UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 0-26059
CIRTRAN CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
---------------------------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
---------------------- ------
Address of Principal Executive Offices) (Zip Code)
(801) 963-5112
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____
The number of shares outstanding of the registrant's common stock as of November
19, 2002: 209,272,191.
Transitional Small Business Disclosure Format (check one): Yes ____ NO X
The purpose of this amendment to CirTran Corporation's Quarterly Report on Form
10-QSB is to show the effects of a fourth quarter adjustment, discussed in the
Company's Annual Report on Form 10KSB for the year ended December 31, 2001, on
the period ended September 30, 2001. Also the segment information contained in
Note 7 has been corrected.
This amendment does not reflect events occurring after the filing of the
Quarterly Report on November 20, 2002, the original filing date of the Quarterly
Report, or modify or update those disclosures as presented in the original Form
10-QSB, except to reflect the restatement as described above, and to describe
certain subsequent events in Note 8 to the unaudited Condensed Consolidated
Financial Statements.
Page
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Balance Sheets as of November 30, 2002 (unaudited) and 3
December 31, 2001
Statements of Operations for the Nine Months ended 4
September 30, 2002 (unaudited) and 2001 (unaudited)
Statements of Cash Flows for the Nine Months ended 5
September 30, 2002 (unaudited) and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
(unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation 9
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
6
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
----------------------------------
2002 2001
---------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 882 $ 499
Trade accounts receivable, net of allowance for doubtful accounts
of $32,317 and $66,316, respectively 158,807 369,250
Inventories 1,624,543 1,773,888
Subscription receivable 25,000 -
Other 100,561 97,037
---------------- ---------------
Total current assets 1,909,793 2,240,674
Property and equipment, at cost, net 968,371 1,333,925
Other assets, net 23,102 10,887
---------------- ---------------
Total Assets $ 2,901,266 $ 3,585,486
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 123,268 $ 159,964
Accounts payable 1,297,281 2,141,290
Accrued liabilities 3,230,117 3,071,191
Notes payable to stockholders 2,465 1,390,125
Notes payable to related parties 1,547,397 2,405,507
Current maturities of capital lease obligations - 41,206
Current maturities of long-term notes payable 1,157,656 863,650
---------------- ---------------
Total current liabilities 7,358,184 10,072,933
---------------- ---------------
Long-Term Liabilities
Long-term notes payable, less current maturities 201,206 447,155
Capital lease obligations, less current maturities - 7,775
---------------- ---------------
Total long-term liabilities 201,206 454,930
---------------- ---------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding 211,772,191 at September 30, 2002 before
3,000,000 shares held in treasury at no cost and 160,951,005
at December 31, 2001 211,772 160,951
Additional paid-in capital 9,510,433 5,977,164
Accumulated deficit (14,380,329) (13,080,492)
---------------- ---------------
Total Stockholders' Deficit (4,658,124) (6,942,377)
---------------- ---------------
Total Liabilities and Stockholders' Deficit $ 2,901,266 $ 3,585,486
================ ===============
See accompanying notes to unaudited condensed
consolidated financial statements.
3
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended, For the Nine Months Ended,
September 30, September 30,
------------------------------------------ ------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- --------------------
Net Sales $ 367,755 $ 474,055 $ 1,981,103 $ 1,545,020
Cost of Sales 358,869 499,772 1,735,380 1,794,854
-------------------- -------------------- -------------------- --------------------
Gross Profit/(Loss) 8,886 (25,717) 245,723 (249,834)
Operating Expenses
Selling, general and administrative expenses 516,650 393,368 1,400,240 1,238,036
Non-cash compensation expense 25,000 - 25,000 -
-------------------- -------------------- -------------------- --------------------
Total Operating Expenses 541,650 393,368 1,425,240 1,238,036
Loss From Operations (532,764) (419,085) (1,179,517) (1,487,870)
-------------------- -------------------- -------------------- --------------------
Other income (expense)
Interest (41,865) (124,452) (282,609) (667,959)
Other, net 97 25 162,289 4,125
-------------------- -------------------- -------------------- --------------------
(41,768) (124,427) (120,320) (663,834)
-------------------- -------------------- -------------------- --------------------
Net Loss $ (574,532) $ (543,512) $ (1,299,837) $ (2,151,704)
==================== ==================== ==================== ====================
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
==================== ==================== ==================== ====================
Basic and diluted weighted-average
common shares outstanding 209,652,626 157,947,744 205,907,734 156,855,950
==================== ==================== ==================== ====================
See accompanying notes to unaudited condensed
consolidated financial statements.
4
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended,
September 30,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Cash flows from operating activities
Net loss $ (1,299,837) $ (2,151,704)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 368,376 374,791
Provision for loss on trade receivables (33,999) 31,399
Settlement of litigation (25,000) -
Non-cash compensation expense 25,000
Issuance of common stock options for prepaid commission - 200,000
Payments made on behalf of the Company
as a settlement of a sublease agreement (152,500) -
Changes in assets and liabilities:
Trade accounts receivable 244,442 458,496
Inventories 149,345 (16,936)
Other assets (8,739) (198,502)
Accounts payable (547,727) 397,240
Accrued liabilities 366,602 771,738
----------------------- -----------------------
Total adjustments 385,800 2,018,226
----------------------- -----------------------
Net cash used in operating activities (914,037) (133,478)
----------------------- -----------------------
Cash flows from investing activities
Purchase of property and equipment (2,822) (1,844)
----------------------- -----------------------
Net cash used in investing activities (2,822) (1,844)
----------------------- -----------------------
Cash flows from financing activities
Increase (decrease) in checks written in excess of cash in bank (36,696) 134,841
Payments on notes payable to stockholders (140,125) -
Principal payments on long-term notes payable (348,402) (311,462)
Principal payments on capital leases - (4,550)
Proceeds from long-term notes payable 655,000 -
Proceeds from notes payable to stockholders 2,465 305,625
Proceeds from exercise of options to purchase common stock 285,000 -
Proceeds from issuance of common stock 500,000 -
----------------------- -----------------------
Net cash provided by financing activities 917,242 124,454
----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents 383 (10,868)
Cash and cash equivalents at beginning of period 499 11,068
----------------------- -----------------------
Cash and cash equivalents at end of period $ 882 $ 200
======================= =======================
See accompanying notes to unaudited condensed
consolidated financial statements.
5
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine Months Ended,
September 30,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 186,311 $ 53,013
Noncash investing and financing activities
Prepaid commission by stock option issuance $ - $ 200,000
Notes payable issued for accounts payable 345,263 -
Common stock issued for notes payable to stockholders 1,250,000 -
Common stock issued for notes payable 1,499,090 -
Legal fees to be paid on behalf of lender 120,000 -
Accrued interest converted to notes payable 41,301 -
Exercise of options for subscription receivable 25,000 -
See accompanying notes to unaudited condensed
consolidated financial statements.
6
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiary (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
included in the Company's December 31, 2001, Annual Report on Form 10-KSB. In
particular, the Company's significant accounting principles were presented as
Note 1 to the consolidated financial statements in that report. In the opinion
of management, all adjustments necessary for a fair presentation have been
included in the accompanying condensed consolidated financial statements and
consist of only normal recurring adjustments. The results of operations
presented in the accompanying condensed consolidated financial statements for
the nine months ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2002.
NOTE 2 - REALIZATION OF ASSETS
The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a going concern.
However, the Company sustained net losses of $1,299,837 and $2,933,084 for the
nine months ended September 30, 2002, and the year ended December 31, 2001,
respectively. As of September 30, 2002, and December 31, 2001, the Company had
an accumulated deficit of $14,380,329 and $13,080,492, respectively and a total
stockholders' deficit of $4,658,124 and $6,942,377, respectively. In addition,
the Company used, rather than provided, cash in its operations in the amounts of
$914,037 and $288,724 for the nine months ended September 30, 2002, and the year
ended December 31, 2001, respectively.
Since February 2000, the Company has operated without a line of credit. Many of
the Company's vendors stopped credit sales of components used by the Company to
manufacture products and as a result, the Company converted certain of its
turnkey customers to customers that provide consigned components to the Company
for production. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Abacus Ventures, Inc. ("Abacus") purchased the Company's line of credit from the
lender. During the nine months ended September 30, 2002, the Company entered
into an agreement whereby the Company exchanged common stock, issued to certain
principles of Abacus, for a portion of the debt. The Company's plans include
working with vendors to convert trade payables into long-term notes payable and
common stock and cure defaults with lenders through forbearance agreements that
the Company will be able to service. The Company intends to continue to pursue
7
this type of debt conversion going forward with other creditors. The Company has
initiated new credit arrangements for smaller dollar amounts with certain
vendors and will pursue a new line of credit after negotiations with certain
vendors are complete. If successful, these plans may add significant equity to
the Company. There is no assurance that these transactions will occur.
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable -- The Company paid cash and issued stock as a
settlement of the principal amounts due on two separate notes payable to
stockholders. An additional $2,465 was advanced to the company during the
quarter ended September 30, 2002. The principal balance due to stockholders was
$2,465 and $1,390,125 at September 30, 2002, and December 31, 2001,
respectively. Interest associated with amounts due to stockholders was accrued
at 10 percent. Unpaid accrued interest was $210,734 and $205,402 at September
30, 2002, and December 31, 2001, respectively, and is included in accrued
liabilities. These notes are due on demand.
During the nine months ended September 30, 2002, Abacus completed negotiations
with several vendors of the Company, whereby Abacus purchased various past due
amounts for goods and services provided by vendors, as well as capital leases.
The total of these obligations was $345,263. In addition, Abacus agreed to
deduct as an offset of the amount owed to Abacus $120,000, constituting the
amounts paid by the Company as legal fees incurred by the Company as part of its
negotiations with the Company's vendors. The Company has recorded this
transaction as a $345,263 non-cash increase and a $120,000 non-cash payment to
the note payable owed to Abacus, pursuant to the terms of the Abacus agreement.
Additionally, the Company entered into a bridge loan agreement with Abacus. This
agreement allows the Company to request funds from Abacus to finance the
build-up of inventory relating to specific sales. The loan bears interest at 24%
and is payable on demand. The principal balance cannot exceed $600,000 at any
point in time. During the nine months ended September 30, 2002, the Company was
advanced $655,000 and made cash payments of $156,258 for an outstanding balance
on the bridge loan of $498,742. The total principal amount owed to Abacus
between the note payable and the bridge loan was $1,547,397 as of September 30,
2002.
For the nine months ended September 30, 2002, the Company recorded $1,174,417 of
accrued interest and paid $7,089 of interest on the Abacus loans. Total accrued
interest due at September 30, 2002, was $548,255.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation - During the nine months ended September 30, 2002, the
Company settled a lawsuit that alleged a breach of facilities sublease agreement
involving facilities located in Colorado. The Company's liability in this action
was originally estimated to range up to $2.5 million. The Company subsequently
filed a counter suit in the same court for an amount exceeding $500,000 for
missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which are currently held in escrow and have been treated as treasury
stock recorded at no cost. Because seventy-five percent (75%) of the balance had
not been paid by May 18, 2002, the Company was required to prepare and file with
8
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. Because, by July 18, 2002, the
remaining balance had not been paid, the registration statement with respect to
the escrowed shares had not been declared effective, and the Company had not
replaced the escrowed shares with registered free-trading shares pursuant to the
terms of the settlement agreement, the plaintiff filed the Confession of
Judgment and proceeded with execution thereon. The Company is currently
negotiating with the plaintiff to settle this obligation without the release of
the shares held in escrow.
In connection with a sublease agreement of these facilities, the Company
received a settlement 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. The plaintiff
has filed a claim that this payment was to be applied against rents owed rather
than the note payable. The Company disputes the claim and intends to vigorously
defend the action. 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.
Litigation - In December 1999, a vendor of the Company filed a lawsuit that
alleges breach of contract and seeks payment in the amount of approximately
$213,000 of punitive damages from the Company related to the Company's
non-payment for materials provided by the vendor. The Company denies all
substantive allegations made by the vendor and intends to vigorously contest the
case.
The Company has been a party to a lawsuit with a customer stemming from an
alleged breach of contract. In July 2002, the Company reached a settlement with
the customer in which the customer was to make payments from August 1, 2002,
through October 29, 2002, to the Company totaling $265,000. As part of the
settlement, the Company returned inventory valued at $158,010, settled
receivables from the customer of 287,277, settled payables owed to the customer
in the amount of $180,287 and sold inventory to a Company related to the
customer for $13,949. At September 30, 2002, the Company had received $185,000.
Subsequent to September 30, 2002, the final payment of $80,000 had been
collected.
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and terms of a promissory note. The Company entered a settlement
agreement under which the Company is to pay $6,256.24 each month until the
obligation and interest thereon are paid. This did not represent the forgiveness
of any obligation, but rather the restructuring of the terms of the previous
agreement. The Company has defaulted on its payment obligations under the
settlement agreement. The Company is currently negotiating a new settlement
agreement.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2001 the Company had accrued the entire amount of the claim. The
Company is currently in settlement negotiations with the vendor.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. The parties are presently
negotiating settlement.
9
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. The Company is currently in default
on this obligation and is currently negotiating a new settlement agreement.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,291.69 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has subsequently made
payments to the financial institution, reducing the obligation to $273,089 at
September 30, 2002, plus interest accruing from January 1, 2002. Negotiations
for settlement of the remaining claims are underway.
Suit was brought against the Company during April, 2001, by a former shareholder
alleging that the Company owed $121,825 under the terms of a promissory note. A
Stipulation for Settlement and for Entry of Judgment was executed by the parties
wherein the Company agreed to arrange for payment of a principal amount of
$145,000 in 48 monthly installments. The Company made seven payments and then
failed to make subsequent payments, at which time the shareholder obtained a
consent judgment against the Company. The Company is currently in settlement
negotiations with the former shareholder regarding the judgment.
The Company is the defendant in numerous legal actions primarily resulting from
nonpayment of vendor invoices for goods and services received. The Company has
accrued the payables and is currently in the process of negotiating settlements
with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity, the Company has granted the holders of 5,281,050 shares of common stock
the right to include 50% of the common stock of the holders in any registration
of common stock of the Company, under the Securities Act for offer to sell to
the public (subject to certain exceptions). The Company has also agreed to keep
any filed registration statement effective for a period of 180 days at its own
expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 9), the Company granted to the equity line
investor (the "Equity Line Investor") registration rights, in connection with
which the Company is required to file a registration statement covering the
resale of shares put to the Equity Line Investor under the equity line. The
Company is also required to keep the registration statement effective until two
years following the date of the last advance under the equity line. The Company
has not yet filed such registration statement.
Accrued Payroll Tax Liabilities -- As of September 30, 2002, the Company had
accrued liabilities in the amount of $2,219,709 for delinquent payroll taxes,
including interest estimated at $281,689 and penalties estimated at $264,249. Of
this amount, approximately $301,980 was due the State of Utah. During the first
quarter of 2002, the Company negotiated a monthly payment schedule of $4,000 to
the State of Utah, which did not provide for the forgiveness of any taxes,
penalties or interest. These monthly payments were not made during the third
quarter. Approximately $1,906,790 is owed to the Internal Revenue Service.
10
During the first quarter of 2002, the Company negotiated a payment schedule with
respect to this amount, pursuant to which monthly payments of $25,000 were
required. In addition, the Company committed to keeping current on deposits of
federal withholding amounts. The required monthly payments were made during each
of the three months during the second quarter. None of the monthly payments were
made during the third quarter. The Company is currently renegotiating the terms
of the payment schedule with the Internal Revenue Service. In addition, the
Company failed to pay several of its current withholding obligations.
Approximately $10,939 is owed to the State of Colorado.
NOTE 5 - STOCKHOLDERS' EQUITY
Common Stock Issued for Cash and Debt - Effective January 14, 2002, the Company
entered into four substantially identical agreements with existing shareholders
pursuant to which the Company issued an aggregate of 43,321,186 shares of
restricted common stock at a price of $0.075 per share, the fair value of the
shares, for $500,000 in cash and the reduction of principle of $1,499,090 of
notes payable and $1,250,000 of notes payable to stockholders. No gain or loss
has been recognized on these transactions as the fair value of the stock issued
was equal to the consideration given by the shareholders.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Employee Grants - During March 2002, the Company granted options to purchase
5,000,000 shares of common stock to certain employees of the Company pursuant to
the 2001 Plan. These options vested on the date of grant. The related exercise
price for the options was $0.045 to $0.05 per share, the fair value of the
Company's common stock on the dates of grant. The options are exercisable
through September 2006. The employees exercised all 5,000,000 options for
$235,000 cash during the first quarter.
The Company granted options to purchase 2,500,000 shares of common stock at
$0.03 per share to an employee in July 2002. These options vested immediately
and expire in September 2006. The Company's common stock had a fair value of
$0.04 per share at the time these options were granted. Compensation relating to
these options of $25,000 or $0.01 per share was recognized at the time of grant.
NOTE 7 - SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments; electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies in the Company's Annual Report on Form 10KSB/A. The Company evaluates
performance of each segment based on earnings or loss from operations. Selected
segment information is as follows:
11
Electronics Ethernet
September 30, 2002 Assembly Technology Total
Sales to external customers $ 1,547,594 $ 433,509 $ 1,981,103
Intersegment sales 179,451 -- 179,451
Segment loss (1,157,244) (142,593) (1,299,837)
Segment assets 2,577,129 333,235 2,910,364
Depreciation and amortization 352,674 15,703 368,377
September 30, 2001
Sales to external customers $ 1,161,578 $ 383,442 $ 1,545,020
Intersegment sales 262,832 -- 262,832
Segment loss (2,159,721) 8,017 (2,151,704)
Segment assets 3,513,381 476,454 3,989,835
Depreciation and amortization 363,269 11,522 374,791
September 30,
Sales 2002 2001
Total sales for reportable segments $ 2,160,554 $ 1,807,852
Elimination of intersegment sales (179,451) (262,832)
Consolidated net sales $ 1,981,103 $ 1,545,020
Net Loss
Net loss for reportable segments $ (1,299,837) $ (2,151,704)
Elimination of intersegment losses -- --
$ (1,299,837) $ (2,151,704)
All intersegment sales are recorded at the carrying value of the goods. The
carrying value includes materials, labor and overhead. Therefore, the sales
result in no intersegment gain or loss.
September 30, December 31,
Total Assets 2002 2001
Total assets for reportable segments $ 2,910,364 $ 3,587,286
Adjustment for intersegment amounts (9,098) (1,800)
Consolidated total assets $ 2,901,266 $ 3,585,486
NOTE 8 - SUBSEQUENT EVENTS
On November 5, 2002, the Company entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with a private investor (the "Equity Line
Investor"). Under the Equity Line Agreement, the Company has the right to draw
up to $5,000,000 from the Equity Line Investor against an equity line of credit
(the "Equity Line"), and to put to the Equity Line Investor shares of the
Company's common stock in lieu of repayment of the draw. The number of shares to
be issued is determined by dividing the amount of the draw by the lowest closing
bid price of the Company's common stock over the five trading days after the
advance notice is tendered. The maximum amount of any single draw is $85,000.
12
The Equity Line Investor is required under the Equity Line Agreement to tender
the funds requested by the Company within two trading days after the
five-trading-day period used to determine the market price.
In connection with the Equity Line Agreement, the Company granted registration
rights to the Equity Line Investor, in connection with which the Company is
required to use its best efforts to file a registration statement and have it
declared effective by the Securities and Exchange Commission. The Company has
not yet filed such registration statement. The Company is unable to draw on the
Equity Line until the registration statement has been declared effective.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements
All statements made herein, other than statements of historical fact, which
address activities, actions, goals, prospects, or new developments that the
Company expects or anticipates 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 the Company's 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 the Company are based on
knowledge of the Company's business and the environment in which the Company
currently operates. Because of the factors listed above, as well as other
factors beyond the Company's control, actual results may differ from those in
the forward-looking statements.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, consumer products,
telecommunications, automotive, medical, and semiconductor industries. Our
services include pre-manufacturing, manufacturing and post-manufacturing
services. Through our subsidiary, Racore Technology Corporation, we design and
manufacture Ethernet technology products. Our goal is to offer customers the
significant competitive advantages that can be obtained from manufacture
outsourcing, such as access to advanced manufacturing technologies, shortened
product time-to-market, reduced cost of production, more effective asset
utilization, improved inventory management, and increased purchasing power.
Critical Accounting Policies
We considered the disclosure requirements of Financial Reporting Release No. 60
regarding critical accounting policies and Financial Reporting Release No. 61
regarding liquidity and capital resources, certain trading activities and
related party/certain other disclosures, and concluded that nothing materially
changed during the quarter that would warrant further disclosure beyond those
matters previously disclosed in our Annual Report on Form 10-KSB/A for the year
ended December 31, 2001.
Results of Operations
Sales and Cost of Sales
Net sales for the three-month period ended September 30, 2002, decreased 22.4%
to $367,755, as compared to net sales of $474,055 during the same three-month
period in 2001. Net sales for the nine-month period ended September 30, 2002
increased 28.2% to $1,981,103, from $1,545,020 during the same period in 2001.
This increase resulted from increased sales to existing customers including
Tempo Research, General Cable, Merit Optical, and Silicon Graphics, as well as
an increase in slaes to new costomers including Sarcom, Digicon, and GTSI.
14
Cost of sales during the three-month period ended September 30, 2002, was
$358,869, as compared to $499,772 during the same period in 2001. Cost of sales
during the nine-month period ended September 30, 2002 was $1,735,380, as
compared to $1,794,854 during the same nine-month period in 2001. Our gross
profit percentage for the three-month period ended September 30, 2002 was 2.4%,
as compared to (5.4)% during the same three-month period in 2001. Our gross
profit percentage for the nine-month period ended September 30, 2002 was 12.4%,
as compared to (16.2)% during the same nine-month period in 2001.
Selling, General and Administrative Expenses
During the three-month period ended September 30, 2002, selling, general and
administrative expenses were $516,650, as compared to $393,368 for the same
period in 2001, representing a 23.9% decrease. During the nine-month period
ended September 30, 2002, selling, general and administrative expenses were
$1,400,240, as compared to $1,238,036, a 13.1% increase. Due to an increase in
sales and a decrease in selling, general and administrative expenses, the amount
of such expenses as a percentage of sales decreased 80.1% for the nine months
ended September 30, 2001 to 70.7% for the nine months ended September 30, 2002.
Interest Expense
Interest expense for the three-month period ended September 30, 2002 was
$41,865, compared to $124,452 for the same period in 2001, a reduction of
$82,587, or 66.4%. Interest expense for the nine-month period ended September
30, 2002 was $282,609, compared to $667,959 during the same period in 2001, a
reduction of $385,350, or 57.7%. These decreases are primarily attributable to
conversion of a significant amount of debt to equity in January 2002 and to a
decrease in delinquent payroll tax penalties, which were previously recorded as
part of interest expense. As of September 30, 2002, the amount of our liability
for delinquent state and federal payroll taxes and estimated penalties and
interest thereon was $2,219,709. See "Part II - Item 1 - Legal Proceedings."
As a result of the above factors, our overall net loss decreased 39.6% to
$1,299,837 for the nine-month period ended September 30, 2002, from $2,151,704
for the same period in 2001. Our net loss for the three-month period ended
September 30, 2002 increased by 5.7% to $574,532, as compared to a net loss of
$543,512 for the same period in 2001.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses. Our net loss from operations for the nine-month period ending September
30, 2002 was $1,299,837, and our net loss from operations for the year ending
December 31, 2001 was $2,933,084. Our accumulated deficit was $14,380,329 at
September 30, 2002 and was $13,080,492 at December 31, 2001. Our current
liabilities exceeded our current assets by $5,448,391 at September 30, 2002 and
by $7,832,259 as of December 31, 2001. We recorded negative cash flows from
operations for the nine-month period ending September 30, 2002 and the year
ended December 31, 2001 of $914,037 and $288,724, respectively.
Cash
On September 30, 2002, we had $882 cash on hand, as compared to $499 at December
31, 2001. The amount of checks written in excess of cash in bank decreased from
$159,964 at December 31, 2001 to $123,268 at September 30, 2002.
15
Net cash used in operating activities was $914,037 for the period ended
September 30, 2002, compared to $133,478 for the nine months ended September 30,
2001. During the nine months ended September 30, 2002, net cash used by
operations was primarily attributable to our net loss of $1,299,837, decreases
in accounts payable of $547,727, and payments of $152,500 made in settlement of
litigation, offset by a decrease in trade accounts receivable of $244,442 and
non-cash charges of $368,376 for depreciation and amortization.
Net cash used in investing activities during the nine months ended September 30,
2002 and 2001, consisted of equipment purchases of $2,822 and $1,844,
respectively. Net cash provided by financing activities during the nine-month
period ended September 30, 2002, was $917,242. Cash proceeds of $500,000 from
the issuance of restricted common stock, $285,000 from the issuance of stock
upon exercise of stock options, and $655,000 from long-term notes payable were
offset by principal payments of $348,402 on long-term notes payable, $140,125 on
notes payable to stockholders and a $36,696 decrease in the dollar amount of
checks written in excess of cash in bank.
Noncash investing and financing activities during the period ended September 30,
2002 consisted of reclassifying $345,263 from notes payable to accounts payable
(see below under "Accounts Payable"), the cancellation of $1,250,000 in notes
payable to stockholders in exchange for issuance of restricted common stock, the
cancellation of $1,499,090 in notes payable in exchange for the issuance of
restricted common stock (see below under "Liquidity and Financing
Arrangements"), and the allocation of $120,000 to be paid for legal fees which
Abacus Ventures, Inc. ("Abacus"), agreed to deduct as an offset of the amount
the Company owes Abacus. See "Liquidity and Financing Arrangements," below.
Accounts Receivable
By September 30, 2002, accounts receivable had decreased to $158,807 (net of an
allowance for doubtful accounts of $32,317), as compared to accounts receivable
of $369,250 at December 31, 2002 (net of an allowance for doubtful accounts of
$66,316). This significant decrease in accounts receivable is reflective of our
increased collection efforts.
Accounts Payable
Accounts payable were $1,297,281 at September 30, 2002, as compared to
$2,141,290 at December 31, 2001. This decrease is primarily attributable to
payments to vendors from $500,000 in cash provided by the issuance of restricted
common stock in January 2002 and the conversion of $345,263 of accounts payable
to notes payable to Abacus Ventures, Inc., offset by increases in trade payables
incurred in conjunction with our increased sales.
Liquidity and Financing Arrangements
We sustained losses from operations of $1,179,517 and $1,682,870 for the nine
months ended September 30, 2002 and 2001, respectively and losses from
operations of $532,764 and $614,085 for the quarters ended September 30, 2002
and 2001, respectively. We had accumulated deficits of $14,380,329 and
$13,080,492 at September 30, 2002 and December 31, 2001, respectively, and total
stockholders' deficits of $4,658,124 and $6,942,377, respectively, as of such
dates. As of December 31, 2001, our monthly operating costs and interest
expenses averaged approximately $205,000 per month. As of September 30, 2002,
this amount had decreased to approximately $145,000 per month.
16
Since February 2000, we have operated without a line of credit. Abacus, an
entity whose shareholders include the Saliba Private Annuity Trust, one of our
major shareholders, and a related entity, the Saliba Living Trust, purchased our
line of credit of $2,792,609, and this amount was converted into a note payable
to Abacus bearing an interest rate of 10%. As of December 31, 2001, a total of
$2,405,507, plus $380,927 in accrued interest, was owed to Abacus pursuant to
this note payable. In January 2002, we entered into agreements with the Saliba
Private Annuity Trust and the Saliba Living Trust to exchange 19,987,853 shares
of our common stock for $1,499,090 in principal amount of this debt and to issue
an additional 6,666,665 shares to these trusts for $500,000 cash.
In January 2002, in addition to the above-described transactions with the Saliba
trusts, we also issued 16,666,666 shares of restricted common stock at a price
of $0.075 per share in exchange for the cancellation of $1,250,000 of notes
payable to two other stockholders.
During the nine-months ended September 30, 2002, Abacus completed negotiations
with several of our vendors, whereby Abacus purchased various past due amounts
for goods and services provided by vendors, as well as capital leases. The total
of these obligations was $345,263. In addition, Abacus agreed to deduct as an
offset of the amount owed to Abacus $120,000, constituting the amounts paid by
the Company as legal fees incurred by the Company as part of its negotiations
with the Company's vendors. We recorded this transaction as a $345,263 non-cash
increase to the note payable owed to Abacus, pursuant to the terms of the Abacus
agreement. In addition, as partial payment of the amount owed to Abacus, we
agreed to pay $120,000 in legal fees of Abacus that were incurred as part of its
negotiations with our vendors, which amount was recorded as a non-cash payment
to the note payable owed to Abacus.
Additionally, we entered into a bridge loan agreement with Abacus. This
agreement allows us to request funds from Abacus to finance the build-up of
inventory relating to specific sales. The advances bear interest at 24% and are
payable on demand. The principal balance cannot exceed $600,000 at any point in
time. During the nine months ended September 30, 2002, we were advanced $655,000
and made cash payments of $156,258 for an outstanding balance on the bridge loan
of $498,742. The total principal amount owed to Abacus between the note payable
and the bridge loan was $1,547,397 as of September 30, 2002.
Despite our efforts to make our debt-load more serviceable, significant amounts
of additional cash will be needed to reduce our debt and fund our losses until
such time as we are able to become profitable. As at December 31, 2001, we were
in default of notes payable whose principal amount, not including the amount
owing to Abacus, exceeded $666,000. In addition, the principal amount of notes
that either mature in 2002 or are payable on demand exceed $1,157,656. The total
amount per month that we have committed to paying pursuant to various
settlements for outstanding debt, litigation and delinquent payroll taxes is
currently approximately $42,000, all of which is against accrued liabilities and
notes payable. None of these settlements, however, have resulted in the
forgiveness of any amounts owed, but have simply resulted in a restructuring in
the terms of the various debts.
In conjunction with our efforts to improve our results of operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with Cornell Capital Partners, LP, a private
investor ("Cornell"). Under the Equity Line Agreement, we have the right to draw
up to $5,000,000 from Cornell against an equity line of credit (the "Equity
Line"), and to put to Cornell shares of our common stock in lieu of repayment of
the draw. The number of shares to be issued is determined by dividing the amount
17
of the draw by the lowest closing bid price of our common stock over the five
trading days after the advance notice is tendered. Cornell is required under the
Equity Line Agreement to tender the funds requested by us within two trading
days after the five-trading-day period used to determine the market price.
Our issuances of shares of our common stock pursuant to the Equity Line
Agreement will serve to dilute the value of our common stock and existing
shareholders' positions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2002, we had accrued liabilities in the amount of $2,219,709
for delinquent payroll taxes, including interest estimated at $281,689 and
penalties estimated at $264,249. Of this amount, approximately $301,980 was due
the State of Utah. During the first quarter of 2002, we negotiated a monthly
payment schedule of $4,000 to the State of Utah, which did not provide for the
forgiveness of any taxes, penalties or interest. These monthly payments were not
made during the third quarter. Approximately $1,906,790 is owed to the Internal
Revenue Service ("IRS"). During the first quarter of 2002, we negotiated a
payment schedule with respect to this amount, pursuant to which monthly payments
of $25,000 were required. In addition, we committed to keeping current on
deposits of federal withholding amounts. The required monthly payments were made
during each of the three months during the second quarter. None of the monthly
payments were made during the third quarter, and the Company is renegotiating
the payment schedule with the IRS. In addition, we failed to pay several of our
current withholding obligations. Approximately $10,939 is owed to the State of
Colorado.
The amounts in controversy in the matters described in the following paragraphs
have all been included in the Company's financial statements and notes, and do
not represent obligations or contingencies in addition to those set forth in the
financial statements and notes.
Sunborne XII, LLC - The Company (as successor to Circuit Technology, Inc.) was a
defendant in an action in El Paso County, Colorado District Court, brought by
Sunborne XII, LLC, a Colorado limited liability company, for alleged breach of a
sublease agreement involving facilities located in Colorado. Our liability in
this action was originally estimated to range up to $2.5 million, and we
subsequently filed a counter suit in the same court against Sunborne in an
amount exceeding $500,000 for missing equipment. Effective January 18, 2002, the
Company entered into a settlement agreement with Sunborne with respect to the
above-described litigation. The settlement agreement required the Company to pay
Sunborne the sum of $250,000. Of this amount, $25,000 was paid upon execution of
the agreement, 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 Sunborne a Confession of Judgment and also issued to
Sunborne 3,000,000 shares of the Company's common stock, which are currently
held in escrow as security for performance of our obligations under the
settlement agreement. We were also required, if 75% of the balance owing under
the agreement was not paid by May 18, 2002, to prepare and file with the
Securities & Exchange Commission, at the Company's expense, a registration
statement with respect to the shares that were escrowed. The settlement
agreement also stipulated that if such registration was not completed by July
18, 2002 and the escrowed shares were not replaced with registered free-trading
shares pursuant to the terms of the agreement, Sunborne could file the
Confession of Judgment and proceed with execution thereon.
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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 November 12, 2002, the Company was in default of its obligations under the
settlement agreement with Sunborne, i.e., the total payment due thereunder had
not been made, a registration statement with respect to the escrowed shares was
not filed, and the Company did not replace the escrowed shares with registered,
free-trading shares as per the terms of the agreement. Accordingly, Sunborne has
filed the Confession of Judgment and proceeded with execution thereon. The
Company is currently negotiating with Sunborne in an attempt to settle the
remaining obligation under the settlement agreement.
Osicom Settlement - On July 31, 2002, the Company entered into a Mutual Release
and Settlement Agreement (the "Osicom Agreement") with Osicom Technologies, Inc
and Entrada Networks, Inc. In January 2001, the Company had filed a breach of
contract action against Osicom, one the Company's customers, seeking damages of
$875,000 in respect of Osicom's cancellation of a portion of a manufacturing
contract. Pursuant to the terms of the Osicom Agreement, The Company has agreed
to dismiss its claims against Osicom and Entrada in consideration for a series
of six payments by Entrada to the Company in August-October 2002 that total
$265,000. As part of the settlement, the Company returned inventory valued at
$158,010, settled receivables from the customer of 287,277, settled payables
owed to the customer in the amount of $180,287 and sold inventory to a company
related to the customer for $13,949. At September 30, 2002 the Company had
received $185,000. Subsequent to September 30, 2002, the final payment of
$80,000 had been collected.
Arrow Electronics v. Circuit Technology Corporation, Civil No. 990409504, Third
Judicial District Court, Sandy Department, Salt Lake County, State of Utah. Suit
was brought against the Company on or about October 19, 1999, under allegations
that the Company owes $199,647.92 for materials and services and terms of a
promissory note. The Company has answered, admitting that it owed certain sums
and denying all other claims. The Company and Arrow have entered a settlement
agreement under which the Company will pay $6,256.24 each month until the
obligation and interest thereon are paid. The Company has defaulted on its
payment obligations under the settlement agreement. The Company is currently
negotiating a new settlement agreement.
Avnet Electronics has notified the Company that it believes it has a claim
against the Company in the amount of $180,331.02 for the cost of goods or
services provided to the Company for the Company's use and benefit. No lawsuit
has been filed. Negotiations for settlement of this claim have resulted in an
agreement in principal whereby the Company will make a cash payment to this
creditor and issue a promissory note and its restricted common stock in
satisfaction of the creditor's claims. The parties are presently negotiating the
terms of the settlement documents. However, until the settlement documents are
executed and delivered, there can be no assurance that the creditor's claims
will be settled or that the terms will be favorable to the Company.
CirTran Corp. v. Entrada Networks, Inc. et al., Case No. 2:01-CV-142B, United
States District Court, District of Utah. On January 19, 2001, the Company filed
19
suit in state court seeking to recover $874,653 in actual damages plus
unspecified consequential damages and attorneys' fees. The Company claims that
Entrada, and Entrada's predecessor-in-interest, breached its contracts to
purchase goods from the Company. Entrada removed the case to federal court in
Salt Lake City, Utah, and filed a motion to dismiss the complaint on the basis
of lack of personal jurisdiction. The court denied Entrada's motion to dismiss.
Entrada asserted a claim against the Company for unspecified amount based on
alleged defects that Entrada claims to have found in the goods that the Company
assembled. Subsequently, the Company and Entrada entered into a settlement
agreement whereby Entrada paid the Company approximately $250,000, and agreed to
order and pay for certain parts from Orbit Systems, Inc. (see below) over the
next three months.
Future Electronics Corp adv. Circuit Technology Corporation, Civil No.
000900296, Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about January 12, 2000, under allegations
that the Company owed $646,283.96 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims were asserted for breach
of contract, fraud, negligent misrepresentation, unjust enrichment, account
stated and dishonored instruments. The Company answered the complaint, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Partial Summary Judgment was entered in the amount of $646,783.96
as to certain claims against the Company. Negotiations for settlement resulted
in an agreement for settlement of all claims of Future against the Company
subject to performance by the Company under the agreement. The Company also
issued to Future 352,070 shares of its restricted common stock.
Infineon Technologies North America Corp. v. Circuit Technology, Inc. et al.,
Case No. CV 792634, Superior Court of the State of California, County of Santa
Clara. Judgment was entered against Circuit Technology, Inc., on March 12, 2002,
in the amount of $181,342.15. The Company is currently in settlement
negotiations with Infineon.
John J. La Porta v. Circuit Technology, Inc. et al., Case No. 010900785, Third
Judicial District Court, Salt Lake Department, Salt Lake County, State of Utah.
La Porta filed suit on or about January 23, 2001, seeking to recover the
principal sum of $135,941 plus interest on a promissory note given by Racore
Technology Corp. La Porta claims that the Company is a guarantor of the
promissory note and the Company should be held liable because of Racore's
default on the note. The parties are presently negotiating settlement. However,
until the settlement is reached, there can be no assurance that the creditor's
claim will be settled nor that the terms will be favorable to the Company.
Orbit Systems, Inc. v. Circuit Technology, Inc. et al, Case No. 010100050DC,
Third Judicial District Court, West ValleyCity Department, Salt Lake County,
State of Utah. Orbit filed suit on January 4, 2001, seeking to recover $173,310
for the costs of goods that Orbit claims the Company is under contract to
purchase. The Company filed an answer denying the substantive allegations and
filed a Third-party Complaint against Osicom Technologies, Inc., and Entrada
Networks, Inc., for contribution, indemnity and reimbursement in the event the
Company is held liable to Orbit. The Company subsequently entered into a
settlement agreement with Entrada whereby Entrada paid certain funds to the
Company and agreed to order and pay for certain parts from Orbit. The Company
also entered into an agreement with Orbit to the effect that if Entrada fulfills
its obligations to purchase and pay for the parts from Orbit, Orbit will release
its claims against the Company.
Sager Electronics v. Circuit Technology Corporation, Civil No. 000403535, Third
Judicial District Court, Sandy Department, Salt Lake County, State of Utah. Suit
was brought against the Company on or about March 23, 2000, under allegations
20
that the Company owed $97,259.23 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims are asserted for
nonpayment of amount owing. The Company has answered, admitting that it owed
certain sums for conforming goods and services and denying all other claims.
Negotiations for settlement have resulted in an agreement for settlement of all
claims of Sager against the Company. The Company has arranged certain payments
and is required to pay Sager $1,972.07 each month until paid. The Company has
defaulted on its payment obligations under the settlement agreement. The Company
is currently negotiating a new settlement agreement.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No. 00L14505,
Circuit Court of Cook County Department, Law Division, State of Illinois. Suit
was brought against the Company on or about December 23, 1999, under allegations
that the Company owed $213,717.70 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims are asserted for breach of
contract, unjust enrichment and account stated. The Company has answered,
admitting that it owed certain sums for conforming goods and services and
denying all other claims. The parties are presently negotiating the terms of
settlement. However, until the settlement documents are executed and delivered,
there can be no assurance that the creditors claims will be settled or that the
terms will be favorable to the Company.
Wells Fargo Equipment Finance v. Circuit Technology Corporation, Civil No.
901207, Third Judicial District Court, Salt Lake County, State of Utah. Suit was
brought against the Company on or about February 10, 2000, under allegations
that the Company owed $439,493,56 for a loan provided to the Company for the
Company's use and benefit. Claims are asserted for breach of contract, breach of
guarantee, and replevin. The Company has answered, admitting that it owed
certain sums for conforming goods and services and denying all other claims.
Judgment has been entered against the Company and certain guarantors in the
amount of $427,291.69 plus interest at the rate of 8.61% per annum from June 27,
2000. The Company has subsequently made payments to Wells Fargo, reducing the
obligation to $273,089, plus interest accruing from January 1, 2002.
Negotiations for settlement of the remaining claims are underway.
Zion's First National Bank has notified the Company that it believes it has a
claim against the Company in the amount of $240,000.00 for loans made to the
Company for the Company's use and benefit. The Company has entered into a Fifth
Forbearance and Loan Modification Agreement, requiring monthly payments of
$20,000.00. The Company is currently negotiating with this creditor to settle
any remaining claims.
George M. Madanat, Civil No. KC 035616, Superior Court of the State of
California for the County of Los Angeles, East District. Suit was brought
against the Company on or about April 2, 2001, under allegations that the
Company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company made seven payments and then failed to make
subsequent payments, at which time Mr. Madanat obtained a consent judgment
against the Company. The Company is currently in settlement negotiations with
Mr. Madanat regarding the judgment.
Abacus Ventures, Inc., ("Abacus") is a Delaware corporation which is owned by
private individuals, some of whom are also affiliates and shareholders of the
Company. The Company does not know the identity of all of the Abacus
shareholders. It is the Company's understanding that Abacus has acquired the
claims and rights of certain creditors of the Company. There may be other claims
acquired by Abacus of which the Company is not aware. The Company is unaware of
the full amount of Abacus' claims against the Company. The Company is
negotiating with Abacus to settle and resolve the claims.
21
In addition to the above specified claims, the Company is currently involved in
at least four lawsuits which individually are not deemed to be material, the
aggregate claims in which are approximately $127,250. The Company is attempting
to settle these suits and claims, but there is no guarantee that the Company
will be able to settle such claims.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
Pursuant to an Equity Line of Credit Agreement (discussed above), the Company
will put to the Equity Line Investor, in lieu of repayment of amounts drawn on
the Equity Line, shares of the Company's common stock. Although the Company
plans to file a registration statement to register the resale by the Equity Line
Investor of the shares put to it by the Company, the issuances of shares to the
Company will be made in reliance on Section 4(2) of the Securities Act of 1933
as a transaction not involving any public offering. No advertising or general
solicitation was employed in offering the securities, and the shares will be
issued to only one investor which has represented that it is an "accredited
investor" as that term is defined in Regulation D promulgated pursuant to the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: The following reports on Form 8-K were filed by us
during the three-month period ended September 30, 2002:
(i) Form 8-K filed November 12, 2002 with respect to our entering into
the Equity Line of Credit Agreement.
Exhibits:
10.1 Subscription Agreement between CirTran Corporation and
Iehab Hawatmeh, dated January 10, 2002
10.2 Subscription Agreement between CirTran Corporation and
Rajai Hawatmeh, dated January 10, 2002
10.3 Subscription Agreement between CirTran Corporation and
Saliba Private Annuity Trust, dated January 10, 2002
10.4 Subscription Agreement between CirTran Corporation and
Saliba Living Trust, dated January 10, 2002
10.5 Accounts Receivable and Purchase Order Financing Agreements
with Abacas Ventures, Inc.
99.1 Certifications
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
22
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CIRTRAN CORPORATION
Date: December 23, 2002 By: Iehab Hawatmeh
President
23