CAPITAL TRANSACTIONS

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

Note 6. CAPITAL TRANSACTIONS

Preferred Stock

The Company has a total of 1,000,000 shares of authorized preferred shares which are segregated into four classes of preferred stock.

The Company has 182,525 authorized shares of convertible, redeemable, 10 percent cumulative, Class A, Preferred Stock with $0.001 par value. One Class A, Preferred share is convertible into 50 restricted common shares and will be entitled to the number of votes equal to the number of shares of common stock into which such holder’s shares of Series A Preferred stock could be converted at the time of the vote. Class A, Preferred Stock is redeemable by the Company at $15 per share. Upon liquidation the holders of Series A Preferred stock will be entitled to be paid out of the assets available for distribution of the corporation an amount equal to $10 per share, before any payment will be made to the common shareholders. As of December 31, 2013 and 2012, no shares of Preferred Stock were issued and outstanding.

The Company has 250,000 authorized shares of Class B, Preferred Stock with $0.001 par value. As of December 31, 2013 and 2012, 49,999 shares of Preferred Stock were issued and outstanding. Class B preferred shares are convertible at a rate of 1 Series B preferred share to 10 common shares.

The Company has 14,000 authorized shares of redeemable, convertible, Class C, Preferred Stock with $100 stated value. Class C, Preferred Stock is not entitled to receive dividends unless dividends are paid on common stock. Upon liquidation Class C, Preferred Stock shall be treated as if it were converted to common stock prior to liquidation. Class C, Preferred Stock is convertible at $100 divided by the 10 day average closing price of common stock. The Class C, Preferred Stock is redeemable by the Company at the stated value. As of December 31, 2013 and 2012, no shares of Preferred Stock were issued and outstanding.

On November 5, 2013, the Company entered into a Conversion Agreement with Marvin Maslow (the "Holder") pursuant to which the Company agreed to convert $1,057,608 of debt (the "Debt"), including principal and interest, currently owed to Holder into 105,761 shares of Series D Preferred Shares of the Company. The Debt has been outstanding since 2007.

The above transactions were approved by the Board of Directors of the Company. The Series D Preferred Stock does not pay dividends and does not have a liquidation preference. The Holder of the Series D Preferred Stock will be entitled to 20 votes for each share of common stock that the Series D Preferred Stock are convertible into. The Series D Preferred Stock has a conversion price of $0.055 (the “Conversion Price”) and a stated value of $10.00 (the “Stated Value”) per share. Each share of Series D Preferred Stock is convertible, at the option of the Holder, into such number of shares of common stock of the Company as determined by dividing Stated Value by the Conversion Price.

Holder may only convert the Series D Preferred Stock upon certain Convertible Promissory Notes, whether presently outstanding or to be issued, issued to three accredited investors (the "Note Investors") in accordance with those certain Convertible Note Purchase Agreements between the Company and the Note Investors dated April 3, 2013, have either (i) been converted in full or in part by the Note Investors into shares of common stock of the Company, (ii) the Note Investors have sold or assigned all or a part of their Convertible Promissory Notes to third parties, or (iii) the Note Investors have been paid in full or in part. The Holder will only be permitted to convert such number of Series D Preferred Stock equal to the pro rata amount of the Convertible Promissory Notes converted, assigned or paid. In the event the Note Investors agree in writing that these restrictions may be terminated, then the Holder will be entitled to convert the Series D Preferred Stock at the Holder’s election and the above restrictions will be null and void. Additionally, Holder may not convert the Series D Preferred Stock until the ten day average daily trading volume is greater than $20,000.

In the event the Holder terminates its consulting agreement or violates a non-compete covenant, then the Series D Preferred Shares shall be returned to the Company for cancellation and the Company shall be obligated on the Debt. As the Series D Preferred Stock is conditionally redeemable, the Company has recorded the Series D Preferred Stock as mezzanine equity in the accompanying consolidated balance sheet.

The Company has 447,714 and 553,475 undesignated blank check preferred stock, $0.001 par value, authorized as of December 31, 2013 and 2012, none outstanding. The preferred shares are to be issued in such series and to have such rights, preferences, and designation as determine by the Board of Directors of the Company.

Common Stock

The Company has a total of 500,000,000 shares of authorized common shares. As of December 31, 2013 and 2012, 464,963,554 and 458,942,480 shares of common stock were issued and outstanding, respectively.

Stocks issued during 2013

For the year ended December 31, 2013, the Company issued 2,363,636 shares of common stock for a total consideration of $130,000 to three individuals.

For the year ended December 31, 2013, the Company issued 2,500,000 shares to an attorney for legal services for the Company totaling $113,000, and 557,000 shares to three consultants for services to satisfy an outstanding obligation totaling $29,000.

For the year ended December 31, 2013, the Company issued 600,000 shares related to the exercise of options for 1,000,000 shares with an exercise price of $0.02 on a cashless basis based on fair market value of $0.05 per share.

For the year ended December 31, 2013, the Company issued 105,671 shares of convertible Class D, Preferred Stock for conversion of a former Chief Executive Officer and shareholder (Preferred Stock section above for additional discussions) debt totaling $1,058,000.

For the year ended December 31, 2013, the Company had granted 14,000,000 shares and warrants for 14,000,000 shares to officers and directors of the Company fair valued at $2,232,000 however, this stock grant has since been rescinded by the Company’s board of directors and thus, reversed out and no longer reflected in the accompanying financial statements as of December 31, 2013.

Stocks issued during 2012

For the year ended December 31, 2012, the Company issued 6,800,000 shares of common stocks and warrants for 3,400,000 shares for a total consideration of $340,000 to seven individuals. Further, the Company issued 5,483,871 shares to an attorney for legal services for the Company totaling $249,000, and 600,000 shares to two consultants for services to satisfy an outstanding obligation totaling $36,000. Additionally, the Company issued 200,000 shares and warrants for 100,000 shares to a consultant for services rendered to the Company totaling $10,000. The fair value of the 200,000 shares and warrants for 100,000 shares of common stock was based on the unit offering price of a private placement agreement during the same period totaling $0.05 per unit which a unit consisted of 1 share of common stock and warrant for half a share.

Options

In 2000, the Company’s Board of Directors adopted the 2000 Equity Incentive Plan (the "2000 Plan"). The 2000 Plan authorizes the issuance of options, right to purchase Common Stock and stock bonuses to officers, employees, directors and consultants. The Company reserved 30,000,000 shares of common Stock for awards to be made under the 2000 Plan.

On September 14, 2001, the Company filed a registration statement on Form S-8 to register 900,000 of these shares. On November 19, 2001, an additional 550,000 shares of common stock were registered for issuance under the 2000 Plan. On January 30, 2002, an additional 975,000 shares of common stock were registered for issuance under the 2000 Plan. On March 22, 2002, an additional 925,000 shares of common stock were registered for issuance under the 2000 Plan. On July 12, 2002, an additional 990,000 shares of common stock were registered for issuance under the 2000 Plan. On January 17, 2003, the Company registered an additional 8,000,000 of common stock for issuance under the 2000 Plan.

The 2000 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The 2000 Plan allows for the issuance of incentive stock options (which, pursuant to Section 422 of the Internal Revenue Code, can only be granted to employees), non-qualified stock options, stock appreciation rights, stock awards, or stock bonuses. The committee, or the Board of Directors if there is no committee, determines the type of option granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of exercisability and methods of exercise. Options must vest within ten-years. Under the 2000 Plan, the exercise price may not be less than fair market value on the date of grant for the incentive stock options. The 2000 Plan also allows for the granting of Stock Appreciation Rights. No Stock Appreciation Rights have been granted. The number of shares under the 2000 Plan available for grant at December 31, 2013 and 2012 was 25,281,000.

In November 2004, the Company’s Board of Directors adopted the 2004 Consultant Stock Plan (the "2004 Plan"). The purpose of this 2004 Consultant Stock Plan is to advance the Company’s interests by helping the Company obtain and retain the services of persons providing consulting services upon whose judgment, initiative, efforts and/or services we are substantially dependent, by offering to or providing those persons with incentives or inducements affording such persons an opportunity to become owners of our capital stock. The Company reserved 2,000,000 shares of Common Stock for awards to be made under the 2004 Plan. A registration statement on Form S-8 was filed with the SEC on November 26, 2004 to register the shares underlying the 2004 plan. The 2004 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The committee or the Board of Directors if there is no committee, determines who is eligible to receive awards under the plan, grant awards and interpret the 2004 Plan. The number of shares under the 2004 Plan available for grant at December 31, 2013 and 2012 was 500,000.

On May 9, 2005, the Company’s Board of Directors adopted the 2005 Equity Compensation Plan (the "2005 Plan"). The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to our success, by offering them an opportunity to participate in the Company’s future performance through awards of Options, the right to purchase Common Stock and Stock Bonuses. The Company reserved 10,000,000 shares of Common Stock for awards to be made under the 2005 Plan. The 2005 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The committee or the Board of Directors if there is no committee, determines who is eligible to receive awards under the plan, grant awards and interpret the 2005 Plan. A registration statement on Form S-8 was filed with the SEC on June 8, 2005 to register the shares underlying the 2005 plan. The number of shares under the 2005 Plan available for grant at December 31, 2013 was 1,618,763.

During 2012, the Company granted options for 3,000,000 shares of common stock vesting immediately, exercise price of $0.07 per share, and 8 year life. The fair value of these options totaled $142,000 based on the Black-Scholes option pricing model using the following assumptions: 8 year term; volatility rate ranging from 134% to 135%; and a risk free rate of 2.5%.

During 2013, the Company issued options for 250,000 shares of common stock vesting immediately, exercise price of $0.07 per share, and 5 year life. The fair value of this option awarded totaled $10,000 based on the Black-Scholes option pricing model using the following assumptions: 5 year term; volatility rate of 133%; and a risk free rate of 2.5%.

Set forth in the table below is information regarding awards made through compensation plans or arrangements through December 31, 2013, the most recently completed fiscal year.

At December 31, 2013, the 35,950,000 outstanding options had an aggregate intrinsic value of $2,517,000.

Equity Compensation Plan Information
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		—		—		—
Equity compensation plans not approved by security holders		—		—		27,399,763
Total		—		—		27,399,763

A summary of the Company’s stock option activity and related information is as follows:

	Number of Options			Exercise Price Per Share		Weighted Average Exercise Price		Number of Options Exercisable
Outstanding as of December 31, 2011		36,700,000							36,700,000
Granted		3,000,000		$	0.07	$	0.07		3,000,000
Expired		-							-
Outstanding as of December 31, 2012		39,700,000							39,700,000
Granted		250,000		$	0.07	$	0.07		250,000
Exercised		(1,000,000	)						(1,000,000	)
Expired		(3,000,000	)						(3,000,000	)
Outstanding as of December 31, 2013		35,950,000							35,950,000

Exercise prices and weighted-average contractual lives of 35,950,000 stock options outstanding as of December 31, 2013 are as follows:

				Options Outstanding				Options Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.01		25,000,000		3.68	$	0.01		25,000,000	$	0.01
$	0.07		6,250,000		7.47	$	0.07		6,250,000	$	0.07
$	0.05		500,000		0.53	$	0.05		500,000	$	0.05
$	0.06		1,200,000		1.38	$	0.06		1,200,000	$	0.06
$	0.07		3,000,000		6.98	$	0.07		3,000,000	$	0.07

The fair value for options granted were determined using the Black-Scholes option-pricing model.

Warrants:

The Company issued the following warrants at the corresponding weighted average exercise price as of December 31, 2013.

	Warrants			Weighted average Exercise Price
Outstanding as of December 31, 2011		8,000,000		$	0.07
Issued/Vested		10,400,000		$	0.36
Cancelled/Expired		(1,000,000	)
Outstanding as of December 31, 2012		17,400,000		$	0.07
Issued/Vested		0
Cancelled/Expired		(4,000,000	)
Outstanding as of December 31, 2013		13,400,000		$	0.08

Date	Number of Warrants		Exercise Price		Contractual Life Remaining		Number of Shares Exercisable
October 11, 2007		3,200,000	$	0.01		6 year		3,200,000
November 9, 2007		800,000	$	0.01		6 year		800,000
May 29, 2012		1,500,000	$	0.07		0.4 year		1,500,000
April 26, 2012		6,000,000	$	0.05		3 year		6,000,000
September 10, 2012		800,000	$	0.07		1 years		800,000
September 19, 2012		600,000	$	0.07		1 years		600,000
September 27, 2012		500,000	$	0.07		1 years		500,000
		13,400,000						13,400,000

The fair value for warrants granted were determined using the Black-Scholes option-pricing model. As of December 31, 2012,warrant for 6,000,000 shares were granted associated with convertible notes payable with exercise prices ranging from $0.05 to $0.07 per share, see Note 5 for additional discussions.