UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 0-26059
CIRTRAN CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
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(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
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(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,
2004: 399,219,310.
Transitional Small Business Disclosure Format (check one): Yes ______ NO X
--
The purpose of this amendment to our quarterly report on Form 10-QSB is to
clarify certain matters related to promissory notes and the functioning of our
equity line of credit, together with the reclassification of offering costs and
interest expense.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 2004, (unaudited) and 3
December 31, 2003
Statements of Operations for the Three ended 4
March 31, 2004, (unaudited) and 2003 (unaudited)
Statements of Cash Flows for the Three Months ended 5
March 31, 2004, (unaudited) and 2003 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
(unaudited)
Item 2 Management's Discussion and Analysis of or Plan of Operation 17
Item 3 Evaluation of Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 27
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 28
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2004 2003
-------------- ---------------
(As Restated
- Note 1)
ASSETS
Current Assets
Cash and cash equivalents $ 88,443 $ 54,135
Trade accounts receivable, net of allowance for doubtful
accounts of $28,876 278,206 89,187
Inventory 1,483,153 1,247,428
Other 165,091 165,091
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Total Current Assets 2,014,893 1,555,841
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Property and Equipment, Net 533,034 577,603
Other Assets, Net 16,555 10,390
Deferred Offering Costs 60,000 26,000
-------------- ---------------
Total Assets $ 2,624,482 $ 2,169,834
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 9,623
Accounts payable 833,163 1,300,597
Accrued liabilities 3,776,539 3,615,264
Current maturities of long-term notes payable 2,253,436 1,964,021
Notes payable to stockholders 7,086 31,838
Notes payable to related parties 257,345 163,742
-------------- ---------------
Total Current Liabilities 7,127,569 7,085,085
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Long-Term Notes Payable, Less Current Maturities - -
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Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 391,455,709 and 349,087,699
net of 3,000,000 shares held in treasury at no cost at
March 31, 2004 and December 31, 2003, respectively 391,455 349,088
Additional paid-in capital 13,691,325 12,876,941
Accumulated deficit (18,585,867) (18,141,280)
-------------- ---------------
Total Stockholders' Deficit (4,503,087) (4,915,251)
-------------- ---------------
Total Liabilities and Stockholders' Deficit $ 2,624,482 $ 2,169,834
-------------- ---------------
The accompanying notes are an integral part of these financial statements.
F-2
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, 2004 2003
--------------------- --------------------
(As Restated - Note 1)
Net Sales $ 645,612 $ 269,774
Cost of Sales (433,759) (185,716)
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Gross Profit 211,853 84,058
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Operating Expenses
Selling, general and administrative expenses 545,068 555,554
Non-cash employee compensation expense 33,750 72,500
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Total Operating Expenses 578,818 628,054
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Loss From Operations (366,965) (543,996)
--------------------- --------------------
Other Income (Expense)
Interest (156,562) (110,743)
Other, net (96) -
Gain on forgiveness of debt 79,036 -
--------------------- --------------------
Total Other Expense, Net (77,622) (110,743)
--------------------- --------------------
Net Loss $ (444,587) $ (654,739)
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Basic and diluted loss per common share $ (0.00) $ (0.00)
--------------------- --------------------
Basic and diluted weighted-average
common shares outstanding 373,825,900 248,129,897
--------------------- --------------------
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 2004 2003
-------------------- --------------------
(As Restated - Note 1)
Cash flows from operating activities
Net loss $ (444,587) $ (654,739)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 61,769 83,295
Loss on disposal of equipment 2,305 -
Gain on forgiveness of debt (79,036) -
Non-cash compensation expense 33,750 72,500
Loan costs and interest paid from loan proceeds 76,500 -
Options issued to attorneys and consultants for services 93,701 -
Changes in assets and liabilities:
Trade accounts receivable (189,019) (45,593)
Inventories (235,725) 27,694
Prepaid expenses and other assets (6,165) (175)
Accounts payable 36,245 85,042
Accrued liabilities 253,187 84,894
-------------------- --------------------
Total adjustments 47,512 307,657
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Net cash used in operating activities (397,075) (347,082)
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Cash flows from investing activities
Purchase of property and equipment (19,505) (6,495)
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Net cash used in investing activities (19,505) (6,495)
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Cash flows from financing activities
Change in checks written in excess of cash in bank (9,623) 60,856
Proceeds from notes payable to stockholders 5,748 17,914
Payments on notes payable to stockholders (30,500) -
Proceeds from notes payable 1,363,500 10,568
Principal payments on notes payable (179,619) (33,261)
Proceeds from notes payable to related parties 451,223 100,000
Payment on notes payable to related parties (1,185,141) -
Proceeds from exercise of options and warrants to purchase
common stock 35,000 197,500
Exercise of options issued to attorneys and consultants
for services 300 -
-------------------- --------------------
Net cash provided by financing activities 450,888 353,577
-------------------- --------------------
Net increase in cash and cash equivalents 34,308 -
Cash and cash equivalents at beginning of year 54,135 500
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Cash and cash equivalents at end of year $ 88,443 $ 500
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The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
For the Three Months Ended March 31, 2004 2003
-------------------- --------------------
(As Restated - Note 1)
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 67,292 $ 22,543
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 503,679 $ -
Common stock issued for settlement of note payable $ 30,000 $ -
Common stock issuance in which proceeds were retained
as payment of notes payable $ 650,000 $ -
Accrued interest converted to notes payable $ 9,160 $ -
Stock options exercised for settlement of accrued interest
and accrued compensation $ 40,000 $ -
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.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its 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 Annual Report on Form 10-KSB/A. In particular, the
Company's significant accounting principles were presented as Note 1 to the
consolidated financial statements in that Report. In the opinion of management,
all adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three months
ended March 31, 2004, are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2004.
Stock-Based Compensation -- At March 31, 2004, the Company has one stock-based
employee compensation plan, which is described more fully in Note 7. 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, 2004 and 2003, the
Company recognized compensation expense relating to stock options and warrants
of $33,750 and $72,500, respectively. The following table illustrates the effect
on net loss and basic and diluted loss per common share as if the Company had
applied the fair value recognition provisions of Financial Accounting Standards
Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation:
Three Months Ended March 31,
-------------------------------------------
2004 2003
-------------------- --------------------
Net loss, as reported $ (444,587) $ (654,739)
Add: Stock-based employee compensation expense
included in net loss 33,750 72,500
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (135,473) (141,665)
-------------------- --------------------
Pro forma net loss $ (546,310) $ (723,904)
-------------------- --------------------
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)
-------------------- --------------------
Restatement of Financial Statements -- The Company has reclassified offering
costs related to the Equity Line of Credit from selling, general and
administrative expenses to additional paid-in capital and interest expense
related to notes payable to the Equity Line Investor from selling, general and
administrative expenses (see Notes 5 and 6) for the three months ended March 31,
2004.The effects of the restatement were as follows:
6
As Previously Effect of As
Reported Restatement Restated
--------------- ---------------- -------------------
For the Three Months Ended March 31, 2004
Selling, general and administrative expense $ 680,068 $ (135,000) $ 545,068
Loss from operations 501,965 (135,000) 366,965
Interest expense 81,562 75,000 156,562
Net loss 504,587 (60,000) 444,587
Basic and diluted loss per common share - - -
As of March 31, 2004
Deferred offering costs $ - $ 60,000 $ 60,000
Total assets 2,564,482 60,000 2,624,482
Additional paid in capital 13,764,525 (73,200) 13,691,325
Accumulated deficit (18,719,067) 133,200 (18,585,867)
Total stockholders' deficit (4,563,087) 60,000 (4,503,087)
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 $444,587 and $2,910,978 for the three
months ended March 31, 2004 and the year ended December 31, 2003, respectively.
As of March 31, 2004 and December 31, 2003, the Company had an accumulated
deficit of $18,585,867 and $18,141,280, respectively, and a total stockholders'
deficit of $4,503,087 and $4,915,251, respectively. In addition, the Company
used, rather than provided, cash in its operations in the amounts of $397,075
and $1,123,818 for the three months ended March 31, 2004, and the year ended
December 31, 2003, respectively.
Since February of 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 addition, the Company is a defendant in numerous legal actions (see Note 4).
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.
7
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit from the
lender. During 2002, the Company entered into agreements whereby the Company has
issued common stock to certain principals of Abacas in exchange 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 to cure defaults
with lenders through forbearance agreements that the Company will be able to
service. During the three months ended March 31, 2004, and the year ended
December 31, 2003, the Company successfully converted trade payables, notes
payable, and accrued interest of approximately $827,521 and $2,986,
respectively, into notes. Accrued interest of $17,666 associated with the notes
payable was not converted to the note payable with Abacus; therefore, a gain on
forgiveness of debt was recorded for $17,666 for the three months ended March
31, 2004. The Company intends to continue to pursue this type of debt conversion
going forward with other creditors. As discussed in Note 4, the Company has
entered into an equity line of credit agreement with a private investor.
Realization of any proceeds under the equity line of credit is not assured.
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable -- The Company had amounts due to stockholders from
two separate notes. The balance due to stockholders at March 31, 2004, and
December 31, 2003, was $7,086 and $31,838, respectively. Interest associated
with amounts due to stockholders is accrued at 10 percent. Unpaid accrued
interest was $6,929 and $6,900 at March 31, 2004, and December 31, 2003,
respectively, and is included in accrued liabilities. These notes are due on
demand.
Related Party Notes Payable -- The Company had amounts due to Abacas Ventures,
Inc., a related party, under the terms of a note payable and a bridge loan.
During 2002, the Company entered into a 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
three months ended March 31, 2004, and the year ended December 31, 2003, the
Company was advanced $451,223 and $350,000, respectively, and made cash payments
of $1,185,141 and $875,000, respectively, for an outstanding balance on the
bridge loan of $257,345 and $163,742, respectively.
The balance due to Abacas related to the note payable was paid in full at
December 31, 2002. The note accrued interest at 10%. The amounts owed were due
on demand with no required monthly payments. This note was collateralized by
assets of the Company. As discussed in Note 10, a significant amount of the
Abacas note was converted to shares of the Company's common stock during 2002.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $257,345 and $163,742 as of March 31, 2004, and December 31,
2003, respectively. The total accrued interest owed to Abacas between the note
payable and the bridge loan was $252,613 and $230,484 as of March 31, 2004, and
December 31, 2003, respectively, and is included in accrued liabilities.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation -- During January 2002, the Company settled a lawsuit
that had alleged a breach of facilities sublease agreement involving facilities
located in Colorado. The Company's liability in this action was originally
estimated to range up to $2.5 million. The Company had filed a counter suit in
the same court for an amount exceeding $500,000 for missing equipment.
8
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which are currently held in escrow and have been treated as treasury
stock recorded at no cost. The fair value of the 3,000,000 shares was less than
the carrying amount of the note payable. Because 75 percent of the balance had
not been paid by May 18, 2002, the Company was required to prepare and file with
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. The remaining balance has not
been paid, and the registration statement with respect to the escrowed shares
has not been declared effective and the Company has not replaced the escrowed
shares with registered free-trading shares pursuant to the terms of the
settlement agreement; therefore, the plaintiff filed the Confession of Judgment
and proceeded with execution thereon. The Company is currently negotiating with
the plaintiff to settle this obligation without the release of the shares held
in escrow.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which has been recorded as other income. The Company did not
receive cash from this settlement, but certain obligations of the Company were
paid directly. $109,125 of the principal balance of the note related to the
settlement mentioned above was paid. Also, $7,000 was paid to the Company's
legal counsel as a retainer for future services. The remaining $36,375 was paid
to the above mentioned plaintiff as a settlement of rent expense.
During September 2002, the plaintiff filed a claim that the $109,125 portion of
the payment was to be applied as additional rent expense rather than a principal
payment on the note payable. The Company estimates that the probability of the
$109,125 being considered additional rent expense is remote and disputes the
claim. The Company intends to vigorously defend the action.
Litigation - During 2000, the Company settled a lawsuit filed by a vendor by
issuing 5,281,050 shares of the Company's common stock valued at $324,284,
paying $83,000 in cash and issuing two notes payable totaling $239,000. During
2002, the vendor filed a confession of judgement claiming that the Company
defaulted on its agreement and claims the 2000 lawsuit was not properly
satisfied. At December 31, 2003, the Company owed $60,133 of principal under the
terms of the remaining note payable. The Company denies the vendor's claims and
intends to vigorously defend itself against the confession of judgement.
During 2003, an investment firm filed suit in the U.S. District Court, District
of Utah seeking finders fees, consisting of common stock valued at $350,000 for
allegedly introducing the Company to the Equity Line Investor. The case was
previously dismissed in a New York court. The Company estimates that the risk of
loss is remote, therefore no accrual has been made.
In December 1999, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $213,000 of punitive
damages from the Company related to the Company's non-payment for materials
provided by the vendor. Judgment was entered against the Company in May 2002 in
the amount of $213,718. The Company has accrued the entire amount due under the
judgment.
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and pursuant to the terms of a promissory note. The Company entered a
settlement agreement under which the Company is to pay $6,256 each month until
the obligation and interest thereon are paid. This did not represent the
9
forgiveness of any obligation, but rather the restructuring of the terms of the
previous agreement. At December 31, 2003, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. During the first quarter, this claim was purchased by
Abacus and recorded as an increase to the amount owed to Abacus under the terms
of the bridge loan.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2003, the Company had accrued the entire amount of the claim.
During the first quarter, this claim was purchased by Abacus and recorded as an
increase to the amount owed to Abacus under the terms of the bridge loan.
In December 1999, a vendor of the Company filed a lawsuit that seeks payment in
the amount of $44,269 for the cost of goods provided to the Company. The Company
admits owing certain amounts to the vendor and has accrued the entire amount
claimed as of December 31, 2003. During the first quarter, this claim was
purchased by Abacus and recorded as an increase to the amount owed to Abacus
under the terms of the bridge loan.
During 2002, a vendor of the Company filed a lawsuit that seeks payment in the
amount of $31,745 for the cost of goods provided to the Company. The Company has
accrued the entire amount claimed. No trial date has been set. During the first
quarter, this claim was purchased by Abacus and recorded as an increase to the
amount owed to Abacus under the terms of the bridge loan.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. The parties are presently
negotiating settlement.
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. At December 31, 2003, the Company
owed $87,632 on this settlement agreement. 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 $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has made payments to the
financial institution, reducing the obligation to $215,516 at December 31, 2003,
plus interest accruing from January 1, 2002. The Company has settled this claim
in full as discussed in Note 5.
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.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $193,604. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims and it is included in accounts payable.
10
The Company is the defendant in numerous legal actions, primarily resulting from
nonpayment of vendor invoices for goods and services received, that it has
determined the probability of realizing any loss is remote. The total amount of
these legal actions is $159,908. The Company has made no accrual for the legal
actions and is currently in the process of negotiating the dismissal of these
claims with the various vendors.
The Company is also the defendant in numerous immaterial legal actions primarily
resulting from nonpayment of vendors for goods and services received. The
Company has accrued the payables and is currently in the process of negotiating
settlements with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity during 2000, the Company has granted the holders of 5,281,050 shares of
common stock the right to include 50% of the common stock of the holders in any
registration of common stock of the Company, under the Securities Act for offer
to sell to the public (subject to certain exceptions). The Company has also
agreed to keep any filed registration statement effective for a period of 180
days at its own expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 6), 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 March 31, 2004, the Company had accrued
liabilities in the amount of $2,114,092 for delinquent payroll taxes, including
interest estimated at $415,244 and penalties estimated at $230,927. Of this
amount, approximately $316,828 was due the State of Utah. During 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.
Approximately $1,786,325 was owed to the Internal Revenue Service as of March
31, 2004. During 2002, the Company negotiated a payment schedule with respect to
this amount, pursuant to which monthly payments of $25,000 were required. The
Company is currently renegotiating the terms of the payment schedule with the
Internal Revenue Service. Approximately $10,939 was owed to the State of
Colorado as of March 31, 2004.
NOTE 5- NOTES PAYABLE
In March 2004, the Company settled a note payable with a financial institution.
The outstanding loan balance and accrued interest at the time of settlement was
$189,663. The balance was settled for $90,000 in cash and 542,495 shares of
common stock valued at $30,000. A gain on forgiveness of debt of $61,370 was
recorded on this transaction.
Notes Payable to Equity Line Investor -- At December 31, 2003, the Company owed
$650,000 to Cornell Capital Partners, LP, pursuant to prior unsecured promissory
notes. During the three months ended March 31, 2004, the Company borrowed an
additional $1,500,000 from Cornell, pursuant to three additional unsecured
promissory notes. In lieu of interest, the Company paid fees at closing of 5% of
the loan amount to an affiliate of the lender. These fees have been recorded as
interest expense. The fees were negotiated in each instance and agreed upon by
the Company and by the lender and its affiliate. The notes were repayable over
periods ranging from 88 days to 132 days. Each of the notes stated that if the
Company did not repay the notes when due, a default interest rate of 24% would
11
apply to the unpaid balance. Through March 31, 2004, the Company directed the
repayment of $650,000 of these notes from proceeds generated under the Amended
Equity Line Agreement, discussed in Note 6 below. At March 31, 2004, the balance
owing on these notes was $1,500,000. All notes were paid when due or before, and
at no time did the Company incur the 24% penalty interest rate.
NOTE 6 - STOCKHOLDER'S EQUITY
Common Stock Issuance -- As discussed in Note 5, the Company issued 542,495
shares of common stock valued at $30,000 as part of a settlement agreement for a
note payable.
Equity Line of Credit Agreement - In conjunction with efforts to improve the
results of operations, discussed above, on November 5, 2002, the Company entered
into an Equity Line of Credit Agreement (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.
During the three months ended March 31, 2004, the Company drew an aggregate
amount of $650,000 under the Amended Equity Line Agreement, pursuant to draws on
the equity line, net of fees of $26,000, and issued a total of 30,075,515 shares
of common stock to Cornell under the Amended Equity Line Agreement. At the
Company's direction, Cornell retained the proceeds of the draws under the
Amended Equity Line Agreement and applied them as payments on the notes to
Cornell, discussed in Note 5 above.
Pursuant to the Amended Equity Line Agreement, in connection with each draw the
Company agreed to pay a fee of 4% of the amount of the draw to Cornell as
consideration for its providing the Equity Line. Total fees paid for the three
months ended March 31, 2004 were $60,000. These fees were classified as deferred
offering costs at March 31, 2004. These deferred offering costs were offset
against additional paid-in capital as shares were issued under the Amended
Equity Line Agreement subsequent to March 31, 2004.
Subsequent to March 31, 2004, the Company drew an aggregate of $500,000 under
the Amended Equity Line Agreement, net of deferred offering costs of $20,000
which were included in the deferred offering costs at March 31, 2004, and issued
7,763,601 shares of common stock to Cornell under the Amended Equity Line
Agreement. At the Company's direction, Cornell applied the proceeds of the draws
under the Amended Equity Line Agreement as payments on the notes to Cornell,
discussed in Note 5 above.
NOTE 7 - 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
12
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 at their fair value in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan - During February 2003, the Company adopted the 2002 Stock
Option Plan (the "2002 Plan") with 25,000,000 shares of common stock reserved
for issuance there under. Also, during November 2003, the Company adopted the
2003 Stock Option Plan (the "2003 Plan") with 35,000,000 shares of common stock
reserved for issuance there under. The Company's Board of Directors administers
the plans and has discretion in determining the employees, directors,
independent contractors and advisors who receive awards, the type of awards
(stock, incentive stock options or non-qualified stock options) granted, and the
term, vesting, and exercise prices.
Non-Employee Grants - During the three months ended March 31, 2004, the Company
granted options to purchase 3,000,000 shares of common stock to attorneys for
services at exercise prices of $0.0001 per share. The options were all five year
options and vested on the dates granted. The weighted average fair value of the
options on the grant dates was $0.031, which resulted in a fair value of $93,701
which reduced the amount owed for prior services provided. The attorneys
exercised the 3,000,000 options for cash proceeds of $300.
Employee Grants - During the three months ended March 31, 2004, the Company
granted options to purchase 11,750,000 shares of common stock to directors and
employees of the Company pursuant to the 2002 and 2003 Plans. These options are
five year options that vested on the date of grant. The related exercise prices
range from $0.01 to $0.015 per share. 11,750,000 of these options were exercised
during the three months ended March 31, 2004 for $35,000 of cash, $33,750 of
compensation and $40,000 of accrued compensation.
A summary of the stock option activity for the three months ended March 31,
2004, is as follows:
Shares Weighted Average
Exercise Price
-------------------- --------------------
Outstanding at December 31, 2003 3,850,500 -
Granted 11,750,000 $ 0.01
Exercised (11,750,000) 0.01
Cancelled - -
-------------------- --------------------
Outstanding at March 31, 2004 3,850,500 $ 0.02
==================== ====================
Excercisable at March 31, 2004 3,850,500 $ 0.02
==================== ====================
The fair value of stock options was determined at the grant dates using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the three months ended March 31, 2004:
13
2004
--------------------
Expected dividend yield -
Risk free interest rate 3.05%
Expected volatility 317%
Expected life .10 years
Weighted average fair value per share $ 0.01
NOTE 8 -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. The Company evaluates performance of each segment based on earnings or
loss from operations. Selected segment information is as follows:
14
Electronics Ethernet
Assembly Technology Total
--------------- ---------------- -------------------
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, 2003
Sales to external customers $ 227,511 $ 42,263 $ 269,774
Intersegment sales 16,301 - 16,301
Segment loss (598,963) (55,776) (654,739)
Segment assets 2,273,392 255,297 2,528,689
Depreciation and amortization 81,846 1,449 83,295
March 31,
-------------------------------------------
Sales 2004 2003
-------------------- -------------------
Total sales for reportable segments $ 654,333 $ 286,075
Elimination of intersegment sales (8,721) (16,301)
-------------------- -------------------
Consolidated net sales $ 645,612 $ 269,774
-------------------- -------------------
March 31,
-------------------------------------------
Total Assets 2004 2003
-------------------- -------------------
Total assets for reportable segments $ 2,624,482 $ 2,528,869
Adjustment for intersegment amounts - -
-------------------- -------------------
Consolidated total assets $ 2,624,482 $ 2,528,869
-------------------- -------------------
NOTE 9 - SUBSEQUENT EVENTS
On April 1, 2004, the Company settled outstanding notes payable with a finance
corporation. The outstanding loan balances and accrued interest at the time of
settlement were $194,221. The balance was settled for $75,000 in cash. A gain on
forgiveness of debt of $119,221 was recorded on this transaction.
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. The Preferred Shares are convertible, at the
15
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.
In connection with 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.
On April 14, 2004 an unrelated party filed a claim against the Company alleging
that the Company stopped paying amounts due under a note entered into in June
1998. The suit seeks $90,500 plus fees and costs. The Company denies all claims
and intends to vigorously defend itself in this matter.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This discussion should be read in conjunction with Managements' Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-KSB/A for the year ended December 31, 2003.
Overview
We provide a mixture of high- and medium volume turnkey manufacturing services
using surface mount technology, ball-grid array assembly, pin-through-hole and
custom injection molded cabling for leading electronics original equipment
manufactures ("OEMs") in the communications, networking, peripherals, gaming,
law enforcement, consumer products, telecommunications, automotive, medical, and
semiconductor industries. Our services include pre-manufacturing, manufacturing,
and post-manufacturing services. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
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.
17
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has agreements with most of its customers that require the customer to
purchase inventory items related to their contracts in the event that the
contracts are cancelled. The market value of related inventory is based upon
those agreements. The Company typically orders inventory on a
customer-by-customer basis. In doing so the Company enters into binding
agreements that the customer will purchase any excess inventory after all orders
are complete. Almost 80% of the total inventory is secured by these agreements.
Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out more funds
than were in our accounts, under existing lines of credit with those banks.
Subsequent to May 2000, when Abacas purchased our line of credit obligation, the
Company no longer had lines of credit with banks, and those loans were no longer
available or made to us. The Company acquired an equity line of credit effective
as of June of 2003, described more fully under "Liquidity and Financing
Arrangements."
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item 6
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Item 5 - Other Information."
Results of Operations - Comparison of Periods Ended March 31, 2004 and 2003
Sales and Cost of Sales
Net sales increased to $645,612 for the three-month period ended March 31, 2004,
as compared to $269,774 during the same period in 2003 for an increase of
139.3%. The first quarter sales increase can be attributed to a 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 significant factor directly related to CirTran is our marketing approach.
Most contract manufacturers approach customers on a job-by-job basis. CirTran
approaches customers on a partner basis. We have developed a program where we
can be more effective when we control the material procurement, purchasing, and
final assembly, providing the customer a final quality product delivered on time
and at a lower market cost. Cost of sales increased by 133.6%, from $185,716
during the three-month period ended March 31, 2003, to $433,759 during the same
period in 2004. Our gross profit margin for the three-month period ended March
31, 2004, was 32.8%, up from 31.2% for the same period in 2003. The increase is
negligible.
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.
18
This manufacturing technique requires us to maintain an inventory of component
parts to meet customer orders. Inventory at March 31, 2004, was $1,483,153, as
compared to $1,247,248 at December 31, 2003. The increase in inventory is
required to facilitate the increase in turnkey sales.
Selling, General and Administrative Expenses
During the quarter ended March 31, 2004, selling, general and administrative
expenses were $545,068 versus $555,554 for the same period in 2003, a 1.9%
decrease. The decrease was very nominal. Selling, general and administrative
expenses as a percentage of sales as of March 31, 2004 were 84.4% as compared to
205.9% during the same period in 2003. This decrease is due in part to an
increase in sales and better management.
Interest Expense
Interest expense for quarter ended March 31, 2004, was $156,562 as compared to
$110,743 for the same period in 2003, an increase of 41.4%. The increase is
primarily due to interest expense related to notes payable to the Equity Line
Investor. As of March 31, 2004, and December 31, 2003, the amount of our
liability for delinquent state and federal payroll taxes and estimated penalties
and interest thereon was $2,114,092 and $2,107,930, respectively.
As a result of the above factors, our overall net loss decreased 32.1% to
$444,587 for the quarter ended March 31, 2004, as compared to $654,739 for the
quarter ended March 31, 2003. This decrease was in part attributed to a
substantial increase in sales with better margins.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $18,585,867 at March 31, 2004, and
$18,141,280 at December 31, 2003. Our net operating loss for the quarter ending
March 31, 2004, was $444,587, compared to $654,739 for the quarter ended March
31, 2003. Our current liabilities exceeded our current assets by $5,112,676 as
of March 31, 2004, and $5,529,244 as of December 31, 2003. The decrease was
mostly attributable to decreasing account payables, and in increase in accounts
receivable and inventory. For the three months ended March 31, 2004 and 2003, we
had negative cash flows from operations of $397,075 and $347,082, respectively.
Cash
We had cash on hand of $88,443 at March 31, 2004, and $54,135 at December 31,
2003.
Net cash used in operating activities was $397,075 for the three months ended
March 31, 2004. During three months ended March 31, 2004, net cash used in
operations was primarily attributable to $444,587 in net losses from operations,
partially offset by increases in accrued liabilities of $253,187. The non-cash
charges were for depreciation and amortization of $61,769 and loan costs and
interest paid from loan proceeds of $76,500.
Net cash used in investing activities during the three months ended March 31,
2004, consisted of equipment purchases of $19,505.
Net cash provided by financing activities was $450,888 during the three months
ended March 31, 2004. Principal sources of cash were proceeds of $451,223 from
notes payable to related parties, proceeds from notes payable of $1,363,500, and
proceeds from the exercise of options to purchase common stock of $35,000. These
proceeds were offset by principal payments on notes payable to related parties
in the amount of $1,185,141.
19
Accounts Receivable
At March 31, 2004, we had receivables of $278,206, net of a reserve for doubtful
accounts of $28,876, as compared to $89,187 at December 31, 2003, net of a
reserve of $28,876. This increase was primarily attributed to sales having
increased compared to the last two months in 2003.
Accounts Payable
Accounts payable were $833,163 at March 31, 2004, as compared to $1,300,597 at
December 31, 2003. This decrease is primarily attributed to conversions of
accounts payable to notes payable in relation to settlements made by Abacas
Ventures.
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather than
providing cash in operations. We had an accumulated deficit of $18,585,867 and a
total stockholders' deficit of $4,503,087 at March 31, 2004. As of March 31,
2004, our monthly operating costs and interest expenses averaged approximately
$265,000 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, 2004, we were in default of notes payable whose principal amount, not
including the amount owing to Abacas Ventures, Inc., was approximately $725,000.
In addition, the principal amount of notes that either mature in 2004 or are
payable on demand was approximately $1,525,000.
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 -- At December 31, 2003, we owed $650,000
to Cornell Capital Partners, LP, pursuant to prior unsecured promissory notes.
During the three months ended March 31, 2004, we borrowed an additional
$1,500,000 from Cornell, pursuant to three additional unsecured promissory
notes. In lieu of interest, we paid fees at closing of 5% of the loan amount to
an affiliate of the lender. These fees have been recorded as interest expense.
The fees were negotiated in each instance and agreed upon by us and by the
lender and its affiliate. The notes were repayable over periods ranging from 88
days to 132 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 March 31, 2004, we directed the repayment of $650,000 of these notes
from proceeds generated under the Amended Equity Line Agreement, discussed
below. At March 31, 2004, the balance owing on these notes was $1,500,000. All
notes were paid when due or before, and at no time did we incur the 24% penalty
interest rate.
20
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.
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
(the "Equity Line Agreement") with Cornell Capital Partners, LP, a private
investor ("Cornell"). We subsequently terminated the Equity Line Agreement, and
on April 8, 2003, we entered into an amended equity line agreement (the "Amended
Equity Line Agreement") with Cornell. Under the Amended 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 Amended 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 three months ended March 31, 2004, we drew an aggregate amount of
$650,000 under the Equity Line Agreement, pursuant to draws on the equity line,
net of fees of $26,000, and issued a total of 30,075,515 shares of common stock
to Cornell under the Amended Equity Line Agreement. At our direction, Cornell
retained the proceeds of the draws under the Amended Equity Line Agreement and
applied them as payments on the notes to Cornell, discussed above.
Pursuant to the Amended 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 three months ended
March 31, 2004 were $60,000. These fees were classified as deferred offering
costs at March 31, 2004. These deferred offering costs were offset against
additional paid-in capital as shares were issued under the Amended Equity Line
Agreement subsequent to March 31, 2004.
Subsequent to March 31, 2004, we drew an aggregate of $500,000 under the Amended
Equity Line Agreement, net of deferred offering costs of $20,000 which were
included in the deferred offering costs at March 31, 2004, and issued 7,763,601
shares of common stock to Cornell under the Amended Equity Line Agreement. At
our direction, Cornell applied the proceeds of the draws under the Amended
Equity Line Agreement as payments on the notes to Cornell, discussed above.
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.
21
Item 3. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)) as of
the end of the period covered by this report (the "Evaluation Date"), have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls, or, to the Company's knowledge, in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2004, the Company had accrued liabilities in the amount
of $2,114,092 for delinquent payroll taxes, including interest estimated at
$415,244 and penalties estimated at $230,927. Of this amount, approximately
$316,828 was due the State of Utah. During the first quarter of 2003, no
payments were made to the State of Utah. During the third and fourth quarter of
2003, partial payments were made to the State of Utah. Approximately $1,767,253
was owed to the Internal Revenue Service as of December 31, 2003. 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, which has gone through the
initial stages of consideration by the IRS and will now be assigned to an IRS
offer specialist for consideration. 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 over an extended period of time, yet
to be determined. Approximately $10,939 was owed to the State of Colorado as of
March 31, 2004.
We (as successor to Circuit Technology, Inc.) were a defendant in an
action in El Paso County, Colorado District Court, brought by Sunborne XII, LLC,
a Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Effective January 18, 2002, we entered
into a settlement agreement with Sunborne with respect to the above-described
litigation. The settlement agreement required us to pay Sunborne the sum of
$250,000. Of this amount, $25,000 was paid upon execution of the agreement, and
the balance of $225,000, together with interest at 8% per annum, was payable by
July 18, 2002. As security for payment of the balance, we executed and delivered
to Sunborne a Confession of Judgment and also issued to Sunborne 3,000,000
shares of our common stock, which are held in escrow and have been treated as
treasury stock recorded at no cost. Because, 75% of the balance owing under the
agreement was not paid by May 18, 2002, we were required to prepare and file a
registration statement to register the resale of the escrowed shares.
As of May 16, 2003, the Company was in default of its obligations under
the settlement agreement with Sunborne, i.e., the total payment due thereunder
had not been made, a registration statement with respect to the escrowed shares
was not filed, and the Company had not replaced the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
22
Sunborne filed a foreign judgment in Salt Lake City and proceeded with execution
thereon. The Company is continuing to negotiate with Sunborne in an attempt to
settle the remaining obligation.
Pursuant to a Termination of Sublease Agreement dated as of May 22,
2002 among the Company, Sunborne and other parties, the sublease agreement that
was the subject of the Colorado litigation with Sunborne was terminated and a
payment of approximately $109,000 was credited against the amount owed by the
Company to Sunborne under the settlement agreement. Sunborne has filed a claim
that this amount was to be an additional rent expense rather than a payment on
the note payable. The Company disputes this claim and intends to vigorously
defend the action.
We also assumed certain liabilities of Circuit Technology, Inc. in
connection with our transactions with that entity in the year 2000, and as a
result we are defendant in a number of legal actions involving nonpayment of
vendors for goods and services rendered. We have accrued these payables and have
negotiated settlements with respect to some of the liabilities, including those
detailed below, and are currently negotiating settlements with other vendors.
Advanced Component Labs adv. Circuit Technology Corporation Civil No.
990912318, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against the Company on or about December
8, 1999, under allegations that the Company owed $44,269.43 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Claims are asserted for breach of implied contract and unjust enrichment. The
parties are presently negotiating a settlement agreement.
Contact East has notified the Company that it believes it has a claim
against the Company in the amount of $32,129.89 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
C/S Utilities has notified the Company that it believes it has a claim
against the Company in the amount of $32,472 regarding utilities services. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
Future Electronics Corp v. Circuit Technology Corporation, Civil No.
000900296, Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about January 12, 2000, under allegations
that the Company owed $646,283.96 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims were asserted for breach
of contract, fraud, negligent misrepresentation, unjust enrichment, account
stated and dishonored instruments. The Company answered the complaint, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Partial Summary Judgment was entered in the amount of $646,783.96
as to certain claims against the Company. Negotiations for settlement resulted
in an agreement for settlement of all claims of Future against the Company
subject to performance by the Company under the agreement. The Company also
issued to Future 352,070 shares of its restricted common stock. The Company did
not perform its obligations under the settlement agreement, and a Confession of
Judgment was entered in January 2002 in the amount of $519,052.00. The Company
disputes the amount of the judgment entered. No collection efforts have been
made. The Company is negotiating settlement.
Christine Hindenes v. Racore Network, Inc., and CirTran Corporation,
Superior Court of California, County of Santa Clara, Civil No. CV811051. Ms.
Hindenes brought suit against the Company and Racore for unpaid wages seeking
$40,516.44. The parties reached a settlement agreement under which the Company
agreed to pay $10,000 in monthly installments of $1,000. The parties also agreed
to a confession of judgment in the amount of $52,961, less payments made, which
23
could be entered if the Company defaulted under its obligations under the
settlement agreement. The Company made the required payments through March,
2004. The Company and Ms. Hindenes have entered into a settlement agreement, in
connection with which Ms. Hindenes has agreed to dismiss the lawsuit with
prejudice upon payment by the Company. As of the date of this report, the
Company had tendered payment but the suit had not been dismissed.
Molex has notified the Company that it believes it has a claim against
the Company in the amount of $90,000.00 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company is
reviewing its records in an effort to confirm the validity of the claims and has
been involved in settlement negotiations.
Signal Transformer Co., Inc., has notified the Company that it believes
it has a claim against the Company in the amount of $38,989 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Negotiations for settlement of this claim have resulted in an agreement in
principal whereby the Company will arrange for a cash payment to this creditor.
The parties are presently negotiating the terms of the settlement documents.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditor's claims will be settled nor that the terms will
be favorable to the Company.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No.
00L14505, Circuit Court of Cook County Department, Law Division, State of
Illinois. Suit was brought against the Company on or about December 23, 1999,
under allegations that the Company owed $213,717.70 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for breach of contract, unjust enrichment and account stated. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Judgment was subsequently entered
against the Company on May 29, 2002. The parties are presently negotiating the
terms of settlement documents, pursuant to which the Company will facilitate a
payment to this creditor a cash payment and issue a promissory note and shares
of its restricted common stock in satisfaction of the creditors' claims.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditors claims will be settled nor that the terms will
be favorable to the Company.
University of Utah v. CirTran Corporation, Third District Court, Salt
Lake County, Civil No. 020900494 . The University of Utah filed a claim against
the Company on January 18, 2002, seeking $37,473.10 in damages. Summary judgment
was entered against the Company. The Company entered into a settlement agreement
on September 16, 2003, under which the Company is required to make monthly
payments of $5,185.47. The total settlement amount under the agreement is
$62,225.64. The Company is making payments pursuant to the settlement agreement.
Volt Temporary Services has notified the Company that it believes it
has a claim against the Company in the amount of $30,986 for the cost of goods
or services provided to the Company for the Company's use and benefit. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
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 subsequently renegotiated a settlement with Zions Bank
under which the Company will pay approximately $12,000 per month beginning in
January 2003.
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
24
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
under the settlement agreement, and judgment was entered against the Company. As
of March 24, 2004, the Company is not aware of any collection efforts.
Cardio Pulmonary Technologies, Inc., vs. Patrick M. Volz, Peripheral
Systems, Inc., and CirTran Corporation, Civil No. 03090501B, Third Judicial
District Court, Salt Lake County, State of Utah. On April 4, 2003, suit was
brought against the Company and two other named defendants by plaintiff Cardio
Pulmonary Technologies ("CPT"), alleging a breach of contract between CPT and
the other two named defendants. Plaintiff's claims against the Company arise out
of an alleged breach of an alleged agreement between the Company and Peripheral
Systems, Inc. The Company has answered the Complaint, and intends to defend
vigorously against these claims. The parties are also attempting to negotiate
settlement.
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 Company is also currently
conducting settlement negotiations.
P R Newswire Association, Inc., v. CirTran, Superior Court of New
Jersey, DC-000359-04. On March 9, 2004, a judgment was entered against CirTran
in the amount of $5,106.28, with fees of $171.13. The Parties are presently
negotiating settlement of this matter.
KPP Family Limited Partnership v. Circuit Technology, Inc., Case No.
040907278, Third Judicial District Court, Salt Lake Department, Salt Lake
County, State of Utah. Suit was brought against Circuit Technology alleging that
Circuit had stopped paying amounts due under a note entered into in June 1998.
The suit seeks $90,500 plus fees and costs. The parties are negotiating final
terms of a settlement agreement to resolve this matter.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
Pursuant to the Amended Equity Line of Credit Agreement (discussed above), the
Company is entitled to put to the Equity Line Investor, in lieu of repayment of
amounts drawn on the Equity Line, shares of the Company's common stock. Although
the Company has filed a registration statement to register the resale by the
Equity Line Investor of the shares put to it by the Company, the issuances of
shares to the Company are 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
have been and 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. Through May 19, 2004, the company has
issued 102,092,624 shares of common stock to the Equity Line Investor in
connection with draws on the Equity Line.
25
Item 5. Other Information
Broadata Manufacturing Agreement
On April 13, 2004, the Company entered into a stock purchase agreement
with Broadata Communications, Inc., a California corporation ("Broadata") under
which the Company purchased 400,000 shares of Broadata Series B Preferred Stock
(the "Broadata Preferred Shares") for an aggregate purchase price of $300,000.
The Broadata Preferred Shares are convertible, at the Company's option, into an
equivalent number of shares of Broadata common stock, subject to adjustment. The
Broadata Preferred Shares are not redeemable by Broadata. As a holder of the
Broadata Preferred Shares, the Company has the right to vote the number of
shares of Broadata common stock into which the Broadata Preferred Shares are
convertible at the time of the vote.
The Company and Broadata also entered into a Preferred Manufacturing
Agreement. Under this agreement, the Company will perform exclusive "turn-key"
manufacturing services handling most of Broadata's manufacturing operations from
material procurement to complete finished box-build of all of Broadata's
products. The initial term of the agreement is three years, continuing month to
month thereafter unless terminated by either party.
Abacas Ventures
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit
from the lender. During 2002, the Company entered into agreements whereby the
Company has issued common stock to certain principals of Abacas in exchange 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 to
cure defaults with lenders through forbearance agreements that the Company will
be able to service. During the three months ended March 31, 2004, and the year
ended December 31, 2003, the Company successfully converted trade payables,
notes payable, and accrued interest of approximately $827,521 and $2,986,
respectively, into notes. Accrued interest of $17,666 associated with the notes
payable was not converted to the note payable with Abacus; therefore, a gain on
forgiveness of debt was recorded for $17,666 for the three months ended March
31, 2004. The Company intends to continue to pursue this type of debt conversion
going forward with other creditors. As discussed in Note 4, the Company has
entered into an equity line of credit agreement with a private investor.
Realization of any proceeds under the equity line of credit is not assured.
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 March 31, 2004:
(i) None.
Exhibits:
10.1 Preferred Manufacturing Agreement between the Company and Broadata
Communications, Inc., dated as of April 13, 2004 (filed as an exhibit
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2004, filed with the Commission on May 21, 2004)
31 Certification
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
26
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: August 17, 2004 By: /s/ Iehab Hawatmeh
----------------------------------
Iehab J. Hawatmeh
President and Chief Financial Officer