-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PNK7sxEPzj5/X/5vylXqeRXykcLhrOgaktOV4e7/lwQxXnx3/X6u54gVFe/sGrpc 04ibwmuQ2xygHAj/sNJbEg== 0001010924-05-000098.txt : 20050523 0001010924-05-000098.hdr.sgml : 20050523 20050523115627 ACCESSION NUMBER: 0001010924-05-000098 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050523 DATE AS OF CHANGE: 20050523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRTRAN CORP CENTRAL INDEX KEY: 0000813716 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 680121636 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-49654 FILM NUMBER: 05850203 BUSINESS ADDRESS: STREET 1: 4125 SOUTH 6000 WEST CITY: WEST VALLEY CITY STATE: UT ZIP: 84128 BUSINESS PHONE: 8019635112 MAIL ADDRESS: STREET 1: 4125 SOUTH 6000 WEST CITY: WEST VALLEY CITY STATE: UT ZIP: 84128 FORMER COMPANY: FORMER CONFORMED NAME: VERMILLION VENTURES INC DATE OF NAME CHANGE: 20000502 10QSB 1 edqsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 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 May 20, 2005: 572,368,569. Transitional Small Business Disclosure Format (check one): Yes ______ NO X -- Table of Contents Page PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Balance Sheets as of March 31, 2005, (unaudited) and 3 December 31, 2004 Statements of Operations for the Three Months ended 4 March 31, 2005, (unaudited) and 2004 (unaudited) Statements of Cash Flows for the Three Months ended 5 March 31, 2005, (unaudited) and 2004 (unaudited) Notes to Condensed Consolidated Financial Statements 8 (unaudited) Item 2. Management's Discussion and Analysis of or Plan of Operation 20 Item 3. Evaluation of Controls and Procedures 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings 28 Item 5. Other Information 30 Item 6 Exhibits 32 Signatures 33 3 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 March 31, 2005, (unaudited) and December 31, 2004 3 Condensed Consolidated Statements of Operations for the Three Months March 31, 2005, (unaudited) and 2004 5 Condensed Consolidated Statements of Cash Flows for the Three Months March 31, 2005, (unaudited) and 2004 6 Notes to Consolidated Financial Statements, (unaudited) 8 CIRTRAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 2005 2004 -------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 140,610 $ 81,101 Trade accounts receivable, net of allowance for doubtful accounts of $41,560 and $41,143, respectively 1,466,805 1,288,719 Inventory 1,601,841 1,453,754 Other 119,099 153,062 -------------- -------------- Total Current Assets 3,328,355 2,976,636 Property and Equipment, Net 2,869,622 840,793 Investment in Securities, at Cost 300,000 300,000 Other Assets, Net 42,520 8,000 Deposits - 100,000 Deferred Offering Costs 68,000 68,000 -------------- -------------- Total Assets $ 6,608,497 $ 4,293,429 -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable $ 1,014,566 $ 1,104,392 Accrued liabilities 1,122,738 2,066,022 Current maturities of long-term notes payable 2,301,970 1,815,875 Notes payable to stockholders - 18,586 Notes payable to related parties - 1,530,587 -------------- -------------- Total Current Liabilities 4,439,274 6,535,462 -------------- -------------- Long-Term Notes Payable, Less Current Maturities 1,046,993 - -------------- -------------- Commitments and Contingencies Stockholders' Equity (Deficit) Common stock, par value $0.001; authorized 750,000,000 shares; issued and outstanding shares: 567,868,569 at March 31, 2005 and 474,118,569 net of 3,000,000 shares held in treasury at no cost at December 31, 2004 567,864 474,114 Additional paid-in capital 19,555,696 16,083,455 Accumulated deficit (19,001,330) (18,799,602) -------------- -------------- Total Stockholders' Equity (Deficit) 1,122,230 (2,242,033) -------------- -------------- Total Liabilities and Stockholders' Equity (Deficit) $ 6,608,497 $ 4,293,429 -------------- --------------
The accompanying notes are an integral part of these financial statements. 4 CIRTRAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, 2005 2004 ------------ ------------ Net Sales $ 2,920,465 $ 645,612 Cost of Sales (1,949,773) (433,759) ------------ ------------ Gross Profit 970,692 211,853 ------------ ------------ Operating Expenses Selling, general and administrative expenses 959,891 545,068 Non-cash employee compensation expense 69,000 33,750 ------------ ------------ Total Operating Expenses 1,028,891 578,818 ------------ ------------ Loss From Operations (58,199) (366,965) ------------ ------------ Other Income (Expense) Interest (143,770) (156,562) Other, net 241 (96) Gain on forgiveness of debt - 79,036 ------------ ------------ Total Other Expense, Net (143,529) (77,622) ------------ ------------ Net Loss $ (201,728) $ (444,587) ------------ ------------ Basic and diluted loss per common share $ (0.00) $ (0.00) ------------ ------------ Basic and diluted weighted-average common shares outstanding 488,490,792 373,825,900 ------------ ------------
The accompanying notes are an integral part of these financial statements. 5 CIRTRAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 2005 2004 -------------------- -------------------- Cash flows from operating activities Net loss $ (201,728) $ (444,587) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 73,660 61,769 Amortization of loan premium to interest expense 11,057 - Provision for loss on trade receivables 417 2,305 Gain on forgiveness of debt - (79,036) Non-cash compensation expense 69,000 33,750 Loan costs and fees in lieu of interest on notes payable 61,500 76,500 Options issued to attorneys and developers for services 21,526 93,701 Changes in assets and liabilities: Trade accounts receivable (119,299) (189,019) Inventories (148,087) (235,725) Prepaid expenses and other assets (1,836) (6,165) Accounts payable (108,800) 36,245 Accrued liabilities (43,111) 253,187 -------------------- -------------------- Total adjustments (183,973) 47,512 -------------------- -------------------- Net cash used in operating activities (385,701) (397,075) -------------------- -------------------- Cash flows from investing activities Cash acquired with PFE acquisition 39,331 - Purchase of property and equipment (230,771) (19,505) -------------------- -------------------- Net cash used in investing activities (191,440) (19,505) -------------------- -------------------- Cash flows from financing activities Change in checks written in excess of cash in bank - (9,623) Proceeds from notes payable to stockholders 4,414 5,748 Payments on notes payable to stockholders - (30,500) Proceeds from notes payable, net of cash paid for offering costs 503,500 1,363,500 Principal payments on notes payable - (179,619) Proceeds from notes payable to related parties 95,586 451,223 Payment on notes payable to related parties - (1,185,141) Proceeds from exercise of options and warrants to purchase common stock 33,000 35,000 Exercise of options issued to attorneys and consultants for services 150 300 -------------------- -------------------- Net cash provided by financing activities 636,650 450,888 -------------------- -------------------- Net increase in cash and cash equivalents 59,509 34,308 Cash and cash equivalents at beginning of period 81,101 54,135 -------------------- -------------------- Cash and cash equivalents at end of period $ 140,610 $ 88,443 -------------------- --------------------
The accompanying notes are an integral part of these financial statements. 6 CIRTRAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
For the Three Months Ended March 31, 2005 2004 -------------------- -------------------- Supplemental disclosure of cash flow information Cash paid during the period for interest $ - $ 67,292 Noncash investing and financing activities Notes issued for accounts payable and capital lease obligations $ - $ 503,679 Acquisition of PFE Properties, LLC for stock and assumption of mortgage loan $ 1,868,974 $ - Common stock issued for settlement of notes payable and accrued interest $ 2,148,913 $ 30,000 Common stock issuance in which proceeds were retained as payment of notes payable $ - $ 650,000 Transfer of deposit to property and equipment $ 100,000 $ - Common stock issued for accrued rent and interest $ 411,402 $ - Accrued interest converted to notes payable $ - $ 9,160 Stock options exercised for settlement of accrued interest and accrued compensation $ 59,000 $ 40,000 Stock options exercised for settlement of notes payable to stockholders $ 23,000 $ - Note issued for settlement of notes payable and accrued interest $ - $ 323,842 Fees withheld from notes payable for Equity Line Agreement $ - $ 26,000 Deferred offering costs withheld from notes payable proceeds $ - $ 60,000
The accompanying notes are an integral part of these financial statements. 7 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. 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 months ended March 31, 2005, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005. Principles of Consolidation -- On March 31, 2005, Cirtran Corporation acquired a 100% ownership interest in PFE Properties, LLC (see Note 3). The condensed consolidated financial statements include the accounts of CirTran Corporation, and its wholly owned subsidiaries, Racore Technology Corporation and CirTran-Asia Inc. The accounts of PFE Properties, LLC have been included as of March 31, 2005. All significant intercompany transactions have been eliminated in consolidation. Stock-Based Compensation -- At March 31, 2005, the Company had one stock-based employee compensation plan, which is described more fully in Note 9. 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 three months ended March 31, 2005 and 2004, the Company recognized compensation expense relating to stock options and warrants of $69,000 and $33,750, 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 March 31, 2005 2004 ---------------------- -------------------- Net loss, as reported $ (201,728) $ (444,587) Add: Stock-based employee compensation expense included in net loss 69,000 33,750 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (138,248) (135,473) ---------------------- -------------------- Pro forma net loss $ (270,976) $ (546,310) ---------------------- -------------------- Basic and diluted loss per common share as reported $ (0.00) $ (0.00) ---------------------- -------------------- Basic and diluted loss per common share pro forma $ (0.00) $ (0.00) ---------------------- --------------------
8 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Patents -- Legal fees and other direct costs incurred in obtaining patents in the United States and other countries are capitalized. Patents costs are amortized over the estimated useful life of the patent. During the three months ended March 31, 2005, the Company capitalized $35,799 in patent related legal costs. Amortization expense was $1,279 during the three months ended March 31, 2005. The realization of patents and other long-lived assets is evaluated periodically when events or circumstances indicate a possible inability to recover the carrying amount. An impairment loss is recognized for the excess of the carrying amount over the fair value of the asset or the group of assets. Fair value is determined based on expected discounted net future cash flows. The analysis necessarily involves significant management judgement to evaluate the capacity of an asset to perform within projections. As required, an evaluation of impairment was made on the patents as of March 31, 2005. No indicators of impairment were noted. 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 $201,728 and $658,322 for the three months ended March 31, 2005, and the year ended December 31, 2004, respectively. As of March 31, 2005, and December 31, 2004, the Company had an accumulated deficit of $19,001,330 and $18,799,602, respectively, and a total stockholders' equity (deficit) of $1,122,230 and $(2,242,033), respectively. The Company also had negative working capital of $1,110,919 and $3,558,826 as of March 31, 2005, and December 31, 2004, respectively. In addition, the Company used, rather than provided, cash in its operations in the amounts of $385,701 and $1,680,054 for the three months ended March 31, 2005, and the year ended December 31, 2004, 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 6). 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. As discussed in Note 8, the Company has entered into an equity line of credit agreement and a standby equity distribution agreement with a private investor. Realization of additional proceeds under the agreements is not assured. 9 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3 - ACQUISITION OF PFE PROPERTIES, LLC On March 31, 2005, the Company purchased a 100% interest in PFE Properties LLC (PFE). PFE was previously owned by a relative of the President and CEO. PFE owns the land and building in which the Company's manufacturing facilities and administrative offices are located. The liabilities of PFE on the date of acquisition include a mortgage note payable of $1,050,000, secured by the building. The Company acquired PFE by issuing 20,000,000 shares of the Company's restricted common stock with a fair value of $800,000 on the date of acquisition and assuming the mortgage note payable of $1,050,000 and accounts payable of $18,974. The results of operations for PFE have been included for the day of March 31, 2005. The additional $800,000 for the purchase of PFE was allocated between the land and building value. The balance sheet of PFE as of March 31, 2005 is presented as follows: Current Assets $ 98,535 Property and Equipment 1,770,439 --------------------------- Total Assets Acquired 1,868,974 --------------------------- Accounts Payable 18,974 Mortgage Note Payable 1,050,000 --------------------------- Total Liabilities Assumed 1,068,974 --------------------------- Net Assets Acquired $ 800,000 =========================== The pro forma information is presented as if the Company had acquired PFE on January 1, 2004, as follows:
For the Three For the Year Ended Months Ended December 31, 2004 March 31, 2005 --------------------------- --------------------------- (Pro Forma) (Pro Forma) Net Sales $ 8,862,715 $ 2,920,465 Net Loss $ (613,378) $ (189,714) Basic and Diluted Loss per Common Share (0.00) (0.00) Basic and Diluted Weighted-Average Common Shares Oustanding 471,620,617 490,490,792
NOTE 4 - INVESTMENT IN SECURITIES AT COST On April 13, 2004, the Company entered into a stock purchase agreement with an unrelated party under which the Company purchased 400,000 shares of the investee's Series B Preferred Stock (the "Preferred Shares") for an aggregate purchase price of $300,000 cash. This purchase was made at fair value. The Preferred Shares are convertible, at the Company's option, into an equivalent number of shares of investee common stock, subject to adjustment. The Preferred Shares are not redeemable by the investee. As a holder of the Preferred Shares, the Company has the right to vote the number of shares of investee common stock into which the Preferred Shares are convertible at the time of the vote. The investment represents less than a 5% interest in the investee. The investment does not have a readily determinable fair value and is stated at historical cost, less an allowance for impairment when circumstances indicate an investment 10 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) has been impaired. The Company periodically evaluates its investments as to whether events and circumstances have occurred which indicate possible impairment. No indicators of impairment were noted for the three months ended March 31, 2005. Separate from the purchase of the Preferred Shares, the Company and the investee also entered into a Preferred Manufacturing Agreement. Under this agreement, the Company will perform exclusive "turn-key" manufacturing services handling most of the investee's manufacturing operations from material procurement to complete finished box-build of all of investee products. The initial term of the agreement is three years, continuing month to month thereafter unless terminated by either party. Sales under this agreement totaled $2,429 and $538,233 for the periods ended March 31, 2005, and December 31, 2004, respectively. NOTE 5 - RELATED PARTY TRANSACTIONS Notes Payable to Stockholder -- The Company had amounts due to stockholders from three separate notes. The balance due to stockholders at March 31, 2005 and December 31, 2004, was zero and $18,586, respectively. Notes were settled during the three months ended March 31, 2005 by the exercise of stock options for $23,000. Notes Payable to Related Party -- During 2002, the Company entered into a verbal bridge loan agreement with Abacas Ventures, Inc. (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 three months ended March 31, 2005, and the year ended December 31, 2004, the Company was advanced $95,586 and $3,128,281, respectively, and made cash payments of zero and $3,025,149, respectively. During the three months ended March 31, 2005, the Company issued 51,250,000 shares of the Company's restricted common stock for payment of $2,055,944 in principal and accrued interest on the note. Because Abacas is a related party, no gain or loss on forgiveness of debt was recognized. The total principal amount owed to Abacas between the note payable and the bridge loan was zero and $1,530,587 as of March 31, 2005, and December 31, 2004, respectively. The total accrued interest owed to Abacas between the note payable and the bridge loan was zero and $430,828 as of March 31, 2005, and December 31, 2004, respectively, and is included in accrued liabilities. NOTE 6 - COMMITMENTS AND CONTINGENCIES Settlement of Litigation -- During January 2002, the Company settled a lawsuit that had alleged a breach of facilities sublease agreement involving facilities located in Colorado. The Company's liability in this action was originally estimated to range up to $2.5 million. The Company had filed a counter suit in the same court for an amount exceeding $500,000 for missing equipment. Effective January 18, 2002, the Company entered into a settlement agreement which required the Company to pay the plaintiff the sum of $250,000. Of this amount, $25,000 was paid upon execution of the settlement, and the balance, together with interest at 8% per annum, was payable by July 18, 2002. As security for payment of the balance, the Company executed and delivered to the plaintiff a Confession of Judgment and also issued 3,000,000 shares of common stock, which were held in escrow and were treated as treasury stock recorded at no cost. The fair value of the 3,000,000 shares was less than 11 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) the carrying amount of the note payable. Because 75 percent of the balance had not been paid by May 18, 2002, the Company was required to prepare and file with the Securities & Exchange Commission, at its own expense, a registration statement with respect to the escrowed shares. As of March 31, 2005, the Company was in default of its obligations under the settlement agreement and the total payment due thereunder had not been made. A registration statement with respect to the escrowed shares was not filed and the Company did not replace the escrowed shares with registered, free-trading shares as per the terms of the agreement. The plaintiff filed a Confession of Judgment and proceeded with execution thereon. The shares in escrow were released and issued as partial settlement of $92,969 on the note payable outstanding. In connection with a separate sublease agreement of these facilities, the Company received a settlement from the sublessee during May 2002, in the amount of $152,500, which 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. Litigation - During 2003 and 2004, an investment firm filed suits in the U.S. District Court for the District of Utah seeking finder's fees consisting of common stock valued at $1,750,000 for allegedly introducing the Company to the Equity Line Investor (See Note 8). 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. Various vendors have notified the Company that they believe they have claims against the Company totaling $147,592. 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. In addition, various vendors have notified the Company that they believe they have claims against the Company totaling $159,308. The Company has determined the probability of realizing any loss is remote. The Company has made no accrual for these claims and is currently in the process of negotiating the dismissal of these claims with the various vendors. 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 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. 12 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Additionally, in connection with the Company's entering into an Equity Line of Credit Agreement (described in Note 8), 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 -- In November 2004, the Internal Revenue Service (IRS) accepted the Company's Amended Offer in Compromise (Offer) to settle delinquent payroll taxes, interest and penalties. The acceptance of the Offer required the Company to pay $500,000 by February 3, 2005. The Company made the required payment on February 2, 2005. Additionally, the Offer requires the Company to remain current in its payment of taxes for 5 years, and may not claim any net operating losses for the years 2001 through 2015, or until the Company pays taxes in an amount equal to the taxes waived by the offer in compromise. The outstanding balance of delinquent payroll taxes, interest and penalties was $1,955,767 on the settlement date. The future cash payments specified by the Offer, including interest and principal, were less than the carrying amount of the payable; therefore the Company reduced the carrying amount of the liability to the total future cash payments of $500,000 and recorded a gain of $1,455,767 during the year ended December 31, 2004. 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 March 2005, the Company had made the required payments. The balance owed to the State of Utah as of March 31, 2005, and December 31, 2004, was $167,627 and $223,660, respectively, including penalties and interest. Manufacturing Agreement -- On June 10, 2004, the Company entered into an exclusive manufacturing agreement with certain Developers. Under the terms of the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia, has the exclusive right to manufacture the certain products developed by the Developers or any of their affiliates. The Developers will continue to provide marketing and consulting services related to the products under the agreement. Should the Developers terminate the agreement early, they must pay the Company $150,000. Revenue is recognized when products are shipped. Title passes to the customer or independent sales representative at the time of shipment. In connection with this agreement the Company 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 units of a fitness product. In addition, the Company agreed to issue options to purchase 300,000 shares of common stock to the Developers for each multiple of 100,000 units of the fitness product sold in excess of the initial 200,000 units within twenty-four months of the agreement (June 2004). The options will be exercisable at $0.06 per share, vest on the grant date and expire one year after issuance. As of March 31, 2005, the Company 13 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) had sold, shipped and received payment for, 229,602 units of the fitness product. In January 2005, the Company issued 1,500,000 options under the terms of the agreement. See Note 9. In connection with the above manufacturing agreement, the Company agreed to issue various options to purchase shares of common stock to the Developers upon the sale, shipment, and payment of certain quantities of additional the products. In addition, the Company agreed to issue additional options to purchase common stock to the developers for each multiple of units sold in excess of the initial units within the first twenty-four months of the agreements. The schedule of units and potential options that will be issued follows:
Options Each Multiple of Options for Initial for Initial Units above Each Multiple Product Units Units Sold Initial Units of Units - -------------------------- ----------------------- -------------------- ----------------------- ---------------- 1 500,000 500,000 200,000 200,000 2 25,000 500,000 15,000 100,000 3 100,000 500,000 50,000 100,000 4 300,000 1,000,000 100,000 200,000 5 200,000 250,000 100,000 100,000 6 200,000 500,000 100,000 100,000
As of March 31, 2005, the Company had not sold, shipped and received payment for enough units to require the issuance of options related to the additional products under these agreements. Because the Developers must provide future services for the options to vest, the options are treated as unissued for accounting purposes. The cost of these options will be recognized when the options are earned. NOTE 7 - NOTES PAYABLE Notes Payable to Equity Line Investor -- As of December 31, 2004, the Company owed $1.7 million to Cornell Capital Partners, LP, pursuant to an unsecured promissory note. The note was repayable over 193 days and is past due as of March 31, 2005. The note states that if the Company does not repay the note when due, a default interest rate of 24% will apply to the unpaid balance. The Company recorded accrued interest of $105,074 on the note. In January 2005, the Company entered into an additional promissory note with Cornell for $565,000. The Company received proceeds of $503,500, net of loan costs of $61,500. The terms of the note include a 9% premium or $50,850, resulting in a total note payable of $615,850. The premium will be amortized to interest expense over the life of the loan. The terms of the loan state that interest only payments will be made for the first six months. The Company will repay the principal, interest, and premium over the next six months. The loan is due January 2006. The Company amortized $11,057 of the premium as interest expense for the three months ended March 31, 2005. The note payable balance as of March 31, 2005, was $576,057, net of a premium of $39,793. Mortgage Note Payable -- In conjuction with the acquisition of PFE, the Company assumed a mortgage note payable for $1,050,000. The note bears interest at 12.5%. Interest only payments are required through January 2006. Starting in February 2006, principal and interest payments will be required based on a 14 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) twenty-year amortization of the note. The entire balance of principal and unpaid interest will be due in December 2008. NOTE 8 - STOCKHOLDERS' EQUITY Common Stock Issuances -- During the three months ended March 31, 2005, the Company issued 51,250,000 shares of the Company's restricted common stock for payment of principal and accrued interest on the note to Abacus. (See Note 4) During the three months ended March 31, 2005, the Company issued 10,000,000 shares of the Company's restricted common stock for payment of accrued rent and accrued interest of $411,402. Because the rent was owed to a related party, no gain or loss on forgiveness of debt was recognized. During the three months ended March 31, 2005, the Company issued 3,000,000 shares of the Company's restricted common stock as partial payment on a note payable for $92,969. (See Note 6) On March 31, 2005, the Company acquired a 100% interest in PFE Properties, LLC for 20,000,000 shares of the Company's restricted common stock. (See Note 3) Equity Line of Credit Agreement -On November 5, 2002, the Company entered into an Equity Line of Credit Agreement (the "Equity Line Agreement") with Cornell Capital Partners, LP, a private investor ("Cornell"). The Company subsequently terminated the Equity Line Agreement, and on April 8, 2003, the Company entered into an amended equity line agreement (the "Amended Equity Line Agreement") with Cornell. Under the Amended Equity Line Agreement, the Company 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 Amended Equity Line Agreement to tender the funds requested by the Company within two trading days after the five-trading-day period used to determine the market price. 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. As of May 20, 2005, the Company had made no draws against the SEDA Facility and issued no shares in connection with the SEDA Facility. 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 15 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 9 - 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 6, 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. Also, during December 2004, the Company adopted the 2004 Stock Option Plan (the "2004 Plan") with 40,000,000 shares of common stock reserved for issuance there under. The Company's Board of Directors administers the plans and has discretion in determining the employees, directors, independent contractors and advisors who receive awards, the type of awards (stock, incentive stock options or non-qualified stock options) granted, and the term, vesting, and exercise prices. Non-Employee Options - During the three months ended March 31, 2005, 1,500,000 previously issued options were exercised by counsel for the company for cash proceeds of $150. Employee Options - During the three months ended March 31, 2005, the Company granted options to purchase 8,000,000 shares of common stock to directors and employees of the Company pursuant to the 2004 Plan. These options are five year options that vested on the date of grant. The related exercise prices were $0.027 per share. The exercise price equaled the fair value of the common shares at the time these options were granted; therefore, the options had no intrinsic value. Eight million options were exercised during the three months ended March 31, 2005, for $33,000 of cash, $69,000 of compensation, $59,000 of accrued compensation, and $23,000 as payment on a shareholder note payable. The $69,000 of compensation was recorded in conjunction with the cashless exercise of 3,000,000 of the options. Developer Options - During the three months ended March 31, 2005, the Company granted options to purchase 1,500,000 shares of common stock to developers as described in Note 6 at exercise prices of $0.06 per share. The options were all five-year options and vested on the dates granted. Two of the developers were employees and together were issued 1,000,000 of the options. The exercise price equaled the fair value of the common shares at the time these options were granted therefore the options had no intrinsic value. The fair value of these options of $42,052 was estimated using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and expected average life of .5 years. None of these options were exercised during the three months ended March 31, 2005. 16 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The remaining 500,000 developer options were issued to a non-employee under the terms described above. Because the developer was a non-employee, cost of goods sold of $21,526 was recorded for the fair value of options issued during the three months ended March 31, 2005. These options were valued using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging of 4.00%, dividend yield of 0.0%, volatility of 302%, and expected average life of .5 years. None of these options were exercised during the three months ended March 31, 2005. A total of 12,249,500 employee options and 2,000,500 non-employee options were outstanding as of March 31, 2005. A summary of the stock option activity for the three months ended March 31, 2005, is as follows: Shares Weighted Average Exercise Price ----------------- -------------------- Outstanding at December 31, 2004 14,250,500 $ 0.02 Granted 9,500,000 $ 0.03 Exercised (9,500,000) $ 0.02 Cancelled - - ----------------- Outstanding at March 31, 2005 14,250,500 $ 0.03 ================= Exercisable at March 31, 2005 14,250,500 $ 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 three months ended March 31, 2005: 2004 ---------------- Expected dividend yield - Risk free interest rate 3.76% Expected volatility 282% Expected life $ 0.16 Weighted average fair value per share $ 0.02 NOTE 10 -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: 17 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Electronics Ethernet Contract Assembly Technology Manufacturing Total ------------------- -------------------- -------------------- --------------------- March 31, 2005 Sales to external customers $ 773,013 $ 22,608 $ 2,124,844 $ 2,920,465 Intersegment sales - - - - Segment income (loss) (372,197) (66,739) 237,208 (201,728) Segment assets 4,591,074 216,838 1,800,585 6,608,497 Depreciation and amortization 50,399 594 22,667 73,660 March 31, 2004 Sales to external customers $ 621,614 $ 23,998 $ - $ 645,612 Intersegment sales 8,721 - - 8,721 Segment loss (383,517) (61,070) - (444,587) Segment assets 2,394,885 229,597 - 2,624,482 Depreciation and amortization 60,845 924 - 61,769
March 31, ------------------------------------------- Sales 2005 2004 -------------------- -------------------- Total sales for reportable segments $ 2,920,465 $ 654,333 Elimination of intersegment sales - (8,721) -------------------- -------------------- Consolidated net sales $ 2,920,465 $ 645,612 -------------------- --------------------
March 31, ------------------------------------------- Total Assets 2005 2004 -------------------- -------------------- Total assets for reportable segments $ 6,608,497 $ 2,624,482 Adjustment for intersegment amounts - - -------------------- -------------------- Consolidated total assets $ 6,608,497 $ 2,624,482 -------------------- --------------------
NOTE 11 - SUBSEQUENT EVENTS Stock Options - On April 11, 2005 the Company granted options to purchase 3,000,000 and 2,000,000 shares of the Company's common stock to directors and employees of the Company, respectively. These options were five-year options that vested immediately and had an exercise price of $0.027 per share. The exercise price of the options equaled the fair value of the common shares on the date of grant therefore the options had no intrinsic value. The Company estimated the fair value of the options at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the Black-Scholes model to determine the fair value of the options to purchase a share of common stock of $0.01: risk-free interest rate of 4.13%, dividend yield of 0 percent, volatility of 271%, and expected lives of 0.10 years. 18 CIRTRAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) During April 2005, directors exercised options to purchase 3,000,000 shares of commons stock with a weighted average exercise price of $0.03 per share. These options were exercised for consideration consisting of $81,000 of accrued compensation. On April 11, 2005, the Company granted options to purchase 1,500,000 shares of common stock to counsel for the Company with an exercise price of $0.0001 per share. The options were five year options and vested on the date granted. Legal expense of $40,351 was recorded for the fair value of options issued. These options were valued using the Black-Scholes option pricing model with the following assumptions: risk free interest rate ranging of 4.13%, dividend yield of 0.0%, volatility of 271%, and expected average life of .10 years. These options were exercised in April 2005 for proceeds of $150. 19 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 for the year ended December 31, 2004. Overview We provide a mixture of high and medium size volume turnkey manufacturing services using surface mount technology, ball-grid array assembly, pin-through-hole and custom injection molded cabling for leading electronics OEMs in the communications, networking, peripherals, gaming, law enforcement, consumer products, telecommunications, automotive, medical, and semiconductor industries. Our services include pre-manufacturing, manufacturing and post-manufacturing services. Through our subsidiary, Racore Technology Corporation, we design and manufacture Ethernet technology products. Our goal is to offer customers the significant competitive advantages that can be obtained from manufacture outsourcing, such as access to advanced manufacturing technologies, shortened product time-to-market, reduced cost of production, more effective asset utilization, improved inventory management, and increased purchasing power. During 2004, we established a new division, CirTran-Asia, Inc, which has contributed to a large portion of the increase in revenue for the year ended December 31, 2004, and the three months ended March 31, 2005. This new division, 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 since 2003 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 abdominal fitness machines. This order was the first order placed with CirTran-Asia under the exclusive manufacturing agreement. Subsequently, on June 14, 2004, we received another order for 80,000 units of the abdominal fitness machines, which was announced on June 16, 2004, through a separate press release. Since these announcements, CirTran-Asia has manufactured, shipped, and received payments of approximately $5,546,000. On August 13, 2004, we also announced that on August 11, 2004 we had received new orders for Wal-Mart. The company shipped to 20 Wal-Mart the complete order of abdominal fitness machines and received payments of approximately $400,000 to date. The units were distributed to Wal-Mart stores throughout Canada. 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. Since these announcements, CirTran-Asia has manufactured, and shipped units, and received payments of approximately $437,000. 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 another type of abdominal fitness machine. We are still awaiting production orders to begin manufacturing and shipping. On September 10, 2004, we announced that on September 7, 2004, CirTran-Asia had been was awarded the rights to manufacture another type of an abdominal fitness machine under the exclusive manufacturing agreement. Since this announcement, CirTran-Asia has manufactured, and shipped units, and received payments of approximately $720,000. On September 14, 2004, we announced that on September 7, 2004, we had begun manufacturing another type of abdominal fitness machine under the exclusive manufacturing agreement. Since this announcement, CirTran-Asia has manufactured, and shipped units, and received payments of approximately $390,000. 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. Since this announcement, CirTran-Asia has manufactured, and shipped units, and received payments of approximately $85,000. Information relating to recent developments in new products under development along with procuring new products for development is as follows: On January 19, 2005, CirTran Corporation signed an Exclusive Manufacturing Agreement with a company relating to the manufacture of a hair product in California. Since these announcements, CirTran-Asia has manufactured and shipped approximately $1,274,000 worth of units. 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 can 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. In March 2005, we extended our agreement to an additional 6 months that will expire in early September 2005. The parties will evaluate the relationship at that time and decide if there needs to be another extension. To date the relationship has proven successful resulting in multiple new manufacturing relationships. On April 28, 2005, CirTran-Asia announced that it has been awarded a $30 million contract to be the exclusive manufacturer of a new fitness machine for the 21 sold-on-TV direct response industry. Since then, we have received orders totaling approximately $700,000 and expect to complete the shipment before the end of June 2005. 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. 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 22 under "Liquidity and Capital Resources - Liquidity and Financing Arrangements," and in "Item 5 - Other Information." Results of Operations - Comparison of Periods Ended March 31, 2005 and 2004 Sales and Cost of Sales Net sales increased to $2,920,465 for the three-month period ended March 31, 2005, as compared to $645,612 during the same period in 2004, for an increase of 352.4%. The first 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. The second 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. Between these new approaches, sales have resulted in an increase of approximately $150,000 during the three months ended March 31, 2005. The biggest factor contributing to the increase of net sales during the first quarter was the new division, CirTran-Asia, which has contributed $2,124,853 of the increase in revenue. CirTran-Asia, yhe 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, and high-volume manufacturing. Cost of sales increased by 349.5%, from $433,759 during the three-month period ended March 31, 2004, to $1,949,773 during the same period in 2005. The increase in cost of sales is due to the increase in revenue. Our gross profit margin for the three-month period ended March 31, 2005, was 33.2%, up from 32.8% for the same period in 2004. The increase insignificant. Inventory We use just-in-time manufacturing, which is a production technique that minimizes work-in-process inventory and manufacturing cycle time, while enabling us to deliver products to customers in the quantities and time frame required. This manufacturing technique requires us to maintain an inventory of component parts to meet customer orders. Inventory at March 31, 2005, was $1,601,841, as compared to $1,453,754 at December 31, 2004. The increase in inventory is required to facilitate the continuing increase in turnkey sales. Selling, General and Administrative Expenses During the quarter ended March 31, 2005, selling, general and administrative expenses were $959,891 versus $545,068 for the same period in 2004, a 76.1% increase. The increase was due to expenses related to the CirTran-Asia division, along with our efforts to aggressively market our products. Selling, general and administrative expenses as a percentage of sales as of March 31, 2005 were 32.9% as compared to 84.4% during the same period in 2004. This decrease is due in part to an increase in sales and better control of expenses. Interest Expense Interest expense for quarter ended March 31, 2005, was $143,770 as compared to $156,562 for the same period in 2004, a decrease of 8.2%. The decrease is primarily due to the reduction of various notes payable. 23 As a result of the above factors, our overall net loss decreased 60.0% to $201,728 for the quarter ended March 31, 2005, as compared to $444,587 for the quarter ended March 31, 2004. 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 $19,001,330 at March 31, 2005, and $18,799,602 at December 31, 2004. Our net loss for the quarter ending March 31, 2005, was $201,728, compared to $444,587 for the quarter ended March 31, 2004. Our current liabilities exceeded our current assets by $1,110,919 as of March 31, 2005, and $3,558,826 as of December 31, 2004. The decrease was mostly attributable to settlements of notes payable, decreasing account payables, and an increase in accounts receivable and inventory. For the three months ended March 31, 2005 and 2004, we had negative cash flows from operations of $385,701 and $397,075 respectively. For the three months ended March 31, 2005, we have a slightly improved the cash flow by $11,374, as compared to the three months ended March 31, 2004. Cash We had cash on hand of $140,610 at March 31, 2005, and $81,101 at December 31, 2004. Net cash used in operating activities was $385,701 for the three months ended March 31, 2005. Cash received from customers of $2,742,379 was not sufficient to offset cash paid to vendors, suppliers, and employees of $3,128,080. The non-cash charges were for depreciation and amortization of $73,660 and loan costs and interest paid from loan proceeds of $61,500. Because the Company has negative cash flows from operations, it must rely on sources of cash other than customers to support its operations. It is anticipated that various methods of equity financing will be required to support operations until cash flows from operations are positive. Net cash used in investing activities during the three months ended March 31, 2005, consisted of equipment purchases of $230,771 and cash acquired with PFE acquisition in the amount of $39,331. Net cash provided by financing activities was $636,650 during the three months ended March 31, 2005. Principal sources of cash were proceeds of $95,586 from notes payable to related parties, proceeds from notes payable of $503,500, and proceeds from the exercise of options to purchase common stock of $33,000. Accounts Receivable At March 31, 2005, we had receivables of $1,466,805, net of a reserve for doubtful accounts of $41,560, as compared to $1,288,719 at December 31, 2004, net of a reserve of $41,143. This increase was primarily attributed to sales having substantially increased in the last month of the first quarter as compared to the last two months in 2004. The Company has implemented an aggressive process to collect past due accounts over the past several years. As such, the receivables that were past due for a period of greater than 45 days as of March 31, 2005, 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 March 31, 2005, related to sales that occurred in the last month of the quarter. Therefore they were not deemed uncollectible. 24 Accounts Payable Accounts payable were $1,014,566 at March 31, 2005, as compared to $1,104,392 at December 31, 2004. This decrease is primarily attributed an improvement in cash flow.. 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 $19,001,330 and a total stockholders' equity of $1,122,230 at March 31, 2005. As of March 31, 2005, our monthly operating costs and interest expenses averaged approximately $368,000 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 March 31, 2005, we were in default of notes payable whose principal amount was approximately $23,000. In addition, the principal amount of notes that either matured in 2004 or are payable on demand was approximately $2,276,000. 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 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 year ended December 31, 2004, Cornell loaned us an additional $3,200,000 pursuant to four additional unsecured promissory notes, $1,700,000 of which remained outstanding at December 31, 2004. The loans were made and the 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 25 of the notes stated that if we did not repay the notes when due, a default interest rate of 24% would apply to the unpaid balance. As noted above, we received proceeds of $5,030,000 from notes payable to Cornell. We used the proceeds from these notes to fund operating losses of approximately $2,938,000, pay down accounts payable, notes payable and other settlements of approximately $1,401,000, purchase equipment and tooling in the amount of $391,000, and to invest in Broadata in the amount of $300,000. During January 2005, the Company received proceeds of $565,000 from an additional note payable to Cornell to fund the settlement with the Internal Revenue Service. The Company issued a note to repay by January 28, 2006. 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 year ended December 31, 2004, we drew an aggregate amount of $2,150,000 under the Equity Line Agreement, pursuant to draws on the Equity Line, net of fees of $86,000, and issued a total of 57,464,386 shares of common stock to Cornell under the Equity Line Agreement. At our direction, Cornell retained the proceeds of the draws under the Equity Line Agreement and applied them as payments on the notes to Cornell, discussed above. Pursuant to the Equity Line Agreement, in connection with each draw, we agreed to pay a fee of 4% of the amount of the draw to Cornell as consideration for its providing the Equity Line. Total fees paid for the year ended December 31, 2004 were $128,000. Of these payments, $86,000 was offset against additional paid-in capital as shares were issued under the Equity Line Agreement and $68,000 was recorded as deferred offering costs for total deferred offering costs of $68,000 at December 31, 2004. These deferred offering costs will be offset against additional paid-in capital as shares are issued under the Equity Line Agreement subsequent to March 31, 2005. 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 26 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. 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 Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer, who is also our Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, has concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are 27 reasonably likely to materially affect, our internal control over financial reporting. Section 404 Assessment. Section 404 of the Sarbanes-Oxley Act of 2002 requires management's annual review and evaluation of our internal controls, and an attestation of the effectiveness of these controls by our independent registered public accountants beginning with our Form 10-K for the fiscal year ending on December 31, 2007. We plan to dedicate significant resources, including management time and effort, and to incur substantial costs in connection with our Section 404 assessment. The evaluation of our internal controls will be conducted under the direction of our senior management. We will continue to work to improve our controls and procedures, and to educate and train our employees on our existing controls and procedures in connection with our efforts to maintain an effective controls infrastructure at our Company. Limitations on Effectiveness of Controls. A system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the system will meet its objectives. The design of a control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon assumptions about the likelihood of future events. PART II. OTHER INFORMATION Item 1. Legal Proceedings As of March 31, 2005, the Company had accrued liabilities in the amount of $211,660 for delinquent payroll taxes, including interest and penalties due to the State of Utah. In November 2003, the Company entered into an agreement with the Utah State Tax Commission to allow the Company to pay the liability owing to the State of Utah in equal monthly installments over a two year period. Under the agreement, the Company would make monthly payments of $4,000 per month through November 2005. As of May 20, 2005, the Company was current in its payments to the State of Utah. As of December 31, 2004, the Company had accrued liabilities in the amount of $500,000 for delinquent payroll taxes, including interest and penalties, owed to the Internal Revenue Service. The Company, in response to collection notices, filed a due process appeal with the Internal Revenue Service's Appeals Office. The appeal was resolved by an agreement with the Appeals Office that allowed the Company to file an offer in compromise of all federal tax liabilities owed by the Company based on its ability to pay. The Company filed its offer in compromise with the IRS in November 2003, and after meeting with IRS personnel, filed a revised offer in compromise on August 31, 2004. The Company was notified in November 2004 that the IRS had accepted the offer in compromise. Under the offer, the Company was required to pay an aggregate amount of $500,000 (representing payments of $350,000 by Circuit Technology, Inc., $100,000 by CirTran Corporation, and $50,000 by Racore Technology, Inc.), not later than February 3, 2005. These amounts were paid. Additionally, the Company must remain current in its payment of taxes for 5 years, and may not claim any NOLs for the years 2001 through 2015, or until the three companies pay taxes in an amount equal to the taxes waived by the offer in compromise. We (as successor to Circuit Technology, Inc.) were a defendant in an action in El Paso County, Colorado District Court, brought by Sunborne XII, LLC, a Colorado limited liability company, for alleged breach of a sublease agreement involving facilities located in Colorado. Our liability in this action was originally estimated to range up to $2.5 million, and we subsequently filed a counter suit in the same court against Sunborne in an amount exceeding $500,000 28 for missing equipment. Effective January 18, 2002, we entered into a settlement agreement with Sunborne with respect to the above-described litigation. The settlement agreement required us to pay Sunborne the sum of $250,000. Of this amount, $25,000 was paid upon execution of the agreement, and the balance of $225,000, together with interest at 8% per annum, was payable by July 18, 2002. As security for payment of the balance, we executed and delivered to Sunborne a Confession of Judgment and also issued to Sunborne 3,000,000 shares of our common stock, which were 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 with the Securities & Exchange Commission, at our expense, a registration statement with respect to the shares that were escrowed. The payment was not made, nor was a registration statement filed with respect to the escrowed shares. Pursuant to a Termination of Sublease Agreement dated as of May 22, 2002 among the Company, Sunborne and other parties, the sublease agreement that was the subject of our litigation with Sunborne was terminated and a payment of approximately $109,000 was credited against the amount owed by the Company to Sunborne under the Company's settlement agreement with them. Sunborne has filed a claim that this amount was to be an additional rent expense rather than a payment on the note payable. The Company disputes this claim and intends to vigorously defend the action. As of April 8, 2005, the Company was in default of its obligations under the settlement agreement with Sunborne, i.e., the total payment due thereunder had not been made, a registration statement with respect to the escrowed shares was not filed, and the Company did not replace the escrowed shares with registered, free-trading shares as per the terms of the agreement. Accordingly, Sunborne has filed the Confession of Judgment and proceeded with execution thereon. Additionally, Sunborne sold the 3,000,000 shares. The Company is continuing to negotiate with Sunborne in an attempt to settle the remaining obligation. C/S Utilities notified the Company that it believes it has a claim against the Company in the amount of $32,472 regarding utilities services. The claim was assigned to BC Services, Inc., which obtained a judgment against Circuit Technology, Inc., for $37,965.84 in El Paso County, Colorado, District Court on February 13, 2003. The Company is reviewing its records in an effort to confirm the validity of the claims and is evaluating its options. 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. 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. The Company subsequently was served with a supplemental complaint, in which Salamon seeks additional finders fees, consisting of shares of the Company's common stock valued at $1,400,000 (for an aggregate claim of $1,750,000), to which the Company filed its answer. The case is still in the discovery phase. The Company is also currently conducting settlement negotiations. RecovAR Group, LLC vs. CirTran Corporation, Inc., District Court of Maryland. 29 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. CirTran Asia v. Mindstorm Civil No. 050902290, Third Judicial District Court, Salt Lake County, State of Utah. CirTran Asia brought suit against Mindstorm Technologies, LLC, for nonpayment for goods provided. On April 22, 2005, the defendant filed its answer and counterclaim. CirTran Asia is reviewing the counterclaim and intends to vigorously pursue this action. CirTran Asia, et al. v. International Edge, et al., Civil No. 2:05 CV 413BSJ, U.S. District Court, District of Utah. On May 11, 2005, CirTran Asia, UKING System Industry Co., Ltd., and Charles Ho filed suit against International Edge, Inc., Michael Casey Enterprises, Inc., Michael Casey, David Hayek, and HIPMG, Inc., for breach of contract, breach of the implied covenant of good faith and fair dealing, interference with economic relationships, and fraud in relation to the manufacture of the Ab King Pro. CirTran Asia intends to vigorously pursue this action. 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. In January, 2002, the Company entered into an agreement with Abacas under which the Company issued an aggregate of 19,987,853 shares of common stock to four of Abacas's shareholders in exchange for cancellation by Abacas of an aggregate amount of $1,499,090 in senior debt owed to the creditors by the Company. The shares were issued with an exchange price of $0.075 per share, for the aggregate amount of $1,500,000. 30 In December, 2002, the Company entered into an agreement with Abacas under which the Company issued an aggregate of 30,000,000 shares of common stock to four of Abacas's shareholders in exchange for cancellation by Abacas of an aggregate amount of $1,500,000 in senior debt owed to the creditors by the Company. The shares were issued with an exchange price of $0.05 per share, for the aggregate amount of $1,500,000. During 2002, the Company entered into a verbal bridge loan agreement with Abacas. This agreement allows the Company to request funds from Abacas to finance the build-up of inventory relating to specific sales. The loan bears interest at 24% and is payable on demand. There are no required monthly payments. During the years ended December 31, 2004 and 2003, the Company was advanced $3,128,281 and $350,000, respectively, and made cash payments of $3,025,149 and $875,000, respectively. During the year ended December 31, 2004, Abacas completed negotiations with several vendors of the Company, whereby Abacas purchased various past due amounts for goods and services provided by vendors, as well as notes payable (see Note 6). The total of these obligations was $1,263,713. The Company has recorded this transaction as a $1,263,713 non-cash increase to the note payable owed to Abacas, pursuant to the terms of the Abacas agreement. The total principal amount owed to Abacas between the note payable and the bridge loan was $1,530,587 and $163,742 as of December 31, 2004 and 2003, respectively. The total accrued interest owed to Abacas between the note payable and the bridge loan was $430,828 and $230,484 as of December 31, 2004 and 2003, respectively, and is included in accrued liabilities. In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 of principal and accrued interest in return for the Company's issuing 51,250,000 shares of our restricted common stock to certain shareholders of Abacas. No registration rights were granted. As of December 31, 2001, Iehab Hawatmeh had loaned us a total of $1,390,125. The loans were demand loans, bore interest at 10% per annum and were unsecured. Effective January 14, 2002, we entered into four substantially identical agreements with existing shareholders pursuant to which we issued an aggregate of 43,321,186 shares of restricted common stock at a price of $0.075 per share for $500,000 in cash and the cancellation of $2,749,090 principal amount of our debt. Two of these agreements were with the Saliba Private Annuity Trust, one of our principal shareholders, and a related entity, the Saliba Living Trust. The Saliba trusts are also principals of Abacas Ventures, Inc., which entity purchased our line of credit in May 2000. Pursuant to the Saliba agreements, the trusts were issued a total of 26,654,520 shares of common stock in exchange for $500,000 cash and the cancellation of $1,499,090 of debt. We used the $500,000 cash from the sale of the shares for working capital. As a result of this transaction, the percentage of our common stock owned by the Saliba Private Annuity Trust and the Saliba Living Trust increased from approximately 6.73% to approximately 17.76%. Mr. Trevor Saliba, one of our directors and officers, is a passive beneficiary of the Saliba Private Annuity Trust. Pursuant to the other two agreements made in January 2002, we issued an aggregate of 16,666,666 shares of restricted common stock at a price of $0.075 per share in exchange for the cancellation of $1,250,000 of notes payable by two shareholders, Mr. Iehab Hawatmeh (our president, a director and our principal shareholder) and Mr. Rajai Hawatmeh. Of these shares, 15,333,333 were issued to Iehab Hawatmeh in exchange for the cancellation of $1,150,000 in debt. As a result of this transaction, the percentage of our common stock owned by Mr. Hawatmeh increased from 19.9% to approximately 22.18%. In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a public company, Circuit Technology, Inc., while still a private entity, redeemed 680,145 shares (as presently constituted) of common stock held by Raed Hawatmeh, who was a director of Circuit Technology, Inc. at that time, in exchange for $80,000 of expenses paid on behalf of the director. No other stated or unstated 31 rights, privileges, or agreements existed in conjunction with this redemption. This transaction was consistent with other transactions where shares were offered for cash. In 1999, Circuit entered into an agreement with Cogent Capital Corp., or "Cogent," a financial consulting firm, whereby Cogent agreed to assist and provide consulting services to Circuit in connection with a possible merger or acquisition. Pursuant to the terms of this agreement, we issued 800,000 (pre-forward split) restricted shares (12,000,000 post-forward split shares) of our common stock to Cogent in July 2000 in connection with our acquisition of the assets and certain liabilities of Circuit. The principal of Cogent was appointed a director of Circuit after entering into the financial consulting agreement and resigned as a director prior to the acquisition of Circuit by Vermillion Ventures, Inc. on July 1, 2000. Also, as of December 31, 2004 the company owed I&R Properties, LLC, the previous owner of our principal office and manufacturing facility for unpaid accrued rent and accrued interest. The Company settled with owed I&R Properties, LLC., on accrued rent and interest of $400,000 by issuing 10,000,000 shares of unregistered common stock in March 2005. Management believed at the time of each of these transactions and continues to believe that each of these transactions were as fair to the Company as could have been made with unaffiliated third parties. Purchase of Interests in Landlord On March 31, 2005, the Company entered into a Membership Acquisition Agreement (the "Acquisition Agreement") with Rajayee Sayegh (the "Seller") for the purchase of one hundred percent (100%) of the membership interests in PFE Properties LLC, a Utah limited liability company ("PFE"). Under the Acquisition Agreement, the Company agreed to issue twenty million (20,000,000) shares of its restricted common stock, with a fair value of $800,000 on the date of issuance. No registration rights were granted. The shares were issued without registration under the 1933 Act in reliance on Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and the rules and regulations promulgated thereunder. The primary asset of PFE is its rights, titles and interests in and to a parcel of real property, together with any improvements, rents and profits thereon or associated therewith, located at 4125 S. 6000 W., West Valley City, Utah, 84128, where the Company presently has its headquarters and manufacturing facility. Prior to the purchase of the membership interests, on December 17, 2003, the Company had entered into a ten-year lease with PFE for the property. The lease payments were $16,974. Following the acquisition of the PFE interests, PFE will continue to own the building, and the Company will continue to make lease payments under the 2003 lease. Item 6. Exhibits Exhibits: 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 32 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: May 20, 2005 By: /s/ Iehab J. Hawatmeh --------------------------------------- Iehab J. Hawatmeh President and Chief Financial Officer EX-31 2 edex31.txt EXHIBIT 31 EXHIBIT 31 CERTIFICATION I, Iehab J. Hawatmeh, President and Chief Financial Officer of CirTran Corporation, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of CirTran Corporation (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a?15(e) and 15d?15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a?15(f) and 15d?15(f)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. 6. The registrant's other certifying officer(s) and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 20, 2005 /s/ Iehab J. Hawatmeh --------------------------------------- Iehab J. Hawatmeh President and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) EX-32 3 edex32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CirTran Corporation on Form 10-QSB for the period ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Iehab Hawatmeh, President and Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 20, 2005 /s/ Iehab J. Hawatmeh ------------------------------------------ Iehab J. Hawatmeh President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----