UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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CIRTRAN CORPORATION
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(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
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(Address of Principal Executive Offices) (Zip Code)
(801) 963-5112
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- --------
The number of shares outstanding of the registrant's common stock as of May
20, 2002: 212,272,191 .
Transitional Small Business Disclosure Format (check one): Yes No X
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Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 2002 (unaudited) and 3
December 31, 2000
Statements of Operations for the Three Months ended 4
March 31, 2002 (unaudited) and 2001 (unaudited)
Statements of Cash Flows for the Three Months ended 5
March 31, 2002 (unaudited) and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
(unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation 9
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
-------------------- -------------------
2002 2001
-------------------- -------------------
ASSETS
Current assets
Cash and cash equivalents $ 500 $ 499
Trade accounts receivable, net of allowance for doubtful accounts
accounts of $66,178 at March 31, 2002 and $66,316 at
December 31, 2001 663,861 369,250
Inventories 1,956,496 1,773,888
Other 93,626 97,037
-------------------- -------------------
Total current assets 2,714,483 2,240,674
Property and equipment, at cost, net 1,202,944 1,333,925
Other assets, net 10,887 10,887
-------------------- -------------------
Total Assets $ 3,928,314 $ 3,585,486
==================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 149,677 $ 159,964
Accounts payable 1,709,795 2,141,290
Accrued liabilities 3,090,199 3,071,191
Notes payable to stockholders - 1,390,125
Current maturities of capital lease obligations - 41,206
Current maturities of long-term notes payable 2,425,953 3,269,157
-------------------- -------------------
Total current liabilities 7,375,624 10,072,933
-------------------- -------------------
Long-Term Liabilities
Long-term notes payable, less current maturities 436,734 447,155
Capital lease obligations, less current maturities - 7,775
-------------------- -------------------
Total long-term liabilities 436,734 454,930
-------------------- -------------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares; issued and
outstanding 212,272,191 at March 31, 2002 and
160,951,005 at December 31, 2001 212,272 160,951
Additional paid-in capital 9,634,933 5,977,164
Treasury stock at cost (225,000) -
Accumulated deficit (13,506,249) (13,080,492)
-------------------- -------------------
Total Stockholders' Deficit (3,884,044) (6,942,377)
-------------------- -------------------
Total Liabilities and Stockholders' Deficit $ 3,928,314 $ 3,585,486
==================== ===================
See accompanying notes to unaudited condensed consolidated financial statements.
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended,
March 31,
---------------------------------------------
2002 2001
---------------------- ---------------------
Net Sales $ 641,330 $ 650,485
Cost of Sales (419,116) (545,478)
---------------------- ---------------------
Gross Profit 222,214 105,007
Selling, general and administrative expenses (520,608) (660,404)
---------------------- ---------------------
Loss From Operations (298,394) (555,397)
---------------------- ---------------------
Other income (expense)
Interest (136,880) (245,221)
Other, net 9,517 -
---------------------- ---------------------
(127,363) (245,221)
---------------------- ---------------------
Net Loss $ (425,757) $ (800,618)
====================== =====================
Basic and diluted loss per common share $ (0.00) $ (0.01)
====================== =====================
Basic and diluted weighted-average
common shares outstanding 201,077,784 156,301,005
====================== =====================
See accompanying notes to unaudited condensed consolidated financial statements.
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended,
March 31,
------------------------------------------
2002 2001
------------------------------------------
Cash flows from operating activities
Net loss $ (425,757) $ (800,618)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 132,633 175,243
Settlement of litigation (25,000) -
Changes in assets and liabilities:
Trade accounts receivable (294,611) 329,082
Inventories (182,608) (27,382)
Other assets 3,411 (8,460)
Accounts payable (154,281) 137,032
Accrued liabilities 269,008 140,769
------------------------------------------
Total adjustments (251,448) 746,284
------------------------------------------
Net cash used in operating activities (677,205) (54,334)
------------------------------------------
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 (10,287) 72,739
Payments on notes payable to stockholders (140,125) -
Principal payments on long-term notes payable (105,730) (27,429)
Proceeds from long-term notes payable 200,000 -
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 678,858 45,310
------------------------------------------
Net increase (decrease) in cash and cash equivalents 1 (10,868)
Cash and cash equivalents at beginning of year 499 11,068
------------------------------------------
Cash and cash equivalents at end of year $ 500 $ 200
See accompanying notes to unaudited condensed consolidated financial statements.
CIRTRAN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Three Months Ended,
March 31,
------------------------------------------
2002 2001
------------------------------------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 44,891 $ 13,054
Noncash investing and financing activities
Notes payable issued for accounts payable $ 326,195 $ -
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 -
See accompanying notes to unaudited condensed consolidated financial statements.
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 three months
ended March 31, 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 $425,757 and $2,933,084 for the
three months ended March 31, 2002 and the year ended December 31, 2001,
respectively. As of March 31, 2002 and December 31, 2001, the Company had an
accumulated deficit of $13,506,249 and $13,080,492, respectively and a total
stockholders' deficit of $3,884,044 and $6,942,377, respectively. In addition,
the Company used, rather than provided, cash in its operations in the amounts of
$677,205 and $288,724 for the three months ended March 31, 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 quarter ended March 31, 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 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
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 March 31, 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 March 31, 2002 and
December 31, 2001, respectively, and is included in accrued liabilities. These
notes are due on demand.
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, is 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 a cost of $250,000. If seventy-five percent (75%) of the
balance has not been paid by May 18, 2002, the Company has agreed to prepare and
file with the Securities & Exchange Commission, at its own expense, a
registration statement with respect to the escrowed shares. If, by August 18,
2002, any portion of the balance remains outstanding and a registration
statement with respect to the escrowed shares has not been declared effective,
the plaintiff is entitled to file the Confession of Judgment and proceed with
execution thereon.
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.
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 - NOTES PAYABLE
During the quarter ended March 31, 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 $326,195. The Company has recorded this
transaction as a $326,195 increase to the note payable owed to Abacus, pursuant
to the terms of the Abacus agreement.
NOTE 6 - 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 7 - 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 March
31, 2002.
NOTE 8 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has two reportable segments; electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles circuit
boards and electronic component cables. The Ethernet technology segment designs
and manufactures Ethernet cards. The accounting policies of the segments are
consistent with those described in the summary of significant accounting
policies. The Company evaluates performance of each segment based on earnings or
loss from operations. Selected segment information is as follows:
March 31, 2002 Assembly Technology Total
-------------- ------------- ----------- -----------
Sales to external customers $ 338,358 $ 302,972 $ 641,330
Intersegment sales 154,246 -- 154,246
Segment loss (425,757) (13,302) (439,059)
Segment assets 3,270,995 628,091 3,899,086
Depreciation and amortization 127,396 5,236 132,632
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2001
Sales to external customers $ 381,534 $ 268,951 $ 650,485
Intersegment sales 177,749 -- 177,749
Segment loss (800,618) (134,362) (934,980)
Segment assets 3,581,888 511,986 4,093,874
Sales 2002 2001
----- ------------- -------------
Total sales for reportable segments $ 795,576 $ 828,234
Elimination of intersegment sales (154,246) (177,749)
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Consolidated net sales $ 641,330 $ 650,485
============= =============
Net Loss
Net loss for reportable segments $ (439,059) $ (934,980)
Elimination of intersegment losses 13,302 134,362
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$ (425,757) $ (800,618)
============= =============
Total Assets March 31, December 31,
------------ 2002 2001
------------- -------------
Total assets for reportable segments $ 3,899,086 $ 3,296,098
Adjustment for intersegment amounts 29,228 289,388
------------- -------------
Consolidated total assets $ 3,928,314 $ 3,585,486
============= =============
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.
Results of Operations
Sales and Cost of Sales
Net sales decreased marginally to $641,330 for the three-month period ended
March 31,2002 as compared to $650,485 during the same period in 2001. This
increase continues an upward trend started in the fourth quarter of 2001, from
lower quarterly sales figures of $420,480 and $279,055 during the second and
third quarters of 2001, respectively. Cost of sales decreased by 23%, from
$545,478 during the three-month period ended March 31, 2001 to $419,116 during
the same period in 2002. Our gross profit margin for the three-month period
ended March 31, 2002 was 34.6%, up from 16.1% for same period in 2001. We
believe this improvement is a reflection of our efforts to solicit higher margin
business and improve inventory control procedures.
Selling, General and Administrative Expenses
During the three-month period ended March 31, 2002 selling, general and
administrative expenses were $520,608, as compared to $660,404 during the same
period in 2001, representing a 21.2% decrease. This decrease was primarily
attributable to an almost 50% reduction in the size of our workforce.
Interest Expense
Interest expense for the three months ended March 31, 2002 was $136,880,
compared to $245,221 during the same period in 2001. This represents a decrease
of $108,341 and is primarily attributable to a decrease in delinquent payroll
tax penalties, which were previously recorded as part of interest expense, and
to the conversion of certain notes payable and stockholder notes payable in
January of 2002 into restricted shares of our common stock.
As a result of the above factors, our overall net loss decreased 46.8% to
$425,757 for the three-month period ended March 31, 2002, from $800,618 during
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 year ending December 31, 2001 was
$933,084, and our net loss from operations for the three-month period ending
March 31, 2002 was $298,394. Our accumulated deficit was $13,080,492 at December
31, 2001 and $13,506,249 at March 31, 2002. Our current liabilities exceeded our
current assets by $7,832,259 as of December 31, 2001 and by $4,661,141 as of
March 31, 2002. We recorded negative cash flows from operations for the year
ended December 31, 2001 and the three-month period ended March 31, 2002 of
$288,724 and $677,205, respectively.
Cash
On March 31, 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 $149,677 at March 31, 2002.
Net cash used in operating activities was $677,205 for the quarter ended March
31, 2002, compared to $54,334 used in operations for the quarter ended March 31,
2001. This significant change was primarily attributable to an increase in trade
accounts receivable of $294,611, an increase in inventories of $182,608 and a
decrease in accounts payable of $154,281. Off-setting amounts included a
non-cash charge of $132,633 for depreciation and an increase in accrued
liabilities of $269,008.
Net cash used in investing activities during the quarters ended March 31, 2002
and 2001, consisted of equipment purchases of $1,652 and $1,844, respectively.
Net cash provided by financing activities during the three-month period ended
March 31, 2002 was $678,858. Cash proceeds as follows: $500,000 from the
issuance of restricted common stock, $235,000 from the issuance of stock upon
exercise of stock options, and $200,000 from long-term notes payable. This last
amount represents cash advanced by Abacus Ventures, Inc. and added to the amount
payable to them. See below under "Liquidity and Financing Arrangements." These
amounts were offset by $105,730 in principal payments on long-term notes
payable, $140,125 in payments on notes payable to stockholders and a $10,287
decrease in checks written in excess of cash in bank.
Noncash investing and financing activities during the period ended March 31,
2002 consisted of reclassifying $326,195 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
restriced common stock (see below under "Liquidity and Financing Arrangements"),
and $225,000 of common stock issued to escrow in settlement of outstanding
ligitation. See below under "Legal Proceedings."
Accounts Receivable
By March 31, 2002 accounts receivable had increased to $663,681, net of an
allowance for doubtful accounts of $66,178, from $369,250, net of an allowance
for doubtful accounts of $66,316 at December 31, 2001. This significant increase
in accounts receivable is reflective of our increase in sales during the first
three months of 2002.
Accounts Payable
Accounts payable were $1,709,795 at March 31, 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 $326,195 of accounts payable to
notes payable to Abacus Ventures, Inc. During the quarter ended March 31, 2002,
Abacus Ventures 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 $326,195.
We recorded this transaction as a $326,195 increase to the note payable owed to
Abacus, pursuant to the terms of our agreement with them.
Liquidity and Financing Arrangements
We sustained losses from operations of $298,394 and $555,397 for the quarters
ended March 31, 2002 and 2001, respectively. We had accumulated deficits of
$13,080,492 and $13,506,249 at March 31, 2002 and December 31, 2001,
respectively, and total stockholders' deficits of $3,884,044 and $6,942,377,
respectively, as of such dates.
Since February 2000, we have operated without a line of credit. Abacus Ventures,
Inc., 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 Ventures, in exchange for $500,000 cash.
Also, during the quarter ended March 31, 2002, Abacus Ventures 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 $326,195. We recorded this
transaction as a $326,195 increase to the note payable owed to Abacus, pursuant
to the terms of our agreement with them. A further $200,000 was added to this
note payable during the quarter ended March 31, 2002 in respect of $200,000 cash
advanced to us. 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 exceed
$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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of December 31, 2001, we had accrued liabilities in the amount of $2,034,688
for delinquent payroll taxes, including interest estimated at $215,268 and
penalties estimated at $242,989. Of this amount, approximately $234,187 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 in
respect of a total amount owed of $104,241, which includes tax, penalty and
interest calculated through the date of our last payment. Approximately
$1,197,000 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. In addition, we have
committed to keeping current on deposits of our federal withholding amounts.
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,
together with interest at 8% per annum, is payable by August 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 currently held in escrow. If seventy-five percent (75%)
of the balance has not been paid by May 18, 2002, we have agreed to prepare and
file with the Securities & Exchange Commission, at our expense, a registration
statement with respect to the shares that have been escrowed. If, by August 18,
2002, any portion of the balance remains outstanding and a registration
statement with respect to the escrowed shares has not been declared effective,
Sunborne is entitled to file the Confession of Judgment and proceed with
execution thereon. Also pursuant to the terms of the settlement agreement,
Sunborne conditionally assigned to us any rights it may have in a claim against
our sublessee of Sunborne's premises and agreed to apportion 75% of any net
settlement or collection proceeds from this claim to us. If, by August 18, 2002,
a registration statement with respect to the escrowed shares has not been
declared effective, or if we have abandoned or failed to diligently pursue the
claim against the sub-lessee, this conditional assignment shall expire and all
rights to the claim will revert back to Sunborne.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
Effective January 14, 2002, we entered into four substantially identical
agreements with existing shareholders pursuant to which we issued an aggregate
of 43,321,186 shares of restricted common stock at a price of $0.075 per share
for $500,000 in cash and the cancellation of $2,749,090 principal amount of our
debt. See above under "Liquidity and Financing Arrangements." In our opinion,
the offer and sale of these shares was exempt by virtue of Section 4(2) of the
Securities Act and the rules promulgated thereunder.
Item 5. Other Information
On February 28, 2002, we filed a Form 8-A with the United States Securities &
Exchange Commission to register our shares of common stock, par value $0.001,
pursuant to section 12(g) of the Securities & Exchange Act of 1934.
On April 11, 2002, the United States Securities & Exchange Commission accepted
for filing our application to withdraw our previously-filed registration
statement on Form SB-2, SEC File No. 333-64832, with respect to a secondary
offering of 52,978,350 shares of common stock .
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: The following reports on Form 8-K were filed by us during
the three-month period ended March 31, 2002:
(i) Form 8-K filed March 14, 2002 with respect to a change in our
certifying accountant.
(ii) Form 8-K filed March 19, 2002 with respect to settlement of
outstanding litigation and corporate debt.
Exhibits: None
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: May 21, 2002 By: /s/ Iehab J. Hawatmeh, President