UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 0-26059
CIRTRAN CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
---------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
------------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
(801) 963-5112 (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____
The number of shares outstanding of the registrant's common stock as of November
18, 2004: 427,844,580.
Transitional Small Business Disclosure Format (check one): Yes ______ NO X
The sole purpose for this amendment is to include additional exhibits as listed
in the Exhibit List in Part 2, Item 6.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of September 30, 2004, (unaudited) and 3
December 31, 2003
Statements of Operations for the Three and Nine Months ended 4
September 30, 2004, (unaudited) and 2003 (unaudited)
Statements of Cash Flows for the Three and Nine Months ended 5
September 30, 2004, (unaudited) and 2003 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
(unaudited)
Item 2. Management's Discussion and Analysis of or Plan of Operation 17
Item 3. Evaluation of Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 5. Other Information 27
Item 6 Exhibits 28
Signatures 28
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements of CirTran Corporation and related
notes thereto are filed as part of this Form 10-QSB:
Page
Condensed Consolidated Balance Sheets as of September 30,
2004 and December 31, 2003 (Unaudited) F-2
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2004 and 2003
(Unaudited) F-4
Notes to Condensed Consolidated Financial Statements
(Unaudited) F-6
F-1
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2004 2003
---------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 118,762 $ 54,135
Trade accounts receivable, net of allowance for doubtful
accounts of $27,626 and $28,876, respectively 546,259 89,187
Inventory 1,444,614 1,247,428
Other 181,696 165,091
---------------- ---------------
Total Current Assets 2,291,331 1,555,841
Property and Equipment, Net 865,607 577,603
Investment in Securities at Cost 300,000 -
Other Assets, Net 13,098 10,390
Deferred Offering Costs 68,000 26,000
---------------- ---------------
Total Assets $ 3,538,036 $ 2,169,834
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 9,623
Accounts payable 773,322 1,300,597
Accrued liabilities 3,756,257 3,615,264
Current maturities of long-term notes payable 2,020,828 1,964,021
Notes payable to stockholders 18,586 31,838
Notes payable to related parties 653,066 163,742
---------------- ---------------
Total Current Liabilities 7,222,059 7,085,085
---------------- ---------------
Long-Term Notes Payable, Less Current Maturities - -
---------------- ---------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 427,844,580 and 349,087,699
net of 3,000,000 shares held in treasury at no cost at
September 30, 2004 and December 31, 2003, respectively 427,844 349,088
Additional paid-in capital 15,527,086 12,876,941
Accumulated deficit (19,638,953) (18,141,280)
---------------- ---------------
Total Stockholders' Deficit (3,684,023) (4,915,251)
---------------- ---------------
Total Liabilities and Stockholders' Deficit $ 3,538,036 $ 2,169,834
---------------- ---------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- ------------
Net Sales $ 2,626,770 $ 267,494 $ 5,230,374 $ 954,030
Cost of Sales (2,069,828) (180,659) (4,066,375) (637,586)
-------------- ------------- ------------- ------------
Gross Profit 556,942 86,835 1,163,999 316,444
-------------- ------------- ------------- ------------
Operating Expenses
Selling, general and administrative expenses 876,043 636,815 2,240,620 1,751,914
Non-cash employee compensation expense 147,500 25,000 226,250 97,500
-------------- ------------- ------------- ------------
Total Operating Expenses 1,023,543 661,815 2,466,870 1,849,414
-------------- ------------- ------------- ------------
Loss From Operations (466,601) (574,980) (1,302,871) (1,532,970)
-------------- ------------- ------------- ------------
Other Income (Expense)
Interest (85,446) (143,028) (400,039) (392,055)
Other, net (39) (50) (196) (50)
Gain on forgiveness of debt - - 205,433 -
-------------- ------------- ------------- ------------
Total Other Expense, Net (85,485) (143,078) (194,802) (392,105)
-------------- ------------- ------------- ------------
Net Loss $ (552,086) $ (718,058) $ (1,497,673) $ (1,925,075)
-------------- ------------- ------------- ------------
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.01)
-------------- ------------- ------------- ------------
Basic and diluted weighted-average
common shares outstanding 424,095,306 278,797,940 400,091,599 262,142,159
-------------- ------------- ------------- ------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2004 2003
-------------------- --------------------
Cash flows from operating activities
Net loss $ (1,497,673) $ (1,925,075)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 181,414 232,094
Provision for loss on trade receivables (1,200) 803
Loss on disposal of equipment 33,238 -
Gain on forgiveness of debt (205,433) -
Non-cash compensation expense - 97,500
Settlement expense 60,000 62,226
Amortization of loan costs - 77,650
Loan costs and interest paid from loan proceeds 145,000 -
Stock issued for consulting expense - 1,996
Intrinsic value of options issued to employees 125,000 -
Options exercised in lieu of board and employee compensation 101,250 -
Options issued to attorneys and consultants for services 175,602 -
Changes in assets and liabilities:
Trade accounts receivable (455,872) (23,503)
Inventories (197,186) 58,551
Prepaid expenses and other assets (19,313) 2,203
Accounts payable 184,619 102,779
Accrued liabilities 294,597 605,184
-------------------- --------------------
Total adjustments 421,716 1,217,483
-------------------- --------------------
Net cash used in operating activities (1,075,957) (707,592)
-------------------- --------------------
Cash flows from investing activities
Purchase of investment (300,000) -
Purchase of property and equipment (502,657) (5,527)
-------------------- --------------------
Net cash used in investing activities (802,657) (5,527)
-------------------- --------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank (9,623) (19,531)
Proceeds from notes payable to stockholders 18,500 262,504
Payments on notes payable to stockholders (31,752) (240,665)
Proceeds from notes payable, net of cash paid for offering costs 2,927,000 515,597
Principal payments on notes payable (298,545) (139,852)
Proceeds from notes payable to related parties 2,145,233 100,000
Payment on notes payable to related parties (2,919,622) -
Proceeds from exercise of options and warrants to purchase
common stock 111,500 262,500
Exercise of options issued to attorneys and consultants
for services 550 -
-------------------- --------------------
Net cash provided by financing activities 1,943,241 740,553
-------------------- --------------------
Net increase in cash and cash equivalents 64,627 27,434
Cash and cash equivalents at beginning of year 54,135 500
-------------------- --------------------
Cash and cash equivalents at end of period $ 118,762 $ 27,934
-------------------- --------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine Months Ended September 30, 2004 2003
-------------------- --------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 230,572 $ 74,204
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 711,894 $ 47,561
Common stock issued for settlement of note payable $ 30,000 $ -
Common stock issuance in which proceeds were retained
as payment of notes payable $ 2,150,000 $ 284,000
Common stock issued for accrued compensation $ - $ 10,000
Accrued interest converted to notes payable $ 6,834 $ 45,205
Stock options exercised for settlement of accrued interest
and accrued compensation $ 61,000 $ 130,000
Note issued for settlement of notes payable and accrued
interest $ 551,819 $ -
Fees withheld from notes payable for Equity Line Agreement $ 86,000 $ 11,360
Deferred offering costs withheld from notes payable proceeds $ 128,000 $ 16,000
Loan costs included in notes payable - $ 77,650
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its 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/A. In particular, the
Company's significant accounting principles were presented as Note 1 to the
consolidated financial statements in that Report. In the opinion of management,
all adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three and nine
months ended September 30, 2004, are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2004.
Principles of Consolidation -- 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 an exclusive manufacturing agreement.
Other such agreements will be sought in the future.
The condensed consolidated financial statements include the accounts of CirTran
Corporation, and its wholly owned subsidiaries, Racore Technology Corporation
and CirTran-Asia Inc. All significant intercompany transactions have been
eliminated in consolidation.
Stock-Based Compensation -- At September 30, 2004, the Company has one
stock-based employee compensation plan, which is described more fully in Note 8.
The Company accounts for the plan under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, ("APB 25") and related
interpretations. During the nine months ended September 30, 2004 and 2003, the
Company recognized compensation expense relating to stock options and warrants
of $226,250 and $97,500, 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:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- --------------------------------------
2004 2003 2004 2003
---------------- --------------- -------------- ---------------------
Net loss, as reported $ (552,086) $ (718,058) $ (1,497,673) $ (1,925,075)
Add: Stock-based employee compensation expense
included in net loss 147,500 27,225 226,250 97,500
Deduct: Total stock-based employee compensation
benefit (expense) determined under fair value based
method for all awards (108,091) (74,639) (412,557) (274,167)
---------------- --------------- -------------- ---------------------
Pro forma net loss $ (512,677) $ (765,472) $ (1,683,980) $ (2,101,742)
---------------- --------------- -------------- ---------------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.00) $ (0.00) $ (0.01)
---------------- --------------- -------------- ---------------------
Basic and diluted loss per common share pro forma $ (0.00) $ (0.00) $ (0.00) $ (0.01)
---------------- --------------- -------------- ---------------------
6
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 $1,497,673 and $2,910,978 for the nine
months ended September 30, 2004 and the year ended December 31, 2003,
respectively. As of September 30, 2004 and December 31, 2003, the Company had an
accumulated deficit of $19,638,953 and $18,141,280, respectively, and a total
stockholders' deficit of $3,684,023 and $4,915,251, respectively. In addition,
the Company used, rather than provided, cash in its operations in the amounts of
$1,075,957 and $1,123,818 for the nine months ended September 30, 2004, and the
year ended December 31, 2003, respectively. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
In addition, the Company is a defendant in numerous legal actions (see Note 5).
These matters may have a material impact on the Company's financial position,
although no assurance can be given regarding the effect of these matters in the
future.
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.
The Company's plans include working with vendors to convert trade payables into
long-term notes payable and common stock, and to cure defaults with lenders
through forbearance agreements that the Company will be able to service. During
the nine months ended September 30, 2004, and the year ended December 31, 2003,
the Company successfully converted trade payables, notes payable, and accrued
interest of approximately $1,263,713 and $2,986, respectively, into notes.
Accrued interest of $27,020 associated with the notes payable was not converted
to the note payable with Abacus Ventures, Inc. ("Abacus"); therefore, a gain on
forgiveness of debt was recorded for $27,020 for the nine months ended September
30, 2004.
The Company intends to continue to pursue this type of debt conversion going
forward with other creditors. As discussed in Note 7, the Company has entered
into an equity line of credit agreement and a standby equity distribution
agreement with a private investor. The Company intends to terminate the equity
line of credit agreement when it is able to draw against the standby equity
distribution agreement. Realization of additional proceeds under either
agreement is not assured.
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
7
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.
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 $89,969 and $510,141 for the
three and nine months ended September 30, 2004, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholder -- The Company had amounts due to stockholders from
three separate notes. The balance due to stockholders at September 30, 2004, and
December 31, 2003, was $18,586 and $31,838, respectively. Interest associated
with amounts due to stockholders is accrued at 10 percent. Unpaid accrued
interest was $7,577 and $6,900 at September 30, 2004, and December 31, 2003,
respectively, and is included in accrued liabilities. These notes are due on
demand.
Notes Payable to Related Party -- The Company had amounts due to Abacas
Ventures, Inc., a related party, under the terms of a note payable and a bridge
loan.
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 nine months ended September 30, 2004, and the year ended
December 31, 2003, the Company was advanced $3,408,946 and $350,000,
respectively, and made cash payments of $2,919,621 and $875,000, respectively,
for an outstanding balance on the bridge loan of $653,066 and $163,742,
respectively.
The total accrued interest owed to Abacas was $361,101 and $230,484 as of
September 30, 2004, and December 31, 2003, respectively, and is included in
accrued liabilities.
NOTE 5 - 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 are currently held in escrow and have been 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
8
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. The remaining balance has not
been paid, and the registration statement with respect to the escrowed shares
has not been declared effective and the Company has not replaced the escrowed
shares with registered free-trading shares pursuant to the terms of the
settlement agreement; therefore, the plaintiff filed the Confession of Judgment
and proceeded with execution thereon. The Company is currently negotiating with
the plaintiff to settle this obligation without the release of the shares held
in escrow.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which has been recorded as other income. The Company did not
receive cash from this settlement, but certain obligations of the Company were
paid 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 estimates that the probability of the
$109,125 being considered additional rent expense is remote and disputes the
claim. The Company intends to vigorously defend the action.
On April 14, 2004, an unrelated party filed a claim against the Company alleging
that the Company stopped paying amounts due under a note entered into in June
1998. The suit seeks $90,500 plus fees and costs. During May 2004, the Company
settled this claim by issuing 1,000,000 shares of common which resulted in a
settlement expense of $60,000.
Litigation - During 2000, the Company settled a lawsuit filed by a vendor by
issuing 5,281,050 shares of the Company's common stock valued at $324,284,
paying $83,000 in cash and issuing two notes payable totaling $239,000. During
2002, the vendor filed a confession of judgment, in the amount of $519,052,
claiming that the Company defaulted on its agreement and claims the 2000 lawsuit
was not properly satisfied. At December 31, 2003, the Company owed $60,133 of
principal under the terms of the remaining note payable. The Company denies the
vendor's claims and intends to vigorously defend itself against the confession
of judgement.
During 2003, an investment firm filed suit in the U.S. District Court, District
of Utah seeking finders fees, consisting of common stock valued at $350,000 for
allegedly introducing the Company to the Equity Line Investor (Notes 6 and 7).
The case was previously dismissed in a New York court. The Company estimates
that the risk of loss is remote, therefore no accrual has been made.
In December 1999, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $213,000 of punitive
damages from the Company related to the Company's non-payment for materials
provided by the vendor. Judgment was entered against the Company in May 2002 in
the amount of $213,718. During 2004, this claim was purchased by Abacus and
recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and pursuant to the terms of a promissory note. The Company entered a
settlement agreement under which the Company is to pay $6,256 each month until
the obligation and interest thereon are paid. This did not represent the
9
forgiveness of any obligation, but rather the restructuring of the terms of the
previous agreement. At December 31, 2003, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. During 2004, this claim was purchased by Abacus and
recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2003, the Company had accrued the entire amount of the claim.
During 2004, this claim was purchased by Abacus and recorded as an increase to
the amount owed to Abacus under the terms of the bridge loan.
In December 1999, a vendor of the Company filed a lawsuit that seeks payment in
the amount of $44,269 for the cost of goods provided to the Company. The Company
admits owing certain amounts to the vendor and has accrued the entire amount
claimed as of December 31, 2003. During 2004, this claim was purchased by Abacus
and recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
During 2002, a vendor of the Company filed a lawsuit that seeks payment in the
amount of $31,745 for the cost of goods provided to the Company. The Company has
accrued the entire amount claimed. No trial date has been set. During 2004, this
claim was purchased by Abacus and recorded as an increase to the amount owed to
Abacus under the terms of the bridge loan.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. During 2004, this claim was
purchased by Abacus and recorded as an increase to the amount owed to Abacus
under the terms of the bridge loan.
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. At December 31, 2003, the Company
owed $87,632 on this settlement agreement. During 2004, this claim was purchased
by Abacus and recorded as an increase to the amount owed to Abacus under the
terms of the bridge loan.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has made payments to the
financial institution, reducing the obligation to $215,516 at December 31, 2003,
plus interest accruing from January 1, 2002. The Company has settled this claim
in full as discussed in Note 6.
Suit was brought against the Company during April 2001, by a former shareholder
alleging that the Company owed $121,825 under the terms of a promissory note. A
Stipulation for Settlement and for Entry of Judgment was executed by the parties
wherein the Company agreed to arrange for payment of a principal amount of
$145,000 in 48 monthly installments. The Company made seven payments and then
failed to make subsequent payments, at which time the shareholder obtained a
consent judgment against the Company. The Company is currently in settlement
negotiations with the former shareholder regarding the judgment.
10
A financial institution brought suit against the Company in June 2003 for the
non-payment of $39,367 under the terms of a note payable. This amount is
included in notes payable at December 31, 2003. The Company is currently in
settlement negotiations to settle this matter.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $116,119. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims and they are included in accounts payable.
The Company is the defendant in numerous legal actions, primarily resulting from
nonpayment of vendor invoices for goods and services received, that it has
determined the probability of realizing any loss is remote. The total amount of
these legal actions is $68,952. The Company has made no accrual for the legal
actions and is currently in the process of negotiating the dismissal of these
claims with the various vendors.
The Company is also the defendant in numerous immaterial legal actions primarily
resulting from nonpayment of vendors for goods and services received. The
Company has accrued the payables and is currently in the process of negotiating
settlements with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity during 2000, the Company has granted the holders of 5,281,050 shares of
common stock the right to include 50% of the common stock of the holders in any
registration of common stock of the Company, under the Securities Act for offer
to sell to the public (subject to certain exceptions). The Company has also
agreed to keep any filed registration statement effective for a period of 180
days at its own expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 7), the Company granted to the equity line
investor (the "Equity Line Investor") registration rights, in connection with
which the Company is required to file a registration statement covering the
resale of shares put to the Equity Line Investor under the equity line. The
Company is also required to keep the registration statement effective until two
years following the date of the last advance under the equity line.
Also, in connection with the Company's entering into a standby equity
distribution agreement (described in Note 7), the Company granted to the
investor registration rights, in connection with which the Company is required
to file a registration statement covering the resale of shares put to the
investor under the standby equity distribution agreement. The Company is also
required to keep the registration statement effective until two years following
the date of the last advance under the standby equity distribution agreement.
The Company has not yet had such registration statement declared effective by
the Securities and Exchange Commission.
Accrued Payroll Tax Liabilities -- As of September 30, 2004, the Company had
accrued liabilities in the amount of $2,136,891 for delinquent payroll taxes,
including interest estimated at $458,677 and penalties estimated at $230,927. Of
this amount, approximately $306,153 was due the State of Utah. Approximately
$1,830,738 was owed to the Internal Revenue Service as of September 30, 2004.
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
11
the IRS had accepted the offer in compromise. Under the offer, the Company is
required to pay $500,000 no later than February 3, 2005. Additionally, the
Company must remain current in its payment of taxes for 5 years, and may not
claim any NOL's 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.
Further, the Utah State Tax Commission has entered into an agreement to allow
the Company to pay the liability owing to the State of Utah in equal monthly
installments of $4,000 over a two-year period running through December 2005.
Through October 2004, the Company had made the required payments.
Marketing Agreement -- On October 1, 2004, the Company signed an agreement with
a marketing firm to provide strategic planning advice. The term of the agreement
is for six months from October 1, 2004 through March 31, 2005. The agreement
shall be automatically extended for successive six month periods unless either
party gives written notice of its intent not to renew the agreement. The Company
will pay the marketing firm a commission of ten percent of all net proceeds from
any new business brought to the Company by the marketing firm. Net proceeds are
defined in the agreement as payments actually received by the Company from new
business (net of returns, discounts, and rebates) from which costs of sales is
subtracted. The Company will also pay $7,500 to the marketing firm during each
of the first three months of the agreement. These payments are nonrefundable,
but may be applied toward future commissions earned.
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 Ab King Pro., The Hot Dog Express and any
other 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 early terminate the
agreement, 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 has agreed to issue options to
purchase 1,500,000 shares common stock to the Developers upon the sale, shipment
and payment for 200,000 Ab King Pro. units. The options will be exercisable at
$0.06 per share, vest on the grant date and expire on June 10, 2005. As of
September 30, 2004, the Company had sold, shipped and received payment for,
130,177 Ab King Pro. units. 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 6 - NOTES PAYABLE
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.
12
Notes Payable to Equity Line Investor -- At December 31, 2003, the Company owed
$650,000 to Cornell Capital Partners, LP, pursuant to prior unsecured promissory
notes. During the nine months ended September 30, 2004, the Company borrowed an
additional $3,200,000, before offering costs of $273,000, from Cornell, pursuant
to four additional unsecured promissory notes. In lieu of interest, the Company
paid fees at closing of 4% to 5% of the loan amount to an affiliate of the
lender. These fees have been recorded as interest expense. The fees were
negotiated in each instance and agreed upon by the Company and by the lender and
its affiliate. The notes were repayable over periods ranging from 88 days to 193
days. Each of the notes stated that if the Company did not repay the notes when
due, a default interest rate of 24% would apply to the unpaid balance. Through
September 30, 2004, the Company directed the repayment of $2,150,000 of these
notes from proceeds generated under the Equity Line Agreement, discussed in Note
7 below. At September 30, 2004, the balance owing on these notes was $1,700,000
and the Company had not incurred the 24% penalty interest rate.
NOTE 7 - STOCKHOLDER'S EQUITY
Common Stock Issuance -- As discussed in Note 6, the Company issued 542,495
shares of common stock with a fair value of $30,000, based on the per share fair
value of the Company's common stock on the date of issuance, as part of a
settlement agreement for a note payable.
As discussed in Note 5, during May 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.
Equity Line of Credit Agreement - In conjunction with efforts to improve the
results of operations, discussed above, on November 5, 2002, the Company entered
into an Equity Line of Credit Agreement with Cornell Capital Partners, LP, a
private investor ("Cornell"). The Company subsequently terminated the original
Equity Line of Credit Agreement, and on April 8, 2003, the Company entered into
an amended equity line agreement (the "Equity Line Agreement") with Cornell.
Under the Equity Line Agreement, the Company has 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 is determined by dividing the
amount of the draw by the lowest closing bid price of our common stock over the
five trading days after the advance notice is tendered. Cornell is required
under the Equity Line Agreement to tender the funds requested by the Company
within two trading days after the five-trading-day period used to determine the
market price.
During the nine months ended September 30, 2004, the Company 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 the Company's
direction, Cornell retained the proceeds of the draws under the Equity Line
Agreement and applied them as payments on the notes to Cornell, discussed in
Note 6 above.
Pursuant to the Equity Line Agreement, in connection with each draw the Company
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 nine months ended
September 30, 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
13
and $68,000 was classified as deferred offering costs at September 30, 2004.
These deferred offering costs will be offset against additional paid-in capital
as shares are issued under the Equity Line Agreement subsequent to September 30,
2004.
Standby Equity Distribution Agreement - The Company entered into a Standby
Equity Distribution Agreement dated May 21, 2004, with Cornell. Under the
Agreement, the Company has 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 is determined by dividing the
amount of the draw by the lowest volume-weighted average price of our common
stock during the five consecutive trading days after the advance is sought. The
maximum advance amount is $1,000,000 per advance, with a minimum of seven
trading days between advances. Cornell will retain 5% of each advance as a fee
under the Agreement. The term of the Agreement runs over a period of twenty-four
months after a registration statement related to the Agreement is declared
effective or until the full $20 million has been drawn, whichever comes first.
The Company intends to terminate the Equity Line of Credit Agreement and cease
further draws or issuances of shares in connection with the Equity Line
Agreement when it is able to draw against the SEDA Facility, which will be when
the SEC declares effective a registration statement registering resale by
Cornell of shares issued under the SEDA Facility. The SEC has not yet declared
the registration statement effective.
NOTE 8 - 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 5, 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 February 2003, the Company adopted the 2002 Stock
Option Plan (the "2002 Plan") with 25,000,000 shares of common stock reserved
for issuance there under. Also, 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. 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.
Non-Employee Grants - During the nine months ended September 30, 2004, the
Company granted options to purchase 5,000,000 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. The weighted average fair
value of the options on the grant dates was $0.044, which resulted in a fair
value of $175,602 which reduced the amount owed for prior services provided.
14
These options were valued using the Black-Scholes option pricing model with the
following assumptions: risk free interest rate ranging from 2.80% to 3.72%,
dividend yield of 0.0%, volatility ranging from 289% to 317%, and expected
average life ranging between 3 and 5 years. The attorneys exercised the
5,000,000 options for cash proceeds of $500. An additional 500,000 of previously
issued options were exercised for cash proceeds of $50.
Employee Grants - During the nine months ended September 30, 2004, the Company
granted options to purchase 15,000,000 shares of common stock to directors and
employees of the Company pursuant to the 2003 Plan. 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. The Company's common stock had a fair value of $0.01
to $0.05 per share at the time these options were granted. Non-cash compensation
relating to the grant of these options was recognized for $125,000 during the
nine months ended September 30, 2004, based upon the intrinsic value of options
on the grant date. 14,250,000 of these options were exercised during the nine
months ended September 30, 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.
A summary of the stock option activity for the nine months ended September 30,
2004, is as follows:
Weighted Average
Shares Exercise Price
---------------------- ----------------------
Outstanding at December 31, 2003 3,850,500 $ 0.02
Granted 20,000,000 $ 0.01
Exercised (19,750,000) $ 0.01
Cancelled - -
----------------------
Outstanding at September 30, 2004 4,100,500 $ 0.03
======================
Excercisable at September 30, 2004 4,100,500 $ 0.03
======================
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 six months ended September 30, 2004:
2004
----------------------
Expected dividend yield -
Risk free interest rate 3.28%
Expected volatility 311%
Expected life .10 years
Weighted average fair value per share $ 0.02
15
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
each segment based on earnings or loss from operations. Selected segment
information is as follows:
Electronics Ethernet Contract
Assembly Technology Manufacturing Total
------------------- ------------------- -------------------- ------------------
September 30, 2004
Sales to external customers $ 2,424,582 $ 46,328 $ 2,759,464 $ 5,230,374
Intersegment sales 11,325 167 - 11,492
Segment loss (1,011,083) (189,543) (297,047) (1,497,673)
Segment assets 2,875,515 204,716 457,805 3,538,036
Depreciation and amortization 168,332 1,787 11,295 181,414
September 30, 2003
Sales to external customers $ 795,239 $ 158,791 $ - $ 954,030
Intersegment sales 65,435 - - 65,435
Segment loss (1,784,619) (140,456) - (1,925,075)
Segment assets 2,136,110 205,543 - 2,341,653
Depreciation and amortization 227,985 4,109 - 232,094
September 30,
-------------------------------------------
Sales 2004 2003
------------------- --------------------
Total sales for reportable segments $ 5,241,866 $ 1,019,465
Elimination of intersegment sales (11,492) (65,435)
------------------- --------------------
Consolidated net sales $ 5,230,374 $ 954,030
------------------- --------------------
September 30,
-------------------------------------------
Total Assets 2004 2003
------------------- --------------------
Total assets for reportable segments $ 3,538,036 $ 2,341,653
Adjustment for intersegment amounts - -
------------------- --------------------
Consolidated total assets $ 3,538,036 $ 2,341,653
------------------- --------------------
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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/A for the year ended December 31, 2003.
Overview
We provide a mixture of high- and medium-volume turnkey manufacturing services
using surface mount technology, ball-grid array assembly, pin-through-hole, and
custom injection molded cabling for leading electronics original equipment
manufactures ("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. ("CirTran-Asia"),
which has contributed to a large portion of the increase in revenue for the nine
months ended September 30, 2004. This new division, CirTran-Asia, is our
Asian-based, wholly owned subsidiary of CirTran Corporation and provides a
myriad of manufacturing services to the direct response and retail consumer
markets. Our experience and expertise in manufacturing enables CirTran-Asia to
enter a project at any phase: engineering and design, product development and
prototyping, tooling, and high-volume manufacturing.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. CirTran-Asia will pursue manufacturing
relationships beyond printed circuit board assemblies, cables, harnesses and
injection molding systems by establishing complete "box-build" or "turn-key"
relationships in the electronics, retail, and direct consumer markets.
We have been preparing for more than a year for this strategic move into the
Asian market. Management anticipates that this new division will elevate CirTran
to an international contract manufacturer status for multiple products in a wide
variety of industries, and will, in short order, allow us to target large-scale
contracts. We anticipate that our new clients will be leading manufacturing and
marketing firms in the retail and direct consumer markets.
Information relating to recent developments in our increasing line of fitness
products is as follows:
On June 7, 2004, we announced that CirTran-Asia had received an initial purchase
order on May 26, 2004, relating to the manufacture of 80,000 AB KING PRO 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 AB KING PRO, which was announced on June
16, 2004, through a separate press release. Since these announcements,
CirTran-Asia has manufactured, shipped, and received payment of approximately
$2,400,000 on approximately 120,000 units. 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 5,000 AB KING PRO machines and
17
received payment of approximately $100,000 in September 2004. 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 a new abdominal fitness machine under the
exclusive manufacturing agreement. This new product is called the AB Trainer
Club Pro. We are still awaiting production orders to begin manufacturing and
shipping this product.
On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had
been was awarded the rights to manufacture the AB Roller, an abdominal fitness
machine under the exclusive manufacturing agreement. Through November 18, 2004,
we have received orders and shipped in excess of 17,000 units valued at over
$85,000. We anticipate that payment will be received within 30 days of shipping.
On September 14, 2004, we announced that on September 7, 2004, we had begun
manufacturing an abdominal fitness machine entitled InStant Abs under the
exclusive manufacturing agreement. Through November 18, 2004, we have received
orders to manufacture and ship in excess of 31,000 units. We anticipate that
payment will be received within 30 days of shipping.
On September 30, 2004, we announced that on September 23, 2004, CirTran-Asia had
been awarded the rights to manufacture a Pilates fitness machine under the
exclusive manufacturing agreement. Through November 18, 2004, we had received
orders to manufacture and ship approximately 2,900 units of this product. As of
November 18, 2004, this product was in the process of being manufactured, and we
anticipated that we would ship the entire order by the end of November 2004.
Information relating to recent developments in new products under development
along with procuring new products for development is as follows:
On August 11, 2004, we announced that CirTran-Asia received a purchase order on
August 10, 2004 relating to the manufacture of a household cooking appliance for
hot dogs and sausages, called The Hot Dog Express. We are still awaiting final
approval of the proto-type unit and instructions to begin manufacturing.
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
three 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 has an initial term
of six months, beginning October 1, 2004, and will be automatically extended for
successive six-month periods unless either party gives written notice at least
30 days prior to the expiration of the term of the agreement of its intent not
to renew. Additionally, we may terminate the agreement at any time by giving 30
days written notice.
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
18
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 provided benefits to Mr. Ho., and his employment may be terminated for
cause, or upon his death or disability. If the Agreement expires of its terms or
is terminated for any reason, Mr. Ho may not compete with us for a period of one
year from the date of termination of the agreement. Mr. Ho also agreed not to
19
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.
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/A includes a summary of the significant
accounting policies and methods used in the preparation of our Financial
Statements. The following is a brief discussion of the more significant
accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material, and overhead costs. Overhead costs are based on
indirect costs allocated among cost of sales, work-in-process inventory, and
finished goods inventory. 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 is secured by these agreements.
Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out more funds
than were in our accounts, under existing lines of credit with those banks.
Subsequent to May 2000, when Abacas purchased our line of credit obligation, the
Company no longer had lines of credit with banks, and those loans were no longer
20
available or made to us. The Company acquired an equity line of credit effective
as of June of 2003, described more fully under "Liquidity and Financing
Arrangements."
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item 2
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Item 5 - Other Information."
Results of Operations - Comparison of Periods Ended September 30, 2004 and 2003
Sales and Cost of Sales
Net sales increased to $2,626,770 for the three-month period ended September 30,
2004, as compared to $267,494 during the same period in 2003 for an increase of
882.0%. The third quarter sales increase can be attributed to several factors,
including the strengthening of the overall market economy. Industry-wide, we are
seeing more OEMs release larger order commitments with extended time tables. We
estimate that $237,465 of the sales increase relates to the strengthening of the
overall market economy. 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 has resulted in sales to new customers of $276,788 during the
three months ended September 30, 2004. The biggest factor contribution to the
increase of net sales during the third quarter was the establishment of the new
division CirTran-Asia, which has contributed $1,793,673 of the increase in
revenue. CirTran-Asia, our Asian-based wholly owned subsidiary of CirTran
Corporation, provides a myriad of manufacturing services to the direct response
and retail consumer markets. Our vast experience and expertise in manufacturing
enables CirTran-Asia to enter a project at any phase; engineering and design,
product development and prototyping, tooling, high-volume manufacturing. Cost of
sales increased by 1045.7%, from $180,659 during the three-month period ended
September 30, 2003, to $2,069,828 during the same period in 2004. The increase
in cost of sale is due to increase in revenue. Our gross profit margin for the
three-month period ended September 30, 2004, was 21.2%, down from 32.5% for the
same period in 2003. The decrease is due to the increase of cost of sales for
CirTran-Asia products that have smaller gross margins, but higher volume.
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 September 30, 2004, was $1,444,614,
as compared to $1,247,428 at December 31, 2003. The increase in inventory is
required to facilitate the increase in turnkey sales.
21
Selling, General and Administrative Expenses
During the quarter ended September 30, 2004, selling, general and administrative
expenses were $876,043 versus $636,815 for the same period in 2003, a 37.6%
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 September 30, 2004 were
33.4% as compared to 238.1% during the same period in 2003. This decrease is due
in part to an increase in sales and better control of expenses.
Interest Expense
Interest expense for quarter ended September 30, 2004, was $85,446 as compared
to $143,028 for the same period in 2003, a decrease of 40.3%. The decrease is
primarily due to the reduction in interest expense related the settlement of
various notes payable. As of September 30, 2004, and December 31, 2003, the
amount of our liability for delinquent state and federal payroll taxes and
estimated penalties and interest thereon was $2,136,891 and $2,107,930,
respectively.
As a result of the above factors, our overall net loss decreased 23.1% to
$552,086 for the quarter ended September 30, 2004, as compared to $718,058 for
the quarter ended September 30, 2003. This decrease was in part attributed to a
substantial increase in sales and better cost controls.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $19,638,953 at September 30, 2004, and
$18,141,280 at December 31, 2003. Our net loss for the quarter ending September
30, 2004, was $466,601, compared to $574,980 for the quarter ended September 30,
2003. Our current liabilities exceeded our current assets by $4,930,728 as of
September 30, 2004, and $5,529,244 as of December 31, 2003. The decrease was
mostly attributable to decreasing account payables, settlements of notes
payable, and an increase in accounts receivable and inventory. For the nine
months ended September 30, 2004 and 2003, we had negative cash flows from
operations of $1,075,957 and $707,592 respectively. For the nine months ended
September 30, 2004, we have improved the cash flow by $368,365, as compared to
the nine months ended September 30, 2003.
Cash
We had cash on hand of $118,762 at September 30, 2004, and $54,135 at December
31, 2003.
Net cash used in operating activities was $1,075,957 for the nine months ended
September 30, 2004. Cash received from customers of $4,773,302 was not
sufficient to offset cash paid to vendors, suppliers, and employees of
$5,849,259. The non-cash charges were for depreciation and amortization of
$181,414 and loan costs and interest paid from loan proceeds of $145,000.
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 nine months ended September 30,
2004, consisted of equipment purchases of $502,657 and a purchase of investment
securities in the amount of $300,000.
Net cash provided by financing activities was $1,943,241 during the nine months
ended September 30, 2004. Principal sources of cash were proceeds of $2,145,233
from notes payable to related parties, proceeds from notes payable of
$2,927,000, and proceeds from the exercise of options to purchase common stock
of $111,500. These proceeds were offset by principal payments on notes payable
22
to related parties in the amount of $2,919,622.
Accounts Receivable
At September 30, 2004, we had receivables of $546,259, net of a reserve for
doubtful accounts of $27,626, as compared to $89,187 at December 31, 2003, net
of a reserve of $28,876. This increase was primarily attributed to sales having
substantially increased in the last month of the third quarter as compared to
the last two months in 2003. The Company has implemented an aggressive process
to collect past due accounts over the past eighteen months. As such, the
receivables that were past due for a period of greater than 45 days as of
September 30, 2004, were less than 5% of total receivables. 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. In addition, the majority of the
increase in accounts receivable as of September 30, 2004, related to sales that
occurred in the last month of the quarter. Therefore they were not deemed
uncollectible.
Accounts Payable
Accounts payable were $773,322 at September 30, 2004, as compared to $1,300,597
at December 31, 2003. This decrease is primarily attributed to conversions of
accounts payable to notes payable in relation to settlements made by Abacas
Ventures.
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 $19,638,953 and a
total stockholders' deficit of $3,684,023 at September 30, 2004. As of September
30, 2004, our monthly operating costs and interest expenses averaged
approximately $318,000 per month.
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. At
September 30, 2004, we were in default of notes payable whose principal amount,
not including the amount owing to Abacas Ventures, Inc., was approximately
$320,000. In addition, the principal amount of notes that either mature in 2004
or are payable on demand was approximately $1,700,000.
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.
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
23
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, discussed in Note 10 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 nine months ended September 30, 2004, Cornell loaned us an additional
$3,200,000 pursuant to four additional unsecured promissory notes, $1,700,000 of
which remained outstanding at November 18, 2004. The loans were made and the
notes were issued in January through June 2004, bringing the total aggregate
loans from Cornell to $5,030,000. As before, in lieu of interest, we paid fees
to the lender, ranging from 4% to 5%, of the amount of the loan. The fees were
negotiated in each instance and agreed upon by us and by the lender and its
affiliate. The notes were repayable over periods of 88 days and 193 days. Each
of the notes stated that if we did not repay the notes when due, a default
interest rate of 24% would apply to the unpaid balance.
As noted above, we received proceeds of $5,030,000 from notes payable to
Cornell. We used the proceeds from these notes to fund operating losses of
approximately $2,938,000, pay down accounts payable, notes payable and other
settlements of approximately $1,401,000, purchase equipment and tooling in the
amount of $391,000, and to invest in Broadata in the amount of $300,000.
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.
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 Capital Partners, LP, a private investor ("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 have the right to draw up to $5,000,000 from
Cornell against an equity line of credit (the "Equity Line"), and to put to
Cornell shares of our common stock in lieu of repayment of the draw. The number
of shares to be issued is determined by dividing the amount of the draw by the
lowest closing bid price of our common stock over the five trading days after
the advance notice is tendered. Cornell is required under the Equity Line
Agreement to tender the funds requested by us within two trading days after the
five-trading-day period used to determine the market price.
During the nine months ended September 30, 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
24
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 nine months ended September
30, 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 September 30, 2004. These deferred offering costs will be
offset against additional paid-in capital as shares are issued under the Equity
Line Agreement subsequent to September 30, 2004.
Standby Equity Distribution Agreement
We entered into a Standby Equity Distribution Agreement (the
"Agreement") dated May 21, 2004, with Cornell Capital Partners, LP (the "SEDA
Investor"). Under the Agreement, we have the right, at our sole discretion, to
sell periodically to the SEDA Investor shares of our common stock for an
aggregate purchase price of up to $20 million. The purchase price for the shares
sold to the SEDA Investor is 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 give an advance notice. The periodic sale of shares is
known as an advance. We may request an advance, by giving a written advance
notice to the SEDA Investor, and may not request advances more frequently than
every seven trading days. A closing will be held on the first trading day after
the end of the pricing period. The maximum advance amount is one million dollars
($1,000,000) per advance, with a minimum of seven trading days between advances.
In addition, we may not request advances if the shares to be issued in
connection with such advances would result in the SEDA Investors owning more
than 9.9% of our outstanding common stock.
The SEDA Investor will retain a commitment fee of 5% of the amount of
each advance under the Agreement.
Proceeds used under the Agreement will be used for general corporate
purposes and likely will include the repayment of notes issued to Cornell, the
SEDA Investor. We cannot predict the total amount of proceeds to be raised in
this transaction because we have not determined the total amount of the advances
we intend to draw.
As noted above, we intend to use proceeds from the SEDA facility to
repay the outstanding balance of $1,700,000 owing to Cornell under a note
payable. Doing so will reduce the amount available to us for other corporate
purposes under the SEDA facility from $20,000,000 to $18,300,000. Management
believes that the remaining amount will be sufficient to sustain our operations
for the commitment period of the SEDA facility, which is 24 months from the date
a registration statement covering the resale of shares by the SEDA Investor is
declared effective. However, if we are able to obtain funding on better terms,
or if our operations begin to generate sufficient revenues to allow us to
operate without drawing on the SEDA facility or at reduced amounts, we may not
draw the full remaining $18,300,000 available to us. As discussed above, under
the Agreement we are not required to draw any of the amounts available to us
under the SEDA facility. Whether to draw and the extent to which we make draws
is in our discretion, and we will make draws only as needed.
Forward-looking statements
All statements made in this report, 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.
25
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.
Item 3. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)) as of
the end of the period covered by this report (the "Evaluation Date"), have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls, or, to the Company's knowledge, in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2004, the Company had accrued liabilities in the
amount of $2,136,891 for delinquent payroll taxes, including interest estimated
at $458,677 and penalties estimated at $230,927. Of this amount, approximately
$306,153 was due the State of Utah. Approximately $1,830,738 was owed to the
Internal Revenue Service as of September 30, 2004. 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 is 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. 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.
Further, the Utah State Tax Commission has entered into an agreement to
allow the Company to pay the liability owing to the State of Utah in equal
monthly installments of $4,000 over a two-year period running through December
2005. Through November 2004, we had made the required payments.
We (as successor to Circuit Technology, Inc.) were a defendant in an
action in El Paso County, Colorado District Court, brought by Sunborne XII, LLC,
a Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado.
Effective January 18, 2002, we entered into a settlement agreement with
Sunborne with respect to the above-described litigation. The settlement
agreement required us to pay Sunborne the sum of $250,000. Of this amount,
$25,000 was paid upon execution of the agreement, and the balance of $225,000,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, we executed and delivered to Sunborne a
26
Confession of Judgment and also issued to Sunborne 3,000,000 shares of our
common stock, which are held in escrow and have been treated as treasury stock
recorded at no cost. Because 75% of the balance owing under the agreement was
not paid by May 18, 2002, we were required to prepare and file a registration
statement to register the resale of the escrowed shares.
As of May 16, 2003, the Company was in default of its obligations under
the settlement agreement with Sunborne, i.e., the total payment due thereunder
had not been made, a registration statement with respect to the escrowed shares
was not filed, and the Company had not replaced the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
Sunborne filed a foreign judgment in Salt Lake City and proceeded with execution
thereon. The Company is continuing to negotiate with Sunborne in an attempt to
settle the remaining obligation.
Pursuant to a Termination of Sublease Agreement dated as of May 22,
2002 among the Company, Sunborne and other parties, the sublease agreement that
was the subject of the Colorado litigation with Sunborne was terminated and a
payment of approximately $109,000 was credited against the amount owed by the
Company to Sunborne under the settlement agreement. Sunborne has filed a claim
that this amount was to be an additional rent expense rather than a payment on
the note payable. The Company disputes this claim and intends to vigorously
defend the action.
We also assumed certain liabilities of Circuit Technology, Inc. in
connection with our transactions with that entity in the year 2000, and as a
result we are defendant in a number of legal actions involving nonpayment of
vendors for goods and services rendered. We have accrued these payables and have
negotiated settlements with respect to some of the liabilities, including those
detailed below, and are currently negotiating settlements with other vendors.
Contact East has notified the Company that it believes it has a claim
against the Company in the amount of $32,129.89 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is not aware of a lawsuit being filed, and has been involved in settlement
negotiations.
C/S Utilities has notified the Company that it has a judgment against
the Company from a Colorado state court in the amount of $37,966, in connection
with utilities services. The Company has been involved in settlement
negotiations.
Future Electronics Corp v. Circuit Technology Corporation, Civil No.
000900296, Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about January 12, 2000, under allegations
that the Company owed $646,283.96 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims were asserted for breach
of contract, fraud, negligent misrepresentation, unjust enrichment, account
stated and dishonored instruments. The Company answered the complaint, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Partial Summary Judgment was entered in the amount of $646,783.96
as to certain claims against the Company. Negotiations for settlement resulted
in an agreement for settlement of all claims of Future against the Company
subject to performance by the Company under the agreement. The Company also
issued to Future 352,070 shares of its restricted common stock. The Company did
not perform its obligations under the settlement agreement, and a Confession of
Judgment was entered in January 2002 in the amount of $519,052.00. The Company
disputes the amount of the judgment entered. No collection efforts have been
made. The Company is currently negotiating settlement of this matter.
Molex has notified the Company that it believes it has a claim against
the Company in the amount of $90,000.00 for the cost of goods or services
27
provided to the Company for the Company's use and benefit. The Company is not
aware of a lawsuit being filed in connection with this claim, and has been
involved in settlement negotiations.
Signal Transformer Co., Inc., has notified the Company that it believes
it has a claim against the Company in the amount of $38,989 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Negotiations for settlement of this claim have resulted in an agreement in
principal whereby the Company will arrange for a cash payment to this creditor.
The parties are presently negotiating the terms of the settlement documents.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditor's claims will be settled nor that the terms will
be favorable to the Company.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No.
00L14505, Circuit Court of Cook County Department, Law Division, State of
Illinois. Suit was brought against the Company on or about December 23, 1999,
under allegations that the Company owed $213,717.70 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for breach of contract, unjust enrichment and account stated. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Judgment was subsequently entered
against the Company on May 29, 2002. The parties subsequently entered into a
settlement agreement, and the Company has paid the amounts required. Under the
settlement agreement, SuhTech is required to dismiss the case, but as of the
date of this report, the case had not been dismissed.
Volt Temporary Services has notified the Company that it believes it
has a claim against the Company in the amount of $30,986 for the cost of goods
or services provided to the Company for the Company's use and benefit. The
Company is not aware of a lawsuit being filed in this matter, and has been
involved in settlement negotiations.
George M. Madanat, Civil No. KC 035616, Superior Court of the State of
California for the County of Los Angeles, East District. Suit was brought
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
under the settlement agreement, and judgment was entered against the Company.
The Company is continuing its attempts to settle this matter with Mr. Madanat.
Howard Salamon, dba Salamon Brothers vs. CirTran Corporation, Civil No.
2:03-00787, U.S. District Court, District of Utah. Howard Salamon originally
filed suit against the Company in the U.S. District Court, Eastern District of
New York, seeking finders fees, consisting of shares of the Company's common
stock valued at $350,000, allegedly owed in connection with Salamon's
introducing the Company to Cornell Capital Partners, L.P., the Equity Line
Investor. The Company disputes the claims in the complaint. The case was
dismissed in New York and refiled in Utah. The Company has filed its answer in
the Utah case and the lawsuit is proceeding. The Plaintiff has sought leave to
file an amended complaint, which the court granted; however, the Company had not
been served with the amended complaint as of November 16, 2004. The Company is
also currently conducting settlement negotiations.
RecovAR Group, LLC vs. CirTran Corporation, Inc., District Court of
Maryland. This matter arises from an agreement between the Company and United
Parcel Services, Inc. ("UPS"). UPS alleges that the Company owes approximately
$8,024 for services rendered. RecovAR Group, LLC, brought the action on behalf
of UPS. The Company is continuing its settlement negotiations with RecovAR
Group, LLC
US Bank vs. Racore Network, Civil No. 030909879, Third Judicial
28
District Court, Salt Lake County, State of Utah. US Bank brought suit against
Racore Network for $39,366.92, plus interest, and default judgment was entered
in June 2003. Racore is in settlement negotiations with US Bank to settle this
matter.
Item 5. Other Information
Abacas Ventures
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.
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 nine months ended September 30, 2004 and the year ended
December 31, 2003, the Company was advanced $3,408,946 and $350,000,
respectively, and made cash payments of $2,919,621 and $875,000 respectively,
for an outstanding balance on the bridge loan of $653,066 and $163,742,
respectively. During the nine months ended September 30, 2004, and the year
ended December 31, 2003, Abacas purchased certain converted trade payables,
notes payable, and accrued interest of the Company of approximately $1,263,713
and $2,986, respectively, and converted the obligations into notes to Abacas.
Accrued interest of $27,020 associated with the 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 nine months ended September 30, 2004. The Company
intends to continue to pursue this type of debt conversion going forward with
other creditors.
Also, as of September 30, 2004 the company owed I&R Properties, LLC,
the previous owner of our principal office and manufacturing facility, a total
amount of $374,001 in accrued rent. I&R Properties is a company owned and
controlled by individuals who are officers, directors and principal
stockholders.
29
Management believed at the time of each of these transactions and
continues to believe that each of these transactions were as fair to the Company
as could have been made with unaffiliated third parties.
Item 6. Exhibits
Exhibits:
10.20 Standby Equity Distribution Agreement between CirTran Corporation
and Cornell Capital Partners, LP, dated as of May 21, 2004
10.21 Registration Rights Agreement between CirTran Corporation and
Cornell Capital Partners, LP, dated as of May 21, 2004
10.22 Placement Agent Agreement between CirTran Corporation and
Newbridge Securities Corporation, dated as of May 21, 2004
10.23 Escrow Agreement by and among CirTran Corporation, Cornell
Capital Partners, LP, and Butler Gonzalez LLP, dated as of May
21, 2004.
10.24 Exclusive Manufacturing Agreement ("Exclusive Agreement") by and
among Michael Casey; Michael Casey Enterprises, Ltd.; Charles Ho;
Uking System Industry Co., Ltd.; David Hayek; HIPMG, Inc. and
CirRran-Asia, Inc., dated as of June 10, 2004
10.25 Appendix A-1 to Exclusive Agreement for AbKing Pro (portions of
this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission)
10.26 Appendix A-2 to Exclusive Agreement for AbRoller (portions of
this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission)
10.27 Appendix A-3 to Exclusive Agreement for AbTrainer Club Pro
(portions of this exhibit have been redacted pursuant to a
request for confidential treatment and have been filed separately
with the Securities and Exchange Commission)
10.28 Appendix A-4 to Exclusive Agreement for Instant Abs (portions of
this exhibit have been redacted pursuant to a request for
confidential treatment and have been filed separately with the
Securities and Exchange Commission)
10.29 Appendix A-5 to Exclusive Agreement for Hot Dog Express
(portions of this exhibit have been redacted pursuant to a
request for confidential treatment and have been filed separately
with the Securities and Exchange Commission)
10.30 Appendix A-7 to Exclusive Agreement for Condiment Caddy
(portions of this exhibit have been redacted pursuant to a
request for confidential treatment and have been filed separately
with the Securities and Exchange Commission)
10.31 Appendix A-8 to Exclusive Agreement for Denise Austin Pilates
product (portions of this exhibit have been redacted pursuant to
a request for confidential treatment and have been filed
separately with the Securities and Exchange Commission)
10.32 Employment Agreement with Iehab Hawatmeh, dated as of July 1,
2004
10.33 Employment Agreement with Shaher Hawatmeh, dated as of July 1,
2004
10.34 Employment Agreement with Trevor Saliba, dated as of July 1,
2004
10.35 Employment Agreement with Charles Ho, dated as of July 1, 2004
10.36 Letter Agreement between MET Advisors and CirTran Corporation,
dated August 1, 2003
10.37 Consulting Agreement between CirTran Corporation and Cogent
Capital Corp., dated September 14, 2003
10.38 Agreement between CirTran Corporation and Transactional
Marketing Partners, Inc., dated as of October 1, 2004
31 Certification
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
30
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CIRTRAN CORPORATION
Date: December 22, 2004 By: /s/ Iehab J. Hawatmeh
Iehab J. Hawatmeh
President and Chief Financial Officer
31