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 June 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 August
15, 2002: 209,272,191.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X___
Table of Contents
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 June 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 September 3, 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 June 30, 2002 (unaudited) and 3
December 31, 2001
Statements of Operations for the Six Months ended 4
June 30, 2002 (unaudited) and 2001 (unaudited)
Statements of Cash Flows for the Six Months ended 5
June 30, 2002 (unaudited) and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
(unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation 11
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
PART I. FINANCIAL INFORMATION
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
---------------------- -----------------------
2002 2001
---------------------- -----------------------
ASSETS
Current assets
Cash and cash equivalents $ 500 $ 499
Trade accounts receivable, net of allowance for doubtful accounts
accounts of $32,317 at June 30, 2002 and $66,316 at
December 31, 2001 843,733 369,250
Inventories 1,749,823 1,773,888
Other 100,561 97,037
---------------------- -----------------------
Total current assets 2,694,617 2,240,674
Property and equipment, at cost, net 1,079,444 1,333,925
Other assets, net 35,364 10,887
---------------------- -----------------------
Total Assets $ 3,809,425 $ 3,585,486
====================== =======================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 128,340 $ 159,964
Accounts payable 1,799,507 2,141,290
Accrued liabilities 3,149,756 3,071,191
Notes payable to stockholders - 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 1,155,561 863,650
---------------------- -----------------------
Total current liabilities 7,780,561 10,072,933
---------------------- -----------------------
Long-Term Liabilities
Long-term notes payable, less current maturities 212,456 447,155
Capital lease obligations, less current maturities - 7,775
---------------------- -----------------------
Total long-term liabilities 212,456 454,930
---------------------- -----------------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares; issued and
outstanding 209,272,191 at June 30, 2002 before 3,000,000 shares held in
treasury at no cost, and
160,951,005 at December 31, 2001 209,272 160,951
Additional paid-in capital 9,412,933 5,977,164
Accumulated deficit (13,805,797) (13,080,492)
---------------------- -----------------------
Total Stockholders' Deficit (4,183,592) (6,942,377)
---------------------- -----------------------
Total Liabilities and Stockholders' Deficit $ 3,809,425 $ 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 Six Months Ended,
June 30, June 30,
--------------------------------------- ---------------------------------------
2002 2001 2002 2001
--------------------- ---------------- --------------------- -----------------
Net Sales $ 972,018 $ 420,480 $ 1,613,348 $ 1,070,965
Cost of Sales 957,395 492,499 1,376,511 1,295,082
--------------------- ---------------- --------------------- -----------------
Gross Profit 14,623 (72,019) 236,837 (224,117)
Selling, general and administrative expenses 362,982 441,369 883,590 844,668
--------------------- ---------------- --------------------- -----------------
Loss From Operations (348,359) (513,388) (646,753) (1,068,785)
--------------------- ---------------- --------------------- -----------------
Other income (expense)
Interest (103,864) (298,286) (240,744) (543,507)
Other, net 152,675 4,100 162,192 4,100
--------------------- ---------------- --------------------- -----------------
48,811 (294,186) (78,552) (539,407)
--------------------- ---------------- --------------------- -----------------
Net Loss $ (299,548) $ (807,574) $ (725,305) $ (1,608,192)
===================== ================ ===================== =================
Basic and diluted loss per common share $ (0.00) $ (0.01) $ (0.00) $ (0.01)
===================== ================ ===================== =================
Basic and diluted weighted-average
common shares outstanding 209,272,191 156,301,005 205,948,269 156,301,005
===================== ================ ===================== =================
See accompanying notes to unaudited
condensed consolidated financial statements.
4
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended,
June 30,
----------------------------------------------
2002 2001
----------------------- ---------------------
Cash flows from operating activities
Net loss $ (725,305) $ (1,608,192)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 256,133 234,065
Provision for loss on trade receivables (138) 29,101
Settlement of litigation (25,000) -
Payments made on behalf of the Company
as a settlement of a sublease agreement (152,500)
Changes in assets and liabilities:
Trade accounts receivable (474,345) 350,815
Inventories 24,065 37,614
Other assets (21,001) (7,445)
Accounts payable (45,501) 344,857
Accrued liabilities 244,940 648,346
----------------------- ---------------------
Total adjustments (170,691) 1,637,353
----------------------- ---------------------
Net cash used in operating activities (918,652) 29,161
----------------------- ---------------------
Cash flows from investing activities
Purchase of property and equipment (1,652) (1,844)
----------------------- ---------------------
Net cash used in investing activities (1,652) (1,844)
----------------------- ---------------------
Cash flows from financing activities
Increase (decrease) in checks written in excess of cash in bank (31,624) 67,965
Payments on notes payable to stockholders (140,125) -
Principal payments on long-term notes payable (297,946) (103,923)
Principal payments on capital leases (2,000)
Proceeds from long-term notes payable 655,000 -
Proceeds from exercise of options to purchase common stock 235,000 -
Proceeds from issuance of common stock 500,000 -
----------------------- ---------------------
Net cash provided by financing activities 920,305 (37,958)
----------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 1 (10,641)
Cash and cash equivalents at beginning of period 499 11,068
----------------------- ---------------------
Cash and cash equivalents at end of period $ 500 $ 427
======================= =====================
See accompanying notes to unaudited condensed
consolidated financial statements.
5
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Six Months Ended,
June 30,
----------------------------------------------
2002 2001
----------------------- ---------------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 112,905 $ 35,572
Noncash investing and financing activities
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 -
Common stock issued to escrow 225,000 -
Legal fees to be paid on behalf of lender 120,000 -
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 generally
accepted accounting principles. 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 six months
ended June 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 $725,305 and $2,933,084 for the six
months ended June 30, 2002 and the year ended December 31, 2001, respectively.
As of June 30, 2002 and December 31, 2001, the Company had an accumulated
deficit of $13,805,797 and $13,080,492, respectively and a total stockholders'
deficit of $4,183,592 and $6,942,377, respectively. In addition, the Company
used, rather than provided, cash in its operations in the amounts of $918,652
and $288,724 for the six months ended June 30, 2002 and the year ended December
31, 2001, 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 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 six months ended June 30, 2002, the Company has entered into
an agreement whereby the Company has 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
this type of debt conversion going forward
7
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. The balance due to stockholders at June 30, 2002 and December 31,
2001 was $0 and $1,390,125, respectively. Interest associated with amounts due
to stockholders is accrued at 10 percent, was $210,734 and $205,402 at June 30,
2002 and December 31, 2001, respectively, and is included in accrued
liabilities. These notes are due on demand.
During the six months ended June 30, 2002, Abacus Ventures 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 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
Ventures. 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 six months ended June 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 Ventures between the note payable and the bridge loan was
$1,547,397 as of June 30, 2002.
For the six months ended June 30, 2002, the Company recorded $116,278 of accrued
interest and paid $7,089 of interest on the Abacus loans. Total accrued interest
due to Abacus at June 30, 2002 was $490,116.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation - The Company settled the 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 August 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 is required to prepare and file with
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. Because the remaining balance had
8
not been paid by August 18, 2002 and a registration statement with respect to
the escrowed shares had not been declared effective, the plaintiff is entitled
to file the Confession of Judgment and proceed 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. Also, $43,375
was paid to the Company's legal counsel, of which $36,375 was for services
rendered and $7,000 was as a retainer for future services.
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 is the defendant in numerous 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, 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.
NOTE 5 - STOCKHOLDER'S 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 date 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. There were no employee options outstanding at June 30, 2002.
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
9
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:
Electronics Ethernet
June 30, 2002 Assembly Technology Total
------------- ---------------- ------------- -------------
Sales to external customers $ 1,225,225 $ 388,123 $ 1,613,348
Intersegment sales 161,553 -- 161,553
Segment loss (647,307) (77,998) (725,305)
Segment assets 3,478,432 330,993 3,809,425
Depreciation and amortization 245,663 10,470 256,133
June 30, 2001
Sales to external customers $ 687,523 $ 383,442 $ 1,070,965
Intersegment sales 262,832 -- 262,832
Segment loss (1,616,209) 8,017 (1,608,192)
Segment assets 3,559,900 476,454 4,036,354
Depreciation and amortization 222,543 11,522 234,065
June 30,
Sales 2002 2001
----- --------------- ---------------
Total sales for reportable segments $ 1,774,901 $ 1,333,797
Elimination of intersegment sales (161,553) (262,832)
--------------- ---------------
Consolidated net sales $ 1,613,348 $ 1,070,965
=============== ===============
Net Loss
Net loss for reportable segments $ (725,305) $ (1,608,192)
Elimination of intersegment losses -- --
--------------- ---------------
$ (725,305) $ (1,608,192)
=============== ===============
All intersegment sales are recorded at the carrying value of the goods. The
carrying value includes materials, labor and overhead. Therefore, the
intersegment sales result in no gain or loss.
June 30, December 31,
Total Assets 2002 2001
------------ --------------- ---------------
Total assets for reportable segments $ 3,809,425 $ 3,587,286
Adjustment for intersegment amounts -- (1,800)
--------------- ---------------
Consolidated total assets $ 3,809,425 $ 3,585,486
=============== ===============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 changed
materially 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 June 30, 2002 increased 131% to
$972,018, as compared to net sales of $420,480 during the same three-month
period in 2001. Net sales for the six-month period ended June 30, 2002 increased
50.7% to $1,613,348, from $1,070,965 during the same period in 2001.
Cost of sales during the three-month period ended June 30, 2002 was $957,395, as
compared to $492,499 during the same period in 2001. Cost of sales during the
six-month period ended June 30, 2002 was $1,376,511, as compared to $1,295,082
during the same six-month period in 2001. Our gross profit margin for the
three-month period ended June 30, 2002 was 1.5%, as compared to (17.1)% during
the same three-month period in 2001. Our gross profit margin for the six-month
period ended June 30, 2002 was 14.7%, as compared to (20.9)% during the same
six-month period in 2001. During the three-month period ended June 30, 2002,
work-in-progress inventory with a high overhead allocation was completed and
sold, causing a decrease in the gross profit margin for the quarter.
Selling, General and Administrative Expenses
During the three-month period ended June 30, 2002, selling, general and
administrative expenses were $362,982, as compared to $441,369 for the same
period in 2001, representing an 18% decrease. During the six-month period ended
June 30, 2002, selling, general and administrative expenses were $883,590, as
compared to $844,668, a 4.4% decrease. 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 from 78% for the six months ended
June 30, 2001 to 55% for the six months ended June 30, 2002.
11
Interest Expense
Interest expense for the three-month period ended June 30, 2002 was $103,864,
compared to $298,286 for the same period in 2001, a reduction of $194,422, or
65%. Interest expense for the six-month period ended June 30, 2002 was $240,744,
compared to $543,507 during the same period in 2001, a reduction of $302,763, or
55.7%. 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
June 30, 2002, the amount of our liability for delinquent state and federal
payroll taxes was $2,073,686. See "Part II - Item 1 - Legal Proceedings."
As a result of the above factors, our overall net loss decreased 54.9% to
$725,305 for the six-month period ended June 30, 2002, from $1,608,192 for the
same period in 2001. Our net loss for the three-month period ended June 30, 2002
decreased by 62.9% to 299,548, as compared to a net loss of $807,574 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 six-month period ending June 30,
2002 was $725,305, and our net loss from operations for the year ending December
31, 2001 was $2,933,084. Our accumulated deficit was $13,805,797 at June 30,
2002 and was $13,080,492 at December 31, 2001. Our current liabilities exceeded
our current assets by $5,085,944 at June 30, 2002 and by $7,832,259 as of
December 31, 2001. We recorded negative cash flows from operations for the
six-month period ending June 30, 2002 and the year ended December 31, 2001 of
$918,652 and $288,724, respectively.
Cash
On June 3, 2002, we had $500 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 $128,340 at June 30, 2002.
Net cash used in operating activities was $918,652 for the period ended June 30,
2002, compared to $29,161 provided by operations for the six months ended June
30, 2001. During the six months ended June 30, 2002, net cash used by operations
was primarily attributable to our net loss of $747,961, increases in trade
accounts receivable of 474,345, and payments of $177,500 made in settlement of
litigation, offset by a decrease in accrued liabilities of $267,596 and non-cash
charges of $256,133 for depreciation and amortization.
Net cash used in investing activities during the six months ended June 31, 2002
and 2001, consisted of equipment purchases of $1,652 and $1,844, respectively.
Net cash provided by financing activities during the six-month period ended June
30, 2002 was $920,305. Cash proceeds of $500,000 from the issuance of restricted
common stock, $235,000 from the issuance of stock upon exercise of stock
options, and $655,000 from long-term notes payable were offset by principal
payments of $297,946 on long-term notes payable, $140,125 on notes payable to
stockholders and a $31,624 decrease in the dollar amount of checks written in
excess of cash in bank.
Noncash investing and financing activities during the period ended June 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 on
behalf of Abacus Ventures, Inc. ("Abacus"). See "Liquidity and Financing
Arrangements," below.
Accounts Receivable
By June 30, 2002, accounts receivable had increased to $843,733 (net of an
allowance for doubtful accounts of $32,317), as compared to accounts receivable
12
of $663,681 at March 31, 2002 (net of an allowance for doubtful accounts of
$66,178) and of $369,250 at December 31, 2002 (net of an allowance for doubtful
accounts of $66,316). This significant increase in accounts receivable is
reflective of our increase in sales during the first six months of 2002 and the
timing of periods of increased sales within the two quarters.
Accounts Payable
Accounts payable were $1,799,507 at June 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, offset by increases in trade payables incurred in
conjunction with our increased sales.
Liquidity and Financing Arrangements
We sustained losses from operations of $646,753 and $1,068,785 for the six-month
periods ended June 30, 2002 and 2001, respectively and losses from operations of
$348,359 and $513,388 for the three-month periods ending June 30, 2002 and 2001,
respectively. We had accumulated deficits of $13,828,453 and $13,080,492 at June
30, 2002 and December 31, 2001, respectively, and total stockholders' deficits
of $4,206,248 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 June 30, 2002, this amount had decreased to
approximately $187,000 per month.
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, 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 to exchange 19,987,853 shares of our common stock for $1,499,090
in principal amount of this debt.
In January 2002, 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 various stockholders. In addition, in connection with these
shares-for-debt transactions, we issued a further 6,666,667 shares of restricted
common stock to the Saliba Private Annuity Trust and the Saliba Living Trust,
principals of Abacus, in exchange for $500,000 cash.
During the six months of ended June 30, 2002, Abacus completed negotiations with
several of our vendors, whereby Abacus purchased various past due amounts for
goods and services provided by the vendors, as well as capital leases. The total
of these obligations was $345,263. We recorded this transaction as a $345,263
increase to the note payable owed to Abacus, pursuant to the terms of our
agreement with them. 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.
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Additionally, we have entered into a bridge loan arrangement with Abacus during
the six-month period ending June 30, 2002. This arrangement allows us to request
advances 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 of such advances cannot exceed $600,000 at any point in time.
During the six months ended June 30, 2002, we were advanced $655,000 by Abacus
pursuant to this arrangement and made cash repayments of $156,258, leaving an
outstanding principal balance owing in respect of the advances of $498,742 as of
June 30, 2002. The total principal amount owed to Abacus as of June 30, 2002 in
respect of the note payable and the bridge loan arrangement was $1,547,397.
We continue to work with vendors in an effort to convert other trade payables
into long-term notes and common stock and to cure defaults with lenders with
forbearance agreements that we are able to service. 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 Ventures, Inc.,
exceeded $666,000. In addition, the principal amount of notes that either mature
in 2002 or are payable on demand exceeded $165,000.
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 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 pay the
debt and secure 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 serve to 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. There can be no assurance,
however, that we will ultimately be successful in obtaining more debt and/or
equity financing 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.
Forward-looking statements
All statements made herein, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Delinquent Payroll Tax Liability
As of December 31, 2001, we had accrued liabilities in the amount of $1,982,445
for delinquent payroll taxes, including interest estimated at $215,268 and
penalties estimated at $242,989. Of this amount, approximately $257,510 was due
the State of Utah. Concerning the amount owed the State of Utah, during the
first quarter of 2002, we negotiated a payment schedule of $4,000 per month,
which did not provide for any forgiveness of any taxes, penalties or interest.
Approximately $1,713,996 is owed to the Internal Revenue Service. During the
first quarter of 2002, we negotiated a payment schedule with respect to this
amount, pursuant to which we are currently making monthly payments of $25,000.
Monthly payments were made during each of the three months in the second quarter
according to the agreed-upon payment schedule. As of June 30, 2002, a total of
$247,556 was owed to the State of Utah and a total of $1,815,191 was owed to the
Internal Revenue Service.
Sunborne Litigation
We (as successor to Circuit Technology, Inc.) were a defendant in an action in
El Paso County, Colorado District Court, brought by Sunborne XII, LLC, a
Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Our liability in this action was
originally estimated to range up to $2.5 million, and we subsequently filed a
counter suit in the same court against Sunborne in an amount exceeding $500,000
for missing equipment. Effective January 18, 2002, we entered into a settlement
agreement with Sunborne with respect to the above-described litigation. The
settlement agreement required us to pay Sunborne the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the agreement, and the balance of
$225,000, together with interest at 8% per annum, was payable by July 18, 2002.
As security for payment of the balance, we executed and delivered to Sunborne a
Confession of Judgment and also issued to Sunborne 3,000,000 shares of our
common stock, to be 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 our 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.
Pursuant to a Termination of Sublease Agreement dated as of May 22, 2002 among
us, 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 us to Sunborne under our
settlement agreement with them.
As of August 18, 2002, we were in default of our obligations under our
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 we did not replace the escrowed shares with registered,
free-trading shares as per the terms of the agreement. Accordingly, Sunborne is
15
entitled to file the Confession of Judgment and proceed with execution thereon.
We are currently negotiating with Sunborne in an attempt to settle our remaining
obligation under the settlement agreement.
Osicom Settlement
On July 31, 2002, we entered into a Mutual Release and Settlement Agreement (the
"Osicom Agreement") with Osicom Technologies, Inc and Entrada Networks, Inc. In
January 2001, we had filed a breach of contract action against Osicom, one of
our 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, we have agreed to dismiss our claims against Osicom and Entrada in
consideration for a series of six payments by Entrada to us in August-October
2002 that total $265,000. Of this amount, approximately $158,000 is allocated to
the purchase of inventory from us and the balance is allocated to amounts owed
to us by Osicom and/or Entrada.
Item 2. Changes in Securities
None.
Item 5. Other Information
Effective July 15, 2002, the Company's common shares were approved for trading
on the National Association of Securities Dealers' Over-the-Counter Bulletin
Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K: The following reports on Form 8-K/A were
filed by us during the three-month period ended June 30, 2002:
(i) Form 8-K/A filed April 9, 2002 with respect to a change in our
certifying accountant;
(ii) Form 8-K/A filed April 26, 2002 with respect to a change in our
certifying accountant; and
(iii)Form 8-K/A filed May 15, 2002 with respect to a change in our
certifying accountant.
(b) Exhibits:
10.1 Termination of Sublease Agreement dated as of May 22, 2002 among
Sunborne XII, LLC, CirTran Corporation et al.
10.2 Mutual Release and Settlement Agreement dated July 31, 2002 among
CirTran Corporation, Osicom Technologies, Inc., Entrada Networks, Inc.
and Entrada Networks, A.J., 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
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SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CIRTRAN CORPORATION
Date: December 23, 2002 By: /s/ Iehab J. Hawatmeh
Iehab J. Hawatmeh, President