30-day period when the price of the Company's stock is greater
than $0.10 per share at the time of conversion; provided, however,
that Cornell may convert in excess of the foregoing amounts if the
Company and Cornell mutually agree; and
(iii) Upon the occurrence of an event of default, Cornell Capital
Partners, LP may, in its sole discretion, accelerate full
repayment of the debenture outstanding and accrued interest
thereon or may convert the Debenture and accrued interest thereon
into shares of the Company's common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
the Company's outstanding common stock.
The Cornell Debenture was issued with 10,000,000 warrants with an exercise price
of $0.09 per share that vest immediately and have a three year life.
As discussed in Note 8, the Company granted Cornell registration rights related
to the issuance of the Cornell Debenture and warrants.
The Company determined that the features on the Cornell Debenture and the
associated warrants fell under derivative accounting treatment. As of December
31, 2005 the carrying value of the Cornell Debenture was $0. The carrying value
will be accreted each quarter over the life of the Cornell Debenture until the
F-23
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
carrying value equals the face value of $1,500,000. The fair value of the
derivative liability as of December 31, 2005 was $1,735,016.
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the Cornell Debenture. As such, of the total Cornell Debenture of $1,500,000,
the net proceeds to the Company were $1,370,000. The proceeds will be used for
general corporate and working capital purposes, at the Company's discretion
NOTE 12 - INCOME TAXES
The Company has paid no federal or state income taxes. The significant
components of the Company's deferred tax assets and liabilities at December 31,
2005 and 2004, were as follows:
2005 2004
- --------------------------------------------------------------------------------
Deferred Income Tax Assets:
Inventory reserve $ 280,233 $ 266,026
Bad debt reserve 102,903 15,346
Vacation reserve 26,602 26,809
Research and development credits 27,285 27,285
Net operating loss carryforward 4,676,769 4,597,493
Depreciation - 2,668
Intellectual property 101,095 115,581
- --------------------------------------------------------------------------------
Total Deferred Income Tax Assets 5,214,887 5,051,208
Valuation allowance (5,213,178) (5,051,208)
Deferred Income Tax Liability - depreciation (1,709) -
- --------------------------------------------------------------------------------
Net Deferred Income Tax Asset $ - $ -
- --------------------------------------------------------------------------------
The Company has sufficient long-term deferred income tax assets to offset the
deferred income tax liability related to depreciation. The long-term deferred
income tax assets relate to the net operating loss carryforward and the
intellectual property.
The Company has sustained net operating losses in both periods presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax benefits
cannot be established. Accordingly, a valuation allowance has been recorded to
reduce the net deferred tax asset to zero and consequently, there is no income
tax provision or benefit presented for the years ended December 31, 2005 and
2004.
As of December 31, 2005, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $12,538,254. These net operating loss
carryforwards, if unused, begin to expire in 2019. Utilization of approximately
$1,193,685 of the total net operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate return limitation
rules and limitations on the carryforward of net operating losses after a change
F-24
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
in ownership. The realization of tax benefits relating to net operation loss
carryforwards is limited due to the settlement related to amounts previously due
to the IRS discussed in Note 8.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2005 and 2004:
2005 2004
- --------------------------------------------------------------------------------
Benefit at statuatory rate (34%) $(179,421) $(223,829)
Non-deductible expenses 21,399 38,099
Change in valuation allowance 161,970 207,457
State tax benefit, net of federal tax benefit (17,416) (21,727)
Return to provision 13,468 -
- --------------------------------------------------------------------------------
Net Benefit from Income Taxes $ - $ -
- --------------------------------------------------------------------------------
NOTE 13 - STOCKHOLDERS' EQUITY
Common Stock Issuances -- During the year ended December 31, 2005, the Company
issued 51,250,000 shares of the Company's restricted common stock for payment of
principal and accrued interest on the note to Abacus. (See Note 7.)
During the year ended December 31, 2005, the Company issued 10,000,000 shares of
the Company's restricted common stock for payment of accrued rent and accrued
interest of $411,402. Because the rent was owed to a related party, no gain or
loss on forgiveness of debt was recognized.
During the year ended December 31, 2005, the Company issued 3,000,000 shares of
the Company's restricted common stock as partial payment on a note payable for
$92,969. (See Note 8.) As of the date of this report, the registration statement
had not been declared effective.
On March 31, 2005, the Company acquired a 100% interest in PFE Properties, LLC
for 20,000,000 shares of the Company's restricted common stock. (See Note 5)
During the year ended December 31, 2004, the Company issued 542,495 shares and
1,000,000 shares of common stock in 2004 with a fair value of $30,000 and
$25,000, respectively, based on the per share fair value of the Company's common
stock on the dates of issuance, as part of a settlement agreements for notes
payable. (See Note 9)
During the year ended December 31, 2004, the Company settled a legal claim by
issuing 1,000,000 shares of common which resulted in a settlement expense of
$60,000, which was the fair value of the shares issued based on the per share
fair value of the Company's common stock on the date of issuance.
During 2004, the Company issued 45,273,989 shares of the Company's restricted
common stock to officers of the Company. The shares were valued at $543,288
based on the fair value of the Company's stock on the date of issuance. The
shares were issued as settlement of accrued compensation of $431,770, accrued
interest of $5,587, and compensation of $105,931.
F-25
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Equity Line of Credit Agreement - On November 5, 2002, the Company entered into
an Equity Line of Credit Agreement (the "Equity Line Agreement") with Cornell.
The Company subsequently terminated the Equity Line Agreement, and on April 8,
2003, the Company entered into an amended equity line agreement (the "Amended
Equity Line Agreement") with Cornell. Under the Amended Equity Line Agreement,
the Company had the right to draw up to $5,000,000 from Cornell against an
equity line of credit (the "Equity Line"), and to put to Cornell shares of the
Company's common stock in lieu of repayment of the draw. The number of shares to
be issued was determined by dividing the amount of the draw by the lowest
closing bid price of the Company's common stock over the five trading days after
the advance notice was tendered. Cornell was required under the Amended Equity
Line Agreement to tender the funds requested by the Company within two trading
days after the five-trading-day period used to determine the market price. Upon
the issuance of the Convertible Debenture, the Amended Equity Line Agreement was
terminated.
Standby Equity Distribution Agreement - The Company entered into a Standby
Equity Distribution Agreement dated May 21, 2004, with Cornell. Under the
Agreement, the Company had the right, at its sole discretion, to draw up to $20
million on the standby equity facility (the "SEDA Facility") and put to Cornell
shares of its common stock in lieu of repayment of the draws. The number of
shares to be issued in connection with each draw was determined by dividing the
amount of the draw by the lowest volume-weighted average price of the Company's
common stock during the five consecutive trading days after the advance was
sought. The maximum advance amount was $1,000,000 per advance, with a minimum of
seven trading days between advances. Cornell was to retain 5% of each advance as
a fee under the Agreement. The term of the Agreement was to run over a period of
twenty-four months after a registration statement related to the Agreement was
declared effective or until the full $20 million had been drawn, whichever came
first. The Company had made no draws against the SEDA Facility and issued no
shares in connection with the SEDA Facility.
With the issuance of the Convertible Debenture on May 27, 2005, the SEDA
Facility and related agreements were terminated. (See Note 12.)
NOTE 14 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under APB No. 25 and related interpretations.
Under APB 25, compensation expense is recognized if an option's exercise price
on the measurement date is below the fair value of the Company's common stock.
For options that provide for cashless exercise or that have been modified, the
measurement date is considered the date the options are exercised or expire.
Those options are accounted for as variable options with compensation adjusted
each period based on the difference between the market value of the common stock
and the exercise price of the options at the end of the period. The Company
accounts for options and warrants issued to non-employees, including the
developers mentioned in Note 7, at their fair value in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
Stock Option Plan - During November 2003, the Company adopted the 2003 Stock
Option Plan (the "2003 Plan") with 35,000,000 shares of common stock reserved
for issuance there under. Also, during December 2004, the Company adopted the
2004 Stock Option Plan (the "2004 Plan") with 40,000,000 shares of common stock
reserved for issuance there under. The Company's Board of Directors administers
the plans and has discretion in determining the employees, directors,
independent contractors and advisors who receive awards, the type of awards
(stock, incentive stock options or non-qualified stock options) granted, and the
term, vesting, and exercise prices.
F-26
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Non-Employee Options - During the year ended December 31, 2005, the Company
granted options to purchase 7,000,000 shares of common stock to counsel for the
Company with an exercise price of $0.0001 per share. The options were five year
options and vested on the date granted. Legal expense of $195,803 was recorded
for the fair value of options issued. During 2005, 5,000,000 of these options
and 1,500,000 previously issued options were exercised by counsel for proceeds
of $650.
During 2004, the Company granted options to purchase 6,500,000 shares of common
stock to attorneys for services at exercise prices of $0.0001 per share. The
options were all five year options and vested on the dates granted. Legal
expense of $209,952 was recorded for the fair value of options issued during
2004. 5,000,000 of these options were exercised in 2004 for cash proceeds of
$500. An additional 500,000 of previously issued options were exercised in 2004
for cash proceeds of $50.
Employee Options - During the year ended December 31, 2005, the Company granted
options to purchase 19,000,000 shares of common stock to directors and employees
of the Company pursuant to the 2004 Plan. These options are five year options
that vested on the date of grant. The related exercise prices ranged from $0.022
to $0.027 per share. These options had intrinsic value of $12,000 which was
recognized as non-cash compensation expense. A total of 18,500,000 options were
exercised during the year ended December 31, 2005, for $33,000 in cash, $135,000
in compensation, $256,500 in accrued compensation, and $23,000 as payment on a
shareholder note payable. The $135,000 of compensation was recorded in
conjunction with the cashless exercise of 3,000,000 of the options.
During 2004, the Company granted options to purchase 24,000,000 shares of common
stock to directors and employees of the Company pursuant to the 2003 and 2004
Plans. These options are five year options that vested on the date of grant. The
related exercise prices range from $0.01 to $0.03 per share. Non-cash
compensation relating to the grant of these options was recognized for $125,000
during 2004, based upon the intrinsic value of options on the grant date.
14,250,000 of these options were exercised during 2004 for $111,500 of cash,
$101,250 of compensation and $61,000 of accrued compensation. The $101,250 of
compensation was recorded in conjunction with the cashless exercise of 4,500,000
of the options.
Developer Options - During the year ended December 31, 2005, the Company granted
options to purchase 1,500,000 shares of common stock to developers as described
in Note 8 at exercise prices of $0.06 per share. The options were all five-year
options and vested on the dates granted. Two of the developers were employees
and together were issued 1,000,000 of the options. The exercise price equaled
the fair value of the common shares at the time these options were granted;
therefore, the options had no intrinsic value. The fair value of these options
of $42,052 was estimated using the Black-Scholes option pricing model with the
following assumptions: risk free interest rate ranging of 4.00%, dividend yield
of 0.0%, volatility of 302%, and expected average life of .5 years. None of
these options were exercised during the year ended December 31, 2005.
The remaining 500,000 developer options were issued to a non-employee under the
terms described above. Because the developer was a non-employee, cost of goods
sold of $21,526 was recorded for the fair value of options issued during the
year ended December 31, 2005. These options were valued using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate
ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and expected
average life of .5 years. None of these options were exercised during the year
ended December 31, 2005.
A total of 12,750,000 employee options and 4,000,500 non-employee options were
outstanding as of December 31, 2005.
F-27
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock option activity for the years ended December 31, 2004 and
2005, is as follows:
Weighted
Average
Exercise
Shares Price
------------ ----------
Outstanding at December 31, 2003 3,850,500 $ 0.02
Granted 30,500,000 $ 0.02
Exercised (19,750,000) $ 0.01
Cancelled (350,000) $ 0.14
-----------
Outstanding at December 31, 2004 14,250,500 $ 0.02
Granted 27,500,000 $ 0.02
Exercised (25,000,000) $ 0.02
Cancelled - $ -
-----------
Outstanding at December 31, 2005 16,750,500 $ 0.02
===========
Excercisable at December 31, 2005 16,750,500 $ 0.02
===========
The fair value of stock options was determined at the grant dates using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended December 31, 2005 and 2004:
2005 2004
------------- -------------
Expected dividend yield - -
Risk free interest rate 4.13% 3.39%
Expected volatility 268% 300%
Expected life .12 years .10 years
Weighted average fair value per share $ 0.02 $ 0.02
A summary of stock option and warrant grants with exercise prices less than,
equal to or greater than the estimated market value on the date of grant during
the years ended December 31, 2005 and 2004 is as follows:
Weighted
Weighted Average
Average Fair
Options Exercise Value of
Granted Price Options
---------- ---------- ---------
Year Ended - December 31, 2005
Grants with exercise prices less
than the estimated market value
of the common stock 13,000,000 $ 0.01 $ 0.02
Grants with exercise prices equal
to the estimated market value of
the common stock 14,500,000 $ 0.03 $ 0.01
Grants with exercise prices greater
than the estimated market value of
the common stock - $ - $ -
Year Ended - December 31, 2004
Grants with exercise prices less than
the estimated market value of the
common stock 12,750,000 $ 0.01 $ 0.03
Grants with exercise prices equal to
the estimated market value of the
common stock 17,750,000 $ 0.02 $ 0.01
Grants with exercise prices greater
than the estimated market value of
the common stock - $ - $ -
F-28
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock options outstanding and exercisable at December 31, 2005
follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------- ----------------------
Weighted-
Range Average Weighted Weighted-
of Remaining Average Average
Exercise Options Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- --------
$0.0001 3,500,500 4.10 $0.0001 3,500,500 $0.0001
$0.0200 - $0.0300 11,750,000 3.82 $0.0251 11,750,000 $0.0251
$0.0600 1,500,000 0.02 $0.0600 1,500,000 $0.0600
Other Warrants - In connection with the Cornell convertible debenture the
company issued 10,000,000 warrants to purchase shares of the Company's common
stock. The warrants had an exercise price of $0.09 per share, vested
immediately, and have a 3 year life. The registration rights associated with the
warrants caused derivative accounting treatment of the debenture and the
warrants. The warrants were measured at their fair value using the Black-Scholes
pricing model with the following assumptions: risk free interest rate of 4.37%,
dividend yield of 0.0%, volatility of 163.31%, and expected average life of 3
years. These warrants were recorded as part of the derivative liability on the
balance sheet and will be re-measured at their fair value for every reporting
period.
NOTE 15 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has three reportable segments: electronics assembly, Ethernet
technology, and contract manufacturing. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables. The
Ethernet technology segment designs and manufactures Ethernet cards. The
contract manufacturing segment manufactures, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement. The
accounting policies of the segments are consistent with those described in the
summary of significant accounting policies. The Company evaluates performance of
each segment based on earnings or loss from operations. Selected segment
information is as follows:
F-29
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Electronics Ethernet Contract
Assembly Technology Manufacturing Total
- --------------------------------------------------------------------------------
December 31, 2005
Sales to external customers 3,002,038 125,451 9,865,023 $ 12,992,512
Intersegment sales 49,015 - - 49,015
Segment income (loss) 2,084,254) (233,394) 1,789,940 (527,708)
Segment assets 5,609,386 183,231 5,109,280 10,901,897
Depreciation and amortization 223,755 1,843 99,357 324,955
December 31, 2004
Sales to external customers $ 3,354,057 $ 49,714 $ 5,458,944 $ 8,862,715
Intersegment sales 11,610 167 - 11,777
Segment loss (375,864) 74,665 (357,123) (658,322)
Segment assets 3,085,208 208,043 1,000,178 4,293,429
Depreciation and amortization 220,940 2,438 26,017 249,395
December 31,
-------------------------------
Sales 2005 2004
- --------------------------------------------------------------------------------
Total sales for reportable segments $ 13,041,527 $ 8,874,492
Elimination of intersegment sales (49,015) (11,777)
- --------------------------------------------------------------------------------
Consolidated net sales $ 12,992,512 $ 8,862,715
- --------------------------------------------------------------------------------
December 31,
-------------------------------
Total Assets 2005 2004
- --------------------------------------------------------------------------------
Total assets for reportable segments $ 10,901,897 $ 4,293,429
Adjustment for intersegment amounts - -
- --------------------------------------------------------------------------------
Consolidated total assets $ 10,901,897 $ 4,293,429
- --------------------------------------------------------------------------------
NOTE 16 - GEOGRAPHIC INFORMATION
All revenue-producing assets are located in the United States of America or
China. Revenues are attributed to the geographic areas based on the location of
the customers purchasing the products. The Company's net sales and assets by
geographic area are as follows:
F-30
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Revenues Revenue-producing assets
- --------------------------------------------------------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
United States of America $12,694,817 $ 8,850,775 $ 280,490 $ 454,610
China - - 663,420 386,183
Other 297,695 11,940 - -
- --------------------------------------------------------------------------------
$12,992,512 $ 8,862,715 $ 943,910 $ 840,793
- --------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS
Accrued Payroll Tax Liabilities - In January 2006, the Utah State Tax Commission
reduced the remaining accrued payroll taxes, penalties and interest due on prior
period payroll taxes and were paid the amount of $98,316.
Settlement of Litigation - On January 26, 2006, a settlement was reached related
to the leased facilities in Colorado. The Company settled the remaining claim
for $200,000 cash. This amount was recorded in full at December 31, 2005 and is
included in accrued liabilities.
On February 24, 2006 the Company entered into a settlement agreement with the
investment firm discussed in Note 8. The Company issued 4,000,000 shares of
restricted stock with a fair value of $0.044 per share. Warrants were also
issued to purchase 7,000,000 shares of the Company's common stock with an
exercise price of $0.05 cents per share and a life of 5 years. The value of the
shares and warrants of $464,186 was accrued in 2005 as an accrued liability.
Convertible Debenture - In January 2006, Highgate converted $750,000 of its
convertible debenture into 24,193,548 shares of the Company's common stock at a
conversion rate of $0.031 per share, which was the lower of $0.10 or 100% of the
lowest closing bid price of the Company's commons stock over the 20 trading days
preceding the conversion.
Stock Options - During January 2006, an employee exercised options to purchase
1,000,000 shares of common stock with an exercise price of $0.027 per share.
These options were exercised as payment of accrued compensation of $27,000.
On January 27, 2006, counsel for the Company exercised options to purchase
2,000,000 shares of common stock with an exercise price of $0.0001 per share.
During February 2006, an employee exercised options to purchase 1,000,000 shares
of common stock with an exercise price of $0.027 per share. These options were
exercised as payment of accrued compensation of $27,000.
During March 2006, a director exercised options to purchase 1,000,000 shares of
common stock with an exercise price of $0.027 per share. These options were
exercised as payment of accrued compensation of $27,000.
F-31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of CirTran Corporation and related notes
thereto and auditors' report thereon were filed as part of the Company's Form
10-QSB, filed on:
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 2006, (unaudited) and Q2
December 31, 2005
Statements of Operations for the Three Months ended Q3
March 31, 2006, (unaudited) and 2005 (unaudited)
Statements of Cash Flows for the Three Months ended Q4
March 31, 2006, (unaudited) and 2005 (unaudited)
Notes to Condensed Consolidated Financial Statements Q6
(unaudited)
Q-1
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2006 2005
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 443,637 $ 1,427,865
Trade accounts receivable, net of allowance
for doubtful accounts of $158,374 and
$158,374, respectively 3,019,960 3,358,981
Inventory, Net of reserve of $751,296 and
$751,296, respectively 2,203,537 2,271,604
Prepaid Deposits - 142,188
Other 108,976 252,941
- --------------------------------------------------------------------------------
Total Current Assets 5,776,110 7,453,579
Property and Equipment, Net 2,778,692 2,686,737
Investment in Securities, at Cost 300,000 300,000
Other Assets, Net 691,417 361,581
Deposits 129,283 100,000
- --------------------------------------------------------------------------------
Total Assets $ 9,675,502 $ 10,901,897
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 528,963 $ 1,239,519
Accrued liabilities 551,049 1,222,018
Deferred revenue 33,625 119,945
Derivative liability 3,136,160 4,910,303
Convertible Debenture - 996,252
Current maturities of long-term notes payable 1,225,785 12,610
Notes payable to stockholders - 95,806
- --------------------------------------------------------------------------------
Total Current Liabilities 5,475,582 8,596,453
- --------------------------------------------------------------------------------
Long-Term Notes Payable, Less Current Maturities 1,033,989 1,037,390
- --------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, par value $0.001; authorized
750,000,000 shares; issued and outstanding
shares: 616,562,117 and 583,368,569 at March
31, 2006 and December 31, 2005, respectively 616,558 583,364
Additional paid-in capital 22,154,684 20,012,000
Accumulated deficit (19,605,311) (19,327,310)
- --------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) 3,165,931 1,268,054
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity (Deficit) $ 9,675,502 $ 10,901,897
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Q-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2006 2005
- --------------------------------------------------------------------------------
Net Sales $ 1,737,824 $ 2,920,465
Cost of Sales (990,370) (1,949,773)
- --------------------------------------------------------------------------------
Gross Profit 747,454 970,692
- --------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative expenses 837,520 959,891
Non-cash employee compensation expense - 69,000
- --------------------------------------------------------------------------------
Total Operating Expenses 837,520 1,028,891
- --------------------------------------------------------------------------------
Loss From Operations (90,066) (58,199)
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest (1,086,253) (143,770)
Other, net - 241
Gain on forgiveness of debt 4,670 -
Gain on derivative valuation 893,651 -
- --------------------------------------------------------------------------------
Total Other Expense, Net (187,932) (143,529)
- --------------------------------------------------------------------------------
Net Loss $ (277,998) $ (201,728)
- --------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.00) $ (0.00)
- --------------------------------------------------------------------------------
Basic and diluted weighted-average
common shares outstanding 558,748,729 488,490,792
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Q-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 2006 2005
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (277,998) $ (201,728)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 114,939 73,660
Accretion expense 965,512 -
Provision for doubtful accounts - 417
Amortization of loan premium to
interest expense - 11,057
Non-cash compensation expense - 69,000
Loan costs and fees in lieu of interest
on notes payable - 61,500
Options issued to attorneys and consultants
for services - 21,526
Gain on derivative valuation (893,651)
Accrued Interest Expense 61,586 -
Changes in assets and liabilities:
Trade accounts receivable 366,021 (119,299)
Prepaid Deposits 142,188 -
Inventories 68,067 (148,087)
Prepaid expenses and other assets (255,318) (1,836)
Accounts payable (710,556) (108,800)
Accrued liabilities (214,368) (43,111)
Deferred revenue (86,320) -
- --------------------------------------------------------------------------------
Total adjustments (441,900) (183,973)
- --------------------------------------------------------------------------------
Net cash used in operating activities (719,898) (385,701)
- --------------------------------------------------------------------------------
Cash flows from investing activities
Cash aquired with PFE acquisition - 39,331
Purchase of property and equipment (166,730) (230,771)
- --------------------------------------------------------------------------------
Net cash used in investing activities (166,730) (191,440)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes payable to stockholders - 4,414
Payments on notes payable to stockholders (95,806) -
Proceeds from notes payable, net of cash
paid for offering costs - 503,500
Principal payments on notes payable (1,994) -
Proceeds from notes payable to related parties - 95,586
Proceeds from exercise of options and warrants
to purchase common stock - 33,000
Exercise of options issued to attorneys and
consultants for services 200 150
- --------------------------------------------------------------------------------
Net cash provided by financing activities (97,600) 636,650
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents (984,228) 59,509
Cash and cash equivalents at beginning of year 1,427,865 81,101
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 443,637 $ 140,610
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Q-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
For the Three Months Ended March 31, 2006 2005
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 22,765 $ -
Noncash investing and financing activities
Acquisition of PFE Properties, LLC for
stock and assumption of note payable $ - $ 1,868,974
Common stock issued for settlement of
note payable and accrued interest - 2,148,913
Deposit applied to purchase of property
and equipment - 100,000
Common stock issued for accrued liabilities 464,187 411,402
Stock options exercised for settlement of
accrued interest and accrued compensation 81,000 59,000
Stock options exercised for settlement of
notes payable to stockholders - 23,000
Common stock issued for partial conversion
of convertible debenture and derivative liability 1,630,491 -
The accompanying notes are an integral part of these financial statements.
Q-5
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 subsidiaries (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 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 Annual Report. In the opinion of
management, all adjustments necessary for a fair presentation have been included
in the accompanying condensed consolidated financial statements and consist of
only normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three months
ended March 31, 2006, are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2006.
Principles of Consolidation -- The consolidated financial statements include the
accounts of CirTran Corporation, and it's wholly owned subsidiaries, Racore
Technology Corporation, CirTran-Asia Inc, CirTran Products, Inc., Diverse Media
Group Corporation and PFE Properties, LLC. All significant intercompany
transactions have been eliminated in consolidation.
Stock-Based Compensation -- Effective January 1, 2006, the Company adopted the
provisions of Statement of Accounting Standards No. 123R, Share Based Payment
("FAS 123R") for its one stock-based compensation plan. The Company previously
accounted for this plan under the recognition and measurement principles of
Accounting Standards No. 25, Accounting for Stock Issued to Employees, ("APB
25") and related interpretations and disclosure requirements established by SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS 123") as amended by SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
Under APB 25, no compensation expense was recorded in earnings for the Company's
stock-based options granted under its compensation plans. The pro forma effects
on net income and earnings per share for the options and awards granted under
the plans were instead disclosed in a note to the consolidated financial
statements. Under SFAS 123R, all stock-based compensation is measured at the
grant date, based on the fair value of the option or award, and is recognized as
an expense in earnings over the requisite service period, which is typically
through the date the options vest.
The Company adopted SFAS 123R using the modified prospective method. Under this
method, for all stock-based options and awards, granted prior to January 1, 2006
that remain outstanding as of that date, compensation cost is recognized for the
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS 123 for pro
forma and disclosure purposes. No such options were outstanding as of January 1,
2006.
The Company utilized the Black-Scholes model for calculating the fair value pro
forma disclosures under SFAS 123 and will continue to use this model, which is
an acceptable valuation approach under SFAS 123R. The following table summarizes
Q-6
the Black-Scholes option-pricing model assumptions used to compute the
weighted-average fair value of stock options granted during the periods below:
Three Months Ended
March 31,
2006 2005
-------- --------
Expected dividend yield N/A* -
Risk free interest rate N/A* 3.76%
Expected volatility N/A* 282%
Expected life N/A* $ 0.16
Weighted average fair value per share N/A* $ 0.02
* Not applicable as there were no options granted during the period
No options were granted for the three months ended March 31, 2006 and all
previously issued options were fully vested prior to January 1, 2006. Therefore,
there were no compensation costs relating to stock-based compensation for the
three months ended March 31, 2006, including the effects from adoption of SFAS
123R, which would have previously been presented in a pro forma disclosure, as
discussed above.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair-value recognition provisions of SFAS 123
to all of its stock-based compensation awards for periods prior to adoption of
SFAS 123R:
Three Months Ended March 31, 2005
-------------------------------------------------------------------------
Net loss, as reported $(201,728)
Add: Stock-based employee compensation expense
included in net loss 69,000
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (138,248)
-------------------------------------------------------------------------
Pro forma net loss $(270,976)
-------------------------------------------------------------------------
Basic and diluted loss per common share as reported $ (0.00)
-------------------------------------------------------------------------
Basic and diluted loss per common share pro forma $ (0.00)
-------------------------------------------------------------------------
Patents -- Legal fees and other direct costs incurred in obtaining patents in
the United States and other countries are capitalized. Patents costs are
amortized over the estimated useful life of the patent. During the year ended
December 31, 2005, the Company capitalized $35,799 in patent related legal
costs. Amortization expense was $1,279 during the three months ended March 31,
2006.
The realization of patents and other long-lived assets is evaluated periodically
when events or circumstances indicate a possible inability to recover the
carrying amount. An impairment loss is recognized for the excess of the carrying
amount over the fair value of the asset or the group of assets. Fair value is
determined based on expected discounted net future cash flows. The analysis
necessarily involves significant management judgment to evaluate the capacity of
an asset to perform within projections. As required, an evaluation of impairment
was made on the patents as of March 31, 2006. No indicators of impairment were
noted.
Q-7
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. The
Company had net loss of $277,998 for the three months ended March 31, 2006,
compared to a net loss of $527,708 for the year ended December 31, 2005. As of
March 31, 2006, and December 31, 2005, the Company had an accumulated deficit of
$19,605,311 and $19,327,310, respectively, and a total stockholders' equity of
$3,165,931 and $1,268,054, respectively. The Company also had a working capital
(deficit) of $300,528 and $(1,142,874) as of March 31, 2006, and December 31,
2005, respectively. In addition, the Company used, rather than provided, cash in
its operations in the amounts of $719,698 and $1,751,744 for the three months
ended March 31, 2006, and the year ended December 31, 2005, respectively. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
In view of the matters described in the preceding 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.
NOTE 3 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders -- During December 2005 a stockholder loaned the
Company $95,806 which was recorded as a notes payable to stockholders. The
proceeds of this loan were used to fund on going operations of the Company. In
January 2006, the Company made a payment to the stockholder which repaid the
entire balance ($95,806) of the loan.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation -- During January 2002, the Company settled a lawsuit
that had alleged a breach of facilities sublease agreement involving facilities
located in Colorado. The Company's liability in this action was originally
estimated to range up to $2.5 million. The Company had filed a counter suit in
the same court for an amount exceeding $500,000 for missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which were held in escrow and were treated as treasury stock recorded at
no cost. The fair value of the 3,000,000 shares was less than the carrying
amount of the note payable. Because 75 percent of the balance had not been paid
by May 18, 2002, the Company was required to prepare and file with the
Securities & Exchange Commission, at its own expense, a registration statement
with respect to the escrowed shares.
As of December 31, 2005, the Company was in default of its obligations under the
settlement agreement and the total payment due thereunder had not been made. A
registration statement with respect to the escrowed shares was not filed and the
Company did not replace the escrowed shares with registered, free-trading shares
as per the terms of the agreement. The plaintiff filed a Confession of Judgment
and proceeded with execution thereon. The shares in escrow were released and
issued as partial settlement of $92,969 on the note payable outstanding.
Q-8
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which was recorded as other income. The Company did not receive
cash from this settlement, but certain obligations of the Company were paid
directly. $109,125 of the principal balance of the note related to the
settlement mentioned above was paid. Also, $7,000 was paid to the Company's
legal counsel as a retainer for future services. The remaining $36,375 was paid
to the above mentioned plaintiff as a settlement of rent expense.
During September 2002, the plaintiff filed a claim that the $109,125 portion of
the payment was to be applied as additional rent expense rather than a principal
payment on the note payable. The Company estimated that the probability of the
$109,125 being considered additional rent expense was remote and disputed the
claim.
On January 26, 2006, a settlement was reached related to the leased facilities
in Colorado. The Company settled the remaining claim for $200,000 cash.
During 2003 and 2004, an investment firm filed suits in the U.S. District Court
for the District of Utah seeking payment of a commission consisting of common
stock valued at 1,750,000 for allegedly introducing the Company to the Equity
Line Investor (See Note 10). The case was previously dismissed in a New York
court.
On February 24, 2006, the Company entered into a settlement agreement with the
investment firm. The Company issued 4,000,000 shares of restricted stock with a
fair value of $0.044 per share. Warrants were also issued to purchase 7,000,000
shares of the Company's common stock with an exercise price of $0.05 cents per
share and a life of 5 years. The warrants were valued using the Black-Scholes
pricing model at $288,186. Total consideration for the settlement was valued at
$464,186.
Litigation - Various vendors have notified the Company that they believe they
have claims against the Company totaling $18,810. None of these vendors have
filed lawsuits in relation to these claims. The Company has accrued for these
claims, and they are included in accounts payable.
In addition, various vendors have notified the Company that they believe they
have claims against the Company totaling $164,802. The Company has determined
the probability of realizing any loss on these claims is remote. The Company has
made no accrual for these claims and is currently in the process of negotiating
the dismissal of these claims with the various vendors.
Registration Rights - In May 2005, in connection with the Company's issuance of
a convertible debenture (discussed below), the Company granted to the debenture
holder registration rights, pursuant to which the Company agreed to file, within
120 days of the closing of the purchase of the debenture, a registration
statement to register the resale of shares of the Company's common stock
issuable upon conversion of the debenture. The company also agreed to use its
best efforts to have the registration statement declared effective within 270
days after filing the registration statement. The Company agreed to register the
resale of up to 100,000,000 shares, and to keep such registration statement
effective until all of the shares issuable upon conversion of the debenture have
been sold. The Company filed the registration statement on September 23, 2005.
As of March 31, 2006, the registration statement had not been declared
effective.
In December 2005, in connection with the Company's issuance of a convertible
debenture (discussed below), the Company granted to the debenture holder
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
Q-9
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
32,608,696 shares and 10,000,000 warrants, and to keep such registration
statement effective until all of the shares issuable upon conversion of the
debenture have been sold.
In connection with the settlement agreement with the investment firm discussed
above in this Note, the Company agreed to register the resale by the investment
firm of shares issued or issuable to it in connection with the settlement.
Accrued Payroll Tax Liabilities -- The Utah State Tax Commission entered into an
agreement to allow the Company to pay the tax liability owing to the State of
Utah in equal monthly installments of $4,000. Through December 2005, the Company
had made the required payments.
In January 2006, the Utah State Tax Commission reduced the remaining accrued
payroll taxes, penalties and interest due on prior period payroll taxes to the
amount of $98,316. The balance was paid in full.
Manufacturing Agreement -- On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain Developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
has the exclusive right to manufacture certain products developed by the
Developers or any of their affiliates. The Developers will continue to provide
marketing and consulting services related to the products under the agreement.
Should the Developers terminate the agreement early, they must pay the Company
$150,000. Revenue is recognized when products are shipped. Title passes to the
customer or independent sales representative at the time of shipment.
In connection with this agreement the Company agreed to issue options to
purchase 1,500,000 shares common stock to the Developers upon the sale, shipment
and payment for 200,000 units of a fitness product. In addition, the Company
agreed to issue options to purchase 300,000 shares of common stock to the
Developers for each multiple of 100,000 units of the fitness product sold in
excess of the initial 200,000 units within twenty-four months of the agreement
(June 2004). The options will be exercisable at $0.06 per share, vest on the
grant date and expire one year after issuance. As of March 31, 2006, the Company
had sold, shipped and received payment for, 257,577 units of the fitness
product. In January 2005, the Company issued 1,500,000 options under the terms
of the agreement. During the three months ended March 31, 2006 the options
expired.
In connection with the above manufacturing agreement, the Company agreed to
issue various options to purchase shares of common stock to the Developers upon
the sale, shipment, and payment of certain quantities of the additional
products. In addition, the Company agreed to issue additional options to
purchase common stock to the developers for each multiple of units sold in
excess of the initial units within the first twenty-four months of the
agreements. The schedule of units and potential options that will be issued
follows:
Q-10
Options Each Multiple of Options for Each
Initial for Initial Units above Multiple
Product Units Units Sold Initial Units of Units
- --------------------------------------------------------------------------------
1 500,000 500,000 200,000 200,000
2 25,000 500,000 15,000 100,000
3 100,000 500,000 50,000 100,000
4 300,000 1,000,000 100,000 200,000
5 200,000 250,000 100,000 100,000
6 200,000 500,000 100,000 100,000
As of March 31, 2006, the Company had not sold, shipped and received payment for
enough units to require the issuance of options related to the additional
products under these agreements. Because the Developers must provide future
services for the options to vest, the options are treated as unissued for
accounting purposes. The cost of these options will be recognized when the
options are earned.
NOTE 5 - MORTGAGE NOTE PAYABLE
In conjunction with the acquisition of PFE, the Company assumed a mortgage note
payable for $1,050,000, which is secured by the land and the building that was
acquired as part of the PFE acquisition. The note bears interest at 12.5% per
annum and is collateralized by the land and building. Interest only payments
were made through January 2006. Starting in February 2006, principal and
interest payments were required based on a twenty-year amortization of the note.
The entire balance of principal and unpaid interest will be due in December
2008.
NOTE 6 - CONVERTIBLE DEBENTURES
Highgate - On May 26, 2005, the Company entered into an agreement with Highgate
to issue to Highgate a $3,750,000, 5% Secured Convertible Debenture (the
"Debenture"). The Debenture is due December 2007 and is secured by all of the
Company's property.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at March 31, 2006, and December 31, 2005, was $152,349 and
$111,986, respectively.
At any time, Highgate may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of the Company's common stock for the twenty trading days immediately
preceding the conversion date. The Company has the right to redeem a portion or
the entire Debenture then outstanding by paying 105% of the principal amount
redeemed plus accrued interest thereon.
Highgate's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the market price of the
Q-11
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Highgate may convert in
excess of the foregoing amounts if the Company and Highgate
mutually agree; and
(iii) Upon the occurrence of an event of default, Highgate may, in
its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon or may
convert the Debentures and accrued interest thereon into
shares of the Company's common stock.
Except in the event of default, Highgate may not convert the Debenture for a
number of shares that would result in Highgate owning more than 4.99% of the
Company's outstanding common stock.
In connection with the issuance of the Highgate Debenture, the Company granted
Highgate registration rights related to the issuance of the debenture. (See Note
4.)
The Company determined that the features of the Debenture fell under derivative
accounting treatment. As of March 31, 2006 the carrying value of the Debenture
was $1,068,604. The carrying value will be accreted each quarter over the life
of the Debenture until the carrying value equals the unconverted face value of
$3,000,000 (see below). The fair value of the derivative liability as of March
31, 2006 was $1,767,254.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were paid to Cornell to repay promissory notes. Fees of $256,433 were withheld
from the proceeds, were capitalized, and are being amortized over the life of
the note. As such, of the total Debenture of $3,750,000, the net proceeds to the
Company were $1,228,567. The proceeds were used for general corporate and
working capital purposes, at the Company's discretion.
In January 2006, Highgate converted $750,000 of its convertible debenture into
24,193,548 shares of the Company's common stock at a conversion rate of $0.031
per share, which was the lower of $0.10 or 100% of the lowest closing bid price
of the Company's commons stock over the 20 trading days preceding the
conversion.
Cornell - On December 30, 2005, the Company entered into an agreement with
Cornell Capital Partners, L.P. ("Cornell") to issue to Cornell a $1,500,000, 5%
Secured Convertible Debenture (the "Cornell Debenture"). The Cornell Debenture
is due July 30, 2008, and is secured by all the Company's property, junior to
the Highgate security interest.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at March 31, 2006 and December 31, 2005 was $18,082 and zero,
respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of the Company's common stock at a conversion price equal
to an amount equal to the lowest closing bid price of the Company's common stock
for the twenty trading days immediately preceding the conversion date. The
Company has the right to redeem a portion or the entire Cornell Debenture then
Q-12
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts into shares of the Company's common
stock is limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Cornell may convert in
excess of the foregoing amounts if the Company and Cornell
mutually agree; and
(iii) Upon the occurrence of an event of default, Cornell Capital
Partners, LP may, in its sole discretion, accelerate full
repayment of the debenture outstanding and accrued interest
thereon or may convert the Debenture and accrued interest
thereon into shares of the Company's common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
the Company's outstanding common stock.
The Cornell Debenture was issued with 10,000,000 warrants with an exercise price
of $0.09 per share that vest immediately and have a three year life.
In connection with the issuance of the Cornell Debenture, the Company granted
Cornell registration rights related to the issuance of the Cornell Debenture and
warrants. (See Note 4.)
The Company determined that the features on the Cornell Debenture and the
associated warrants fell under derivative accounting treatment. As of March 31,
2006 the carrying value of the Cornell Debenture was $143,160. The carrying
value will be accreted each quarter over the life of the Cornell Debenture until
the carrying value equals the face value of $1,500,000. The fair value of the
derivative liability as of March 31, 2006 was $1,368,906.
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the Cornell Debenture. As such, of the total Cornell Debenture of $1,500,000,
the net proceeds to the Company were $1,370,000. The proceeds will be used for
general corporate and working capital purposes, at the Company's discretion.
As of March 31, 2006, Cornell had not converted any of the Cornell Debenture
into shares of the Company's common stock.
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock Issuances -- During the three months ended March 31, 2006, the
Company issued 4,000,000 shares of common stock as a settlement of litigation
with an investment firm. (See Note 4.)
Q-13
During the three months ended March 31, 2006, the Company issued to Highgate
24,193,548 shares of restricted common stock in connection with a conversion by
Highgate of $750,000 principal amount of the convertible debenture. (See Note
6.)
NOTE 8 - STOCK OPTIONS AND WARRANTS
Non-Employee Options - During the three months ended March 31, 2006, 2,000,000
of previously issued options were exercised by counsel for proceeds of $200.
Employee Options - During the three month period ended March 31, 2006, 3,000,000
options were exercised for accrued compensation and employee advances of $54,000
and $27,000 respectively.
Developer Options - During 2005, the Company granted options to purchase
1,500,000 shares of common stock to developers at exercise prices of $0.06 per
share. The options were all one-year options and vested on the dates granted.
Two of the developers were employees and together were issued 1,000,000 of the
options. The exercise price equaled the fair value of the common shares at the
time these options were granted; therefore, the options had no intrinsic value.
The fair value of these options of $42,052 was estimated using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate
ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and expected
average life of .5 years. These options expired during the three months ended
March 31, 2006.
The remaining 500,000 developer options were issued to a non-employee under the
terms described above. Because the developer was a non-employee, cost of goods
sold of $21,526 was recorded for the fair value of options issued during the
year ended December 31, 2005. These options were valued using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate
ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and expected
average life of .5 years. None of these options were exercised during 2005.
These options expired during the three months ended March 31, 2006.
A summary of the stock option activity for the three months ended March 31,
2006, is as follows:
Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding at December 31, 2005 16,750,500 $ 0.02
Granted - $ -
Exercised (5,000,000) $ 0.02
Cancelled (1,500,000) $ 0.06
----------
Outstanding at March 31, 2006 10,250,500 $ 0.03
==========
Excercisable at March 31, 2006 10,250,500 $ 0.03
==========
NOTE 9 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has three reportable segments: electronics assembly, Ethernet
technology, and contract manufacturing. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables. The
Ethernet technology segment designs and manufactures Ethernet cards. The
contract manufacturing segment manufactures, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement. The
accounting policies of the segments are consistent with those described in the
summary of significant accounting policies. The Company evaluates performance of
Q-14
each segment based on earnings or loss from operations. Selected segment
information is as follows:
Electronics Ethernet Contract
Assembly Technology Manufacturing Total
- -------------------------------------------------------------------------------------
March 31, 2006
Sales to external customers $ 774,359 $ 22,226 $ 941,239 $ 1,737,824
Intersegment sales - - - -
Segment income (loss) (30,057) (58,108) (189,833) (277,998)
Segment assets 4,529,176 192,756 4,953,570 9,675,502
Depreciation and amortization 82,912 210 31,817 114,939
March 31, 2005
Sales to external customers $ 773,013 $ 22,608 $ 2,124,844 $ 2,920,465
Intersegment sales - - - -
Segment loss (372,197) (66,739) 237,208 (201,728)
Segment assets 4,591,074 216,838 1,800,585 6,608,497
Depreciation and amortization 50,399 594 22,667 73,660
March 31,
---------------------------
Sales 2006 2005
- --------------------------------------------------------------------------------
Total sales for reportable segments $1,737,824 $2,920,465
Elimination of intersegment sales - -
- --------------------------------------------------------------------------------
Consolidated net sales $1,737,824 $2,920,465
- --------------------------------------------------------------------------------
March 31,
---------------------------
Total Assets 2006 2005
- --------------------------------------------------------------------------------
Total assets for reportable segments $9,675,502 $6,608,497
Adjustment for intersegment amounts - -
Consolidated total assets $9,675,502 $6,608,497
- --------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS
Stock Options - During April 2006, counsel for the Company exercised options to
purchase 1,500,000 shares of common stock with an exercise price of $0.0001 per
share.
During May 2006, an employee was granted options to purchase 1,500,000 shares of
the Company's common stock. These options were five year options that vested
immediately and had an exercise price of $0.03 per share. The options were
immediately exercised in lieu of amounts owed in connection with the PFE
Acquisition.
During May 2006, an employee exercised options to purchase 1,000,000 shares of
common stock with an exercise price of $0.027 per share. These options were
exercised as payment of accrued bonus expense of $27,000.
Q-15
Table of Contents
Summary about CirTran Corporation
and this offering 3
Risk factors 16
Use of proceeds 25
Determination of offering price 25
Description of business 25
Management's discussion and analysis
or plan of operation 42
Forward-looking statements 57
5% Convertible Debenture 57 CirTran Corporation
Selling Shareholders 60
Plan of distribution 62 100,000,000
Regulation M 65 SHARES
Legal Proceedings 65
Directors, executive officers, promoters and COMMON STOCK
control persons 68
Commission's position on indemnification --------------------
for Securities Act liabilities 70
Security ownership of certain beneficial PROSPECTUS
owners and management 71
Description of common stock 72 -------------------
Certain relationships and related
Transactions 74 August 11, 2006
Market for common equity and related
stockholder matters 76
Executive compensation 81
Changes in and disagreements with
accountants on accounting
and financial disclosure 87
Index to financial statements 87
Experts 87
Legal matters 87
- --------------------
Dealer Prospectus Delivery Obligation. Until
November 8, 2006, 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.
88
- --------------------------------------------------------------------------------