UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 0-26059
CIRTRAN CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
---------------------------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
---------------------- ------
Address of Principal Executive Offices) (Zip Code)
(801) 963-5112
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ----
The number of shares outstanding of the registrant's common stock as of November
6, 2003: 310,104,453.
Transitional Small Business Disclosure Format (check one): Yes ______ NO X
--
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Balance Sheets as of September 30, 2003, (unaudited) and 3
December 31, 2002
Statements of Operations for the Three and Nine Months ended 4
September 30, 2003, (unaudited) and 2002 (unaudited)
Statements of Cash Flows for the Nine Months ended 5
September 30, 2003, (unaudited) and 2002 (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
CONSOLIDATED BANANCE SHEETS
September 30, December 31,
2003 2002
-------------------------------------------------------- -------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 27,934 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $37,840 and $37,037, respectively 60,164 37,464
Inventory 1,492,002 1,550,553
Other 104,832 100,189
-------------------------------------------------------- -------------- -------------
Total Current Assets 1,684,932 1,688,706
-------------------------------------------------------- -------------- -------------
Property and Equipment, Net 639,331 865,898
Other Assets, Net 5,390 12,236
Deferred Offering Costs - 13,475
-------------------------------------------------------- -------------- -------------
Total Assets $ 2,329,653 $ 2,580,315
-------------------------------------------------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 19,531
Accounts payable 1,414,941 1,359,723
Accrued liabilities 3,450,949 3,030,970
Current maturities of long-term notes payable 1,632,839 1,059,987
Notes payable to stockholders 42,215 20,376
Notes payable to related parties 788,742 688,742
-------------------------------------------------------- -------------- -------------
Total Current Liabilities 7,329,686 6,179,329
-------------------------------------------------------- -------------- -------------
Long-Term Notes Payable, Less Current Maturities 47,371 295,083
-------------------------------------------------------- -------------- -------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000
shares; issued and outstanding shares: 296,231,317 and
247,184,691 net of 3,000,000 shares held in treasury
at no cost at September 30, 2003 and December 31, 2002,
respectively 296,232 247,185
Additional paid-in capital 11,827,741 11,089,020
Accumulated deficit (17,171,377) (15,230,302)
-------------------------------------------------------- -------------- -------------
Total Stockholders' Deficit (5,047,404) (3,894,097)
-------------------------------------------------------- -------------- -------------
Total Liabilities and Stockholders' Deficit $ 2,329,653 $ 2,580,315
-------------------------------------------------------- -------------- -------------
See accompanying notes to condensed consolidated
financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------------- ---------------------------------------
2003 2002 2003 2002
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Net Sales $ 267,494 $ 367,755 $ 954,030 $ 1,981,103
Cost of Sales 180,660 358,869 637,587 1,735,380
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Gross Profit 86,834 8,886 316,443 245,723
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Operating Expenses
Selling, general and administrative expenses 596,238 516,650 1,735,837 1,400,240
Non-cash employee compensation expense 25,000 25,000 97,500 25,000
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Total Operating Expenses 621,238 541,650 1,833,337 1,425,240
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Loss From Operations (534,404) (532,764) (1,516,894) (1,179,517)
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Other Income (Expense)
Interest (128,178) (41,865) (361,905) (282,609)
Settlement expense (62,226) - (62,226) -
Other, net (50) 97 (50) 162,289
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Total Other Expense, Net (190,454) (41,768) (424,181) (120,320)
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Net Loss $ (724,858) $ (574,532) $ (1,941,075) $ (1,299,837)
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.01)
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
Basic and diluted weighted-average
common shares outstanding 278,797,940 209,652,626 262,142,159 205,907,734
--------------------------------------------------- --------------------- ----------------- ----------------------- ---------------
See accompanying notes to condensed consolidated
financial statements.
F-4
IRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2003 2002
--------------------- -------------------
Cash flows from operating activities
Net loss $ (1,941,075) $ (1,299,837)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 232,094 368,376
Provision for loss on trade receivables 803 (33,999)
Cash paid for settlement of litigation - (25,000)
Non-cash compensation expense 97,500 25,000
Amortization of loan costs 77,650 -
Note payable issued as settlement of litigation expense 62,226 -
Stock issued for consulting expense 1,996 -
Payments made on behalf of the Company
as settlement of a sublease agreement - (152,500)
Changes in assets and liabilities:
Trade accounts receivable (23,503) 244,442
Inventories 58,551 149,345
Prepaid expenses and other assets 2,203 (8,739)
Accounts payable 102,779 (547,727)
Accrued liabilities 605,184 366,602
--------------------- -------------------
Total adjustments 1,217,483 385,800
--------------------- -------------------
Net cash used in operating activities (723,592) (914,037)
--------------------- -------------------
Cash flows from investing activities
Purchase of property and equipment (5,527) (2,822)
--------------------- -------------------
Net cash used in investing activities (5,527) (2,822)
--------------------- -------------------
Cash flows from financing activities
Decrease in checks written in excess of cash in bank (19,531) (36,696)
Proceeds from notes payable to stockholders 262,504 2,465
Payments on notes payable to stockholders (240,665) (140,125)
Proceeds from notes payable, net of cash paid for offering costs 531,597 655,000
Principal payments on notes payable (139,852) (348,402)
Proceeds from notes payable to related parties 100,000 -
Proceeds from exercise of options and warrants to purchase
common stock 262,500 285,000
Proceeds from issuance of common stock - 500,000
--------------------- -------------------
Net cash provided by financing activities 756,553 917,242
--------------------- -------------------
Net increase in cash and cash equivalents 27,434 383
Cash and cash equivalents at beginning of year 500 499
--------------------- -------------------
Cash and cash equivalents at end of year $ 27,934 $ 882
--------------------- -------------------
See accompanying notes to condensed consolidated
financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine Months Ended September 30, 2003 2002
--------------------------------------------------------------------------------- ----------------- -----------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 74,204 $ 186,311
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 47,561 $ 345,263
Common stock issued for notes payable to stockholders $ - $ 1,250,000
Common stock issued upon conversion of notes payable $ 284,000 $ 1,499,090
Legal fees to be paid on behalf of lender $ - $ 120,000
Accrued interest converted to notes payable $ 45,205 $ 41,301
Exercise of options for subscription receivable $ - $ 25,000
Stock options exercised for settlement of accrued interest
and accrued compensation $ 130,000 $ -
Common stock issued for accrued compensation $ 10,000 $ -
Loan costs included in notes payable $ 77,650 $ -
See accompanying notes to condensed consolidated
financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiary (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
included in the Company's December 31, 2002 Annual Report on Form 10-KSB. In
particular, the Company's significant accounting principles were presented as
Note 1 to the consolidated financial statements in that report. In the opinion
of management, all adjustments necessary for a fair presentation have been
included in the accompanying condensed consolidated financial statements and
consist of only normal recurring adjustments. The results of operations
presented in the accompanying condensed consolidated financial statements for
the nine months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2003.
Stock-Based Compensation -- At September 30, 2003, the Company had one
stock-based employee compensation plan, which is described more fully in Note 6.
The Company accounts for the plan under APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. During the nine months ended
September 30, 2003 and 2002, the Company recognized compensation expense
relating to stock options and warrants of $97,500 and $25,000, 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:
7
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended September 30, 2003 2002
---------------- ----------------
Net loss, as reported $ (1,941,075) $ (1,299,837)
Add: Stock-based compensation expense
included in net loss 99,725 25,000
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards (274,167) (142,116)
---------------- ----------------
Pro forma net loss $ (2,115,517) $ (1,416,953)
---------------- ----------------
Basic and diluted loss per common share as reported $ (0.01) $ (0.01)
---------------- ----------------
Basic and diluted loss per common share pro forma $ (0.01) $ (0.01)
---------------- ----------------
Three Months Ended September 30, 2003 2002
---------------- ----------------
Net loss, as reported $ (724,858) $ (574,532)
Add: Stock-based compensation expense
included in net loss 27,225 25,000
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards (74,639) (54,107)
---------------- ----------------
Pro forma net loss $ (772,272) $ (603,639)
---------------- ----------------
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)
---------------- ----------------
NOTE 2 - BUSINESS CONDITION
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 losses of $1,941,077 and $2,149,810 for the nine
months ended September 30, 2003 and the year ended December 31, 2002,
respectively. As of September 30, 2003 and December 31, 2002, the Company had an
accumulated deficit of $17,171,375 and $15,230,302, respectively, and a total
stockholders' deficit of $5,047,404 and $3,894,097, respectively. In addition,
the Company used, rather than provided, cash in its operations in the amounts of
$723,592 and $1,142,148 for the nine months ended September 30, 2003 and the
year ended December 31, 2002, respectively.
The Company conducts a substantial portion of its operations utilizing leased
facilities consisting of a warehouse and a manufacturing plant from a related
party. In 1998 the related party entered into two promissory notes secured by
the deeds of trust on the property leased to the Company. In August 2003, the
related party defaulted on the notes and the property was sold under the first
of the two deeds of trust. The Company has been served a notice of unlawful
detainer and was to vacate the property by September 30, 2003. The Company has
received an extension to file its response until November 21, 2003 and may
occupy the property until notified otherwise subsequent to filing their
response. The Company is currently negotiating with an unrelated party to have
the unrelated party purchase the property from the current property owner. The
Company does not yet have arrangements in place for new facilities, should these
negotiations fail.
8
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Since February of 2000, the Company has operated without an operating line of
credit with a bank. 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.
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, there is
substantial doubt about the Company's ability to continue as a going concern.
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.
During 2002, the Company entered into agreements whereby the Company has issued
common stock to certain principals of Abacas Ventures, Inc. ("Abacas") in
exchange for a portion of the debt. (See Note 3) 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 with other creditors. As discussed in
Note 5, the Company has entered into an equity line of credit agreement with a
private investor. Realization of any additional 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 September 30, 2003 and
December 31, 2002, was $42,215 and $20,376, respectively. Interest associated
with amounts due to stockholders is accrued at 10 percent. Unpaid accrued
interest was $8,084 and $2,378 at September 30, 2003 and December 31, 2002,
respectively, and is included in accrued liabilities. These notes are due on
demand.
Related Party Notes Payable --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 nine months ended September 30, 2003, the Company
was advanced $100,000. The outstanding balance on the bridge loan was $788,742
as of September 30, 2003. The total accrued interest owed to Abacas on the
bridge loan was $204,660 as of September 30, 2003 and is included in accrued
liabilities.
9
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Litigation -- During January 2002, the Company settled a lawsuit that had
alleged a breach of facilities sublease agreement involving facilities located
in Colorado. The Company's liability in this action was originally estimated to
range up to $2.5 million. The Company had filed a counter suit in the same court
for an amount exceeding $500,000 for missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. The
remaining $225,000 was recorded as a note payable. 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 leaving a principal balance of $115,875.
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.
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, 2002, 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 September 2003, a medical provider obtained a summary judgement against
the Company in the amount of $62,226 related to medical services provided to an
employee of the Company. This amount included actual damages, interest and
attorney fees. The Company entered into a settlement with the provider that
requires the Company to make monthly payments of $5,185. The Company is current
10
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
on its monthly payments and owes $57,040 as of September 30, 2003 which is
included in notes payable.
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.
The Company has been a party to a lawsuit with a customer stemming from an
alleged breach of contract. In July 2002, the Company reached a settlement with
the customer in which the customer was to make payments from August 1, 2002,
through October 29, 2002, to the Company totaling $265,000. As part of the
settlement, the Company returned inventory valued at $158,010, settled
receivables from the customer of $287,277, settled payables owed to the customer
in the amount of $180,287 and sold inventory to a Company related to the
customer for $13,949. During 2002, the Company received the entire $265,000.
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
forgiveness of any obligation, but rather the restructuring of the terms of the
previous agreement. At December 31, 2002, the Company owed $183,429 for this
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. The Company is currently negotiating a new settlement
agreement.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2002, the Company had accrued the entire amount of the claim.
The Company is currently in settlement negotiations with the vendor.
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. No trial date has been set and the Company is currently negotiating a
settlement of these claims.
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
entered into a settlement with the vendor that will allow the Company to pay the
entire balance over three years. This amount has been reclassified as a note
payable.
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, 2002, the Company
11
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 subsequently made
payments to the financial institution, reducing the obligation to $258,644 at
December 31, 2002, plus interest accruing from January 1, 2002. The Company is
in default on this obligation and is negotiating for settlement of the remaining
claims.
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 $370,152. 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.
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 $179,757. 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 5), 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 filed the registration statement and had it declared effective by the
Securities and Exchange Commission.
12
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accrued Payroll Tax Liabilities -- As of September 30, 2003, the Company had
accrued liabilities in the amount of $2,096,935 for delinquent payroll taxes,
including interest estimated at $371,385 and penalties estimated at $230,927. Of
this amount, approximately $325,528 was due the State of Utah. During 2002, the
Company negotiated a monthly payment schedule of $4,000 which did not provide
for the forgiveness of any taxes, penalties or interest. During the first
quarter of 2003, no payments were made to the State of Utah. During the second
quarter of 2003, partial payments were made to the State of Utah. All payments
were made to the State of Utah during the third quarter of 2003. Approximately
$1,760,469 was owed to the Internal Revenue Service as of September 30, 2003.
During 2002, the Company negotiated a payment schedule with respect to this
amount, pursuant to which monthly payments of $25,000 were required. The
required monthly payments were made during the nine months ended September 30,
2003. The Company is currently renegotiating the terms of the payment schedule
with the Internal Revenue Service. Approximately $10,938 was owed to the State
of Colorado as of September 30, 2003.
Deferred Compensation to Officers -- Certain officers of the Company have
deferred $224,615 of salary during the nine months ended September 30, 2003. The
total amount of salary deferred by these officers as of September 30, 2003 is
$382,355 and is included in accrued liabilities.
NOTE 5 - STOCKHOLDER'S EQUITY
Common Stock Issuance -- During June 2003, the Company issued 500,000 shares of
restricted common stock to a relative of a director for $10,000 of accrued
compensation owed to the director. The $0.02 cost per share was equal to the
market value of the Company's stock on the date the shares were issued.
Equity Line of Credit -- On April 8, 2003, the Company entered into a revised
Equity Line of Credit Agreement (the "Equity Line Agreement") with a private
investor (the "Equity Line Investor"). Under the Equity Line Agreement, the
Company has the right to draw up to $5,000,000 from the Equity Line Investor
against an equity line of credit (the "Equity Line"). As part of the Equity Line
Agreement, the Company may issue shares of the Company's common stock to the
Equity Line Investor in lieu of repayment of the draw. The number of shares to
be issued is determined by dividing the amount of the draw by the lowest closing
bid price of the Company's common stock over the five trading days after the
advance notice is tendered. The maximum amount of any single draw is $85,000
The Equity Line Investor is required under the Equity Line Agreement to tender
the funds requested by the Company within two trading days after the
five-trading-day period used to determine the market price.
In order to facilitate the issuance of shares of common stock to the Equity Line
Investor, the Company placed 50,000,000 shares of common stock into an escrow
account held by its transfer agent. All shares issued to the Equity Line
Investor are to be issued from these escrowed shares.
In connection with the Equity Line Agreement, the Company issued 2,562,500
shares of the Company's common stock as placement shares at no cost in 2002. The
Company also granted registration rights to the Equity Line Investor, in
connection with which the Company has filed a registration statement and had it
declared effective by the Securities and Exchange Commission.
13
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In order to facilitate the Company's receiving cash proceeds in excess of the
single draw limit of $85,000, the Company has entered into a series of note
payable agreements with the Equity Line Investor. Rather than receiving cash for
each individual put, the proceeds are used to pay down the note payable to the
Equity Line Investor. Because the number of share to be issued is determined
based upon the stock price within five days of actual issuance, the shares are
deemed to be issued at market and there is no beneficial conversion feature.
During the nine months ended September 30, 2003, the Company issued $630,000 of
notes payable to the Equity Line Investor for $552,350 cash and $77,650 in fees
and offering costs. The notes are due seventy days after issuance and bear no
interest. Because of the short term of the notes, no interest rate has been
imputed. Should the Company fail to pay the notes in full, within seventy days;
the notes will accrue interest at 24% per annum. The Company will use proceeds
from the Equity Line Agreement to pay the balance due.
During the nine months ended September 30, 2003, the Company issued 24,797,126
shares of common stock from the escrowed shares under the Equity Line Agreement
in lieu of payments of $330,000 on notes payable, which was offset by prior
offering costs of $44,228, leaving a balance at September 30, 2003 of $300,000.
During October 2003, the Company placed an additional 20,000,000 common shares
in escrow to fund conversions related to the Equity Line Agreement and issued
12,973,136 shares of common stock from the escrowed shares under the Equity Line
Agreement as not payable payments of $300,000.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan - On February 11, 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. The Company's Board of Directors administers the plan
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.
During February 2003, the Company granted options to purchase 5,500,000 shares
of common stock to certain employees of the Company and options to purchase
2,000,000 shares of common stock to members of the board of directors pursuant
to the 2002 Plan. These options vested on the date of grant. The related
exercise price was $0.025 per share for employee options and $0.03 per share for
14
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
members of the board of directors. The market value of the common stock on the
grant date was $0.036, which resulted in non-cash compensation of $72,500. The
options are exercisable through February 2008. The Company estimated the fair
value of the employee and director stock options at the grant date using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used in the Black-Scholes model to determine the fair value of the employee
and director options to purchase a share of common stock of $0.019 and $0.018,
respectively: risk-free interest rate of 2.92 percent, dividend yield of 0
percent, volatility of 364 percent, and expected lives of 0.10 years.
During May 2003, the Company granted options to purchase 2,500,000 shares of
common stock to certain employees of the Company and options to purchase
4,500,000 shares of common stock to members of the board of directors pursuant
to the 2002 Plan. These options vested on the date of grant. The related
exercise price was $0.02 per share for employee options and for options to
members of the board of directors. The market value of the common stock on the
grant date was $0.02, which resulted in no non-cash compensation. The options
are exercisable through May 2008. The Company estimated the fair value of the
employee and director stock options at the grant date using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used in
the Black-Scholes model to determine the fair value of the employee and director
options to purchase a share of common stock of $0.02: risk-free interest rate of
2.35 percent, dividend yield of 0 percent, volatility of 343 percent, and
expected lives of 0.10 years.
During the third quarter, the Company granted options to purchase 15,250,000
shares of common stock to certain employees of the Company pursuant to the 2002
Plan. These options vested on the date of grant. The related exercise price was
$0.005 to $0.143 per share. The market value of the common stock on the grant
dates was $0.01, which resulted in non-cash compensation of $25,000. The options
are expire from July 2008 to September 2008. The Company estimated the fair
value of the employee stock options at the grant dates using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used in
the Black-Scholes model to determine the fair value of the employee options to
purchase a share of common stock of $0.00 to $0.009: risk-free interest rate of
2.65 to 3.63 percent, dividend yield of 0 percent, volatility of 331 to 343
percent, and expected lives of 0.10 years.
During the nine months ended September 30, 2003, 18,000,000 of the options
issued to employees and 5,500,000 of the options issued to directors were
exercised for $262,500 of cash, $95,000 of accrued interest and $35,000 of
accrued compensation. There were 5,250,000 and 1,000,000 options outstanding
that have been granted to employees and members of the board of directors,
respectively, at September 30, 2003.
During September 2003, the Company granted options to purchase 250,000 shares of
common stock to consultants pursuant to the 2002 Plan for services related to
marketing the Company's products. These options vested on the date of grant. The
related exercise price was $0.0001 per share. The market value of the common
stock on the grant date was $0.009, which resulted in advertising expense of
$2,225. The consultants exercised the 249,500 of the options for cash proceeds
of $25. The remaining 500 options are exercisable through September 2008. The
Company estimated the fair value of the stock options at the grant date using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used in the Black-Scholes model to determine the fair value of
the options to purchase a share of common stock of $0.009: risk-free interest
rate of 3.63 percent, dividend yield of 0 percent, volatility of 332 percent,
and expected lives of 0.10 years.
15
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2003, the Company had granted 5,000,000 more options under
the 2002 Plan than were available under that plan. Subsequent to the end of the
third quarter, the Company rescinded the grant of those options through
agreements with three option holders.
NOTE 7 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments: electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies. The Company evaluates performance of each segment based on earnings or
loss from operations. Selected segment information is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------- ------------------- ------------------ ---------------
Revenues
--------------------- ------------------- ------------------ ---------------
Electronics Assembly $ 255,990 $ 340,267 $ 860,674 $ 1,727,045
Ethernet Technology 24,697 45,386 158,791 433,509
Elimination of intersegment sales (13,193) (17,898) (65,435) (179,451)
--------------------- ------------------- ------------------ ---------------
Consolidated revenues $ 267,494 $ 367,755 $ 954,030 $ 1,981,103
--------------------- ------------------- ------------------ ---------------
Net Loss
--------------------- ------------------- ------------------ ---------------
Electronics Assembly $ (663,068) $ (509,937) $ (1,800,619) $ (1,157,244)
Ethernet Technology (61,790) (64,595) (140,456) (142,593)
Elimination of intersegment losses - - - -
--------------------- ------------------- ------------------ ---------------
Consolidated net loss $ (724,858) $ (574,532) $ (1,941,075) $ (1,299,837)
--------------------- ------------------- ------------------ ---------------
NOTE 8 -SUBSEQUENT EVENTS
During October 2003, an employee exercised 900,000 options to purchase shares of
common stock for cash proceeds of $9,000.
Also in October 2003, the Company issued an additional 20,000,000 shares to
escrow for future funding of the equity line of credit agreement (see Note 5).
As of September 30, 2003, the Company had granted 5,000,000 more options under
the 2002 Plan than were available under that plan. Subsequent to the end of the
third quarter, the Company rescinded the grant of those options through
agreements with three option holders.
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 for the year ended December 31, 2002.
Overview
We provide a mixture of high- and medium-sized 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 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 purchase 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.
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 12 - Certain Relationships and Related Transactions."
We lease approximately 40,000 square feet of office and manufacturing space in
West Valley City, Utah, at a monthly lease rate of approximately $16,000. The
lease is renewable in November of 2006 for two additional ten-year periods. This
facility serves as our principal offices and manufacturing facility and is
leased from I&R Properties, LLC, a company owned and controlled by individuals
who are officers, directors, and principal stockholders of the company.
In 1998, I&R Properties had entered into two promissory note in favor of The
Money Store, which were secured by two deeds of trust on the Property. I&R
Properties defaulted on the notes, and in August 2003, The Money Store caused
the Property to be sold under the first deed of trust. In September 2003, The
Money Store served a Notice to Quit on the Company, directing the Company to
vacate the Property by September 30, 2003. The Company did not vacate the
Property, and The Money Store brought this action against the Company for
unlawful detainer. The Company received an extension to file its answer by
November 21, 2003. The Company is negotiating with The Money Store to settle
this matter and to arrange for a third party to purchase the Property and lease
it to the Company. The Company does not believe it will be disruptive to its
business if it is required to locate new headquarters facilities. We believe our
lease for the facility is on commercially reasonable terms.
Management believes that each of the related party transactions were as fair to
the Company as could have been made with unaffiliated third parties.
18
Results of Operations - Comparison of Periods Ended September 30, 2003 and 2002
Sales and Cost of Sales
Net sales decreased to $267,494 for the three-month period ended September 30,
2003, as compared to $367,755 during the same period in 2002. Cost of sales
decreased by 49.7%, from $358,869 during the three-month period ended September
30, 2002, to $180,660 during the same period in 2003. Our gross profit margin
for the three-month period ended September 30, 2003, was 32.4%, up from 2.4% for
the same period in 2002. The large improvement in the gross profit margin is
attributed to our selling products at higher margins, and selling a lower
quantity of high margin products. Though we sustained decreased sales for the
three-month period ended September 30, 2003, compared to the same period in
2002, we were able to increase our gross profit margin.
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
us to deliver products to customers in the quantities and time frame required.
This manufacturing technique requires us to maintain an inventory of component
parts to meet customer orders. Inventory at September 30, 2003, was $1,492,002,
as compared to $1,550,553 at December 31, 2002. Though decrease in inventory is
negligible, it demonstrates better control over inventory purchases.
Selling, General and Administrative Expenses
During the quarter ended September 30, 2003, selling, general and administrative
expenses were $596,238 versus $516,650 for the same period in 2002, a 15.4%
increase. The increase is substantially the result of our increase in fees
related to notes payable to the equity line investor and also the result of
settlement expenses.
Interest Expense
Interest expense for quarter ended September 30, 2003, was $128,178 as compared
to $41,865 for the same period in 2002, an increase of 206.2%. This increase is
primarily attributable to an increase in debt which was attributed to the
increase in notes payable and an increase in interest rates. As of September 30,
2003, and December 31, 2002, the amount of our liability for delinquent state
and federal payroll taxes and estimated penalties and interest thereon was
$2,096,935 and $2,029,626, respectively.
As a result of the above factors, our overall net loss increased 26.2% to
$724,858 for the quarter ended September 30, 2003, as compared to $574,532 for
the quarter ended September 30, 2002 and 49.3% to $1,941,075 for the nine months
ended September 30, 2003, as compared to $1,299,837 for the same period in 2002.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses and our accumulated deficit was $17,171,377 at September 30, 2003, and
$15,230,302 at December 31, 2002. Our net operating loss for the quarter ending
September 30, 2003, was $724,858, compared to $574,532 for the quarter ended
September 30, 2002. Our current liabilities exceeded our current assets by
$5,644,754 as of September 30, 2003, and $4,490,623 as of December 31, 2002. The
increase is mostly attributed to increasing account payables, notes payable, and
accrued liabilities. For the nine months ended September 30, 2003 and 2002, we
had negative cash flows from operations of $723,592 and $914,037, respectively.
19
Cash
We had cash on hand of $27,934 at September 30, 2003, and $500 at December 31,
2002.
Net cash used in operating activities was $723,592 for the nine months ended
September 30, 2003. During 2003, net cash used in operations was primarily
attributable to $1,941,075 in net losses from operations, partially offset by
non-cash charges, increases in accrued liabilities of $605,184 and in increases
to trades accounts payable of $102,779, and in a decrease to inventories of
$58,551. The non-cash charges were for depreciation and amortization of $232,094
and non-cash compensation expense of $97,500.
Net cash used in investing activities during the nine months ended September 30,
2003, consisted of equipment purchases of $5,527.
Net cash provided by financing activities was $756,553 during the nine months
ended September 30, 2003. Principal sources of cash were proceeds of $100,000
from notes payable to related parties, proceeds from notes payable of $562,350
and proceeds from the exercise of options to purchase common stock of $262,500.
Accounts Receivable
At September 30, 2003, we had receivables of $60,164, net of a reserve for
doubtful accounts of $37,840, as compared to $37,464 at December 31, 2002, net
of a reserve of $37,037. This increase is primarily attributed to sales having
increased compared to the last two months of last year.
Accounts Payable
Accounts payable were $1,414,941 at September 30, 2003, as compared to
$1,359,723 at December 31, 2002. This increase is primarily attributed to
additional accounting and legal fees.
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 $17,171,377 and a
total stockholders' deficit of $5,047,404 at September 30, 2003. As of September
30, 2003, our monthly operating costs and interest expenses averaged
approximately $240,000 per month.
Significant amounts of additional cash will be needed to reduce our debt and
fund our losses until such time as we are able to become profitable. At
September 30, 2003, we were in default of notes payable whose principal amount,
not including the amount owing to Abacas Ventures, Inc., was approximately
$675,000. In addition, the principal amount of notes that either mature in 2003
or are payable on demand was approximately $960,000.
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
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.
20
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.
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 our efforts to improve our results of operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
(the "Equity Line Agreement") with Cornell Capital Partners, LP, a private
investor ("Cornell"). 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.
Our issuances of shares of our common stock pursuant to the Amended Equity Line
Agreement will serve to dilute the value of our common stock and existing
shareholders' positions.
Forward-looking statements
All statements made in this prospectus, other than statements of historical
fact, which address activities, actions, goals, prospects, or new developments
that we expect or anticipate will or may occur in the future, including such
things as expansion and growth of operations and other such matters are
forward-looking statements. Any one or a combination of factors could materially
affect our operations and financial condition. These factors include competitive
pressures, success or failure of marketing programs, changes in pricing and
availability of parts inventory, creditor actions, and conditions in the capital
markets. Forward-looking statements made by us are based on knowledge of our
business and the environment in which we currently operate. Because of the
factors listed above, as well as other factors beyond our control, actual
results may differ from those in the forward-looking statements.
Item 3. Evaluation of Disclosure Controls and Procedures
(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 a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, 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.
21
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls, or, to the Company's knowledge, in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2003, the Company had accrued liabilities in the amount of
$2,096,935 for delinquent payroll taxes, including interest estimated at
$371,385 and penalties estimated at $230,927. Of this amount, approximately
$325,528 was due the State of Utah. During the first quarter of 2003, no
payments were made to the State of Utah. During the third quarter of 2003,
partial payments were made to the State of Utah. Approximately $1,760,469 was
owed to the Internal Revenue Service as of September 30, 2003. As discussed
below, the Company has reached an agreement with the Internal Revenue Service's
Appeals Office to allow the Company to file an offer in compromise to resolve
the Company's tax liability on a compromise basis. Further, the Utah State Tax
Commission has advised the Company that it is willing to enter 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 $10,938 was owed to the State of Colorado as of September
30, 2003.
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, 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 with the
Securities & Exchange Commission, at our expense, a registration statement with
respect to the shares that were escrowed. The payment was not made, nor was a
registration statement filed with respect to the escrowed shares.
Pursuant to a Termination of Sublease Agreement dated as of May 22,
2002 among the Company, Sunborne and other parties, the sublease agreement that
was the subject of our litigation with Sunborne was terminated and a payment of
approximately $109,000 was credited against the amount owed by the Company to
Sunborne under the Company's settlement agreement with them. Sunborne has filed
a claim that this amount was to be an additional rent expense rather than a
payment on the note payable. The Company disputes this claim and intends to
vigorously defend the action.
As of 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 did not replace the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
Sunborne has filed the Confession of Judgment and proceeded with execution
22
thereon. The Company is continuing to negotiate with Sunborne in an attempt to
settle the remaining obligation under the settlement agreement.
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
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Initial discovery is beginning. No
trial date has been set.
Advanced Electronics has notified the Company that it believes it has a
claim against the Company in the amount of $67,691.56 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 make a cash payment to this creditor and issue a promissory
note and shares of its restricted common stock in satisfaction of the creditor's
claims. The parties are presently negotiating the terms of the settlement
documents. However, until the settlement documents are executed and delivered,
there can be no assurance that the creditor's claims will be settled nor that
the terms will be favorable to the Company.
Arrow Electronics adv. Circuit Technology Corporation, Civil No.
990409504, Third Judicial District Court Sandy Department, Salt Lake County,
State of Utah. Suit was brought against the Company on or about October 19,
1999, under allegations that the Company owes $199,647.92 for materials and
services and terms of a promissory note. The Company has answered, admitting
that it owed certain sums and denying all other claims. The Company and Arrow
have entered a settlement agreement under which the Company will pay $6,256.24
each month until the obligation and interest thereon are paid. Judgment was
entered April 24, 2001, against the Company for $218,435.46 accruing at 16% per
annum. The Company is currently attempting to negotiate a settlement of these
claims.
Arrow Electronics adv. Circuit Technology Corporation, Civil No.
010406732, Third Judicial District Court, Sandy Department, Salt Lake County,
State of Utah. Suit was brought against the Company on or about June 28, 2001,
under allegations that the Company owes $41,486.26. Judgment was entered against
the Company on January 7, 2002. The Company is currently attempting to negotiate
a settlement of these claims.
Avnet Electronics has notified the Company that it believes it has a
claim against the Company in the amount of $180,331.02 for the cost of goods or
services provided to the Company for the Company's use and benefit. No lawsuit
has been filed. Negotiations for settlement of this claim have resulted in an
agreement in principal whereby the Company will make a cash payment to this
creditor and issue a promissory note and its restricted common stock in
satisfaction of the creditor's claims. The parties are presently negotiating the
terms of the settlement documents. However, until the settlement documents are
executed and delivered, there can be no assurance that the creditor's claims
will be settled nor that the terms will be favorable to the Company.
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
23
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. During 2000, the Company settled the
lawsuit 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, Future filed a confession of judgment claiming that the
Company defaulted on its agreement and claimed the 2000 lawsuit was not properly
satisfied. At December 31, 2002, the Company owed $60,133 of principal under
terms of the remaining note payable. The Company denies the vendor's claim and
intends to vigorously defend itself against the confession of judgment.
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 Company and Racore are defending these claims. The parties are
also conducting settlement negotiations.
Infineon Technologies North America Corp. adv. Circuit Technology, Inc. et
al., Case No. CV 792634, Superior Court of the State of California, County of
Santa Clara. Judgment was entered against Circuit Technology, Inc., on March 12,
2002, in the amount of $181,342.15. As of March 25, 2003, we are not aware of
any collection efforts made by Infineon.
John J. La Porta v. Circuit Technology, Inc. et al., Case No. 010900785,
Third Judicial District Court, Salt Lake Department, Salt Lake County, State of
Utah. Mr. La Porta filed suit on or about January 23, 2001, seeking to recover
the principal sum of $135,941 plus interest on a promissory note given by Racore
Technology Corp. Mr. La Porta claims that the Company is a guarantor of the
promissory note and the Company should be held liable because of Racore's
default on the note. The Company and Racore are defending these claims and are
also negotiating settlement.
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.
Orbit Systems, Inc. adv. Circuit Technology, Inc. et al, Case No.
010100050DC, Third Judicial District Court, West Valley City Department, Salt
Lake County, State of Utah. Orbit filed suit on January 4, 2001, seeking to
recovery $173,310 for the costs of goods that Orbit claims the Company was under
contract to purchase. The Company entered into a settlement agreement with Orbit
and has performed all its obligations under the agreement. Orbit has made demand
for an additional payment of approximately $600. The Company believes it has no
obligation to pay this amount. The Company will seek to enforce the parties'
settlement agreement if Orbit continues to demand this additional payment.
24
Sager Electronics adv. Circuit Technology Corporation, Civil No.
000403535, Third Judicial District Court, Sandy Department, Salt Lake County,
State of Utah. Suit was brought against the Company on or about March 23, 2000,
under allegations that the Company owed $97,259.23 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for nonpayment of amount owing. The Company has answered, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Negotiations for settlement have resulted in an agreement for
settlement of all claims of Sager against the Company. The Company has arranged
certain payments and is required to pay Sager $1,972.07 each month until paid.
The Company defaulted on its obligations in December 2002. The Company is
negotiating a new settlement with Sager.
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.
Wells Fargo Equipment Finance adv. Circuit Technology Corporation,
Civil No. 901207 Third Judicial District Court, Salt Lake County, State of Utah.
Suit was brought against the Company on or about February 10, 2000, under
allegations that the Company owed $439,493.56 for a loan provided to the Company
for the Company's use and benefit. Claims are asserted for breach of contract,
breach of guarantee and replevin. The Company has answered, admitting that it
owed certain sums for conforming goods and services and denying all other
claims. Initial discovery is beginning. Judgment has been entered against the
Company and certain guarantors in the amount of $427,291.69 plus interest at the
rate of 8.61% per annum from June 27, 2000. The parties have reached a
25
settlement agreement under which the Company will pay approximately $12,000 per
month beginning in January 2003 to resolve this claim.
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
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 September 30, 2003, the Company is not aware of any collection efforts.
Internal Revenue Service. The Internal Revenue Service has notified the
Company that the Company owes approximately $1.7 million in payroll taxes. The
Company, in response to collection notices, filed a due process appeal with the
Internal Revenue Service's Appeals Office. The appeal has been resolved by an
agreement with the Appeals Office that will allow the Company to file an offer
in compromise of all federal tax liabilities owed by the Company based on its
ability to pay. As part of the agreement, the Internal Revenue Service will halt
all collection action against the Company until the offer in compromise
proceedings are completed.
Dickson Circuits USA, Third District Court, Sandy Department, Civil No.
030401796. Dickson Circuits filed suit against the Company in the amount of
$31,744.64 for the cost of goods and services provided to the Company for the
Company's use and benefit. The Company has entered into a settlement agreement
with Dickson Circuits, whereby the Company will make monthly payments of
approximately $1,500 over the course of three years.
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.
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.
The Money Store Commercial Mortgage, Inc., vs. I&R Properties, LLC,
CirTran Corporation, and Circuit Technology, Inc., aka Circuit Technologies,
Inc., Civil No. 030922472, Third Judicial District Court, Salt Lake County,
State of Utah. In October 2003, suit was brought against the Company and two
26
other named defendants by plaintiff The Money Store Commercial Mortgage, Inc.
("The Money Store"), bringing claims of unlawful detainer and breach of
contract. By way of background, the Company was leasing its company headquarters
and facility (the "Property") from I&R Properties, LLC. In 1998, I&R Properties
had entered into two promissory note in favor of The Money Store, which were
secured by two deeds of trust on the Property. I&R Properties defaulted on the
notes, and in August 2003, The Money Store caused the Property to be sold under
the first deed of trust. In September 2003, The Money Store served a Notice to
Quit on the Company, directing the Company to vacate the Property by September
30, 2003. The Company did not vacate the Property, and The Money Store brought
this action against the Company for unlawful detainer. The Company received an
extension to file its answer by November 21, 2003. The Company is negotiating
with The Money Store to settle this matter and to arrange for a third party to
purchase the Property and lease it to the Company. The Company does not believe
it will be disruptive to its business if it is required to locate new
headquarters facilities.
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 November 6, 2003, the company
has issued 37,770,262 shares of common stock to the Equity Line Investor in
connection with draws on the Equity Line.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: The following reports on Form 8-K were filed by us
during the three-month period ended September 30, 2003:
(i) None.
Exhibits:
31 Certifications
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
27
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: November 25, 2003 By: /s/ Iehab Hawatmeh
Iehab J. Hawatmeh
President and Chief Financial Officer