U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
Amendment No. 1
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2000, 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 No. 33-13674-LA
CIRTRAN CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 68-0121636
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4125 South 6000 West, West Valley City, Utah 84128
(Address of principal executive offices)
(801) 963-5112
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year: $6,373,096.
Due to the absence of a trading market for the common stock of the Registrant,
the aggregate market value of voting stock held by non-affiliates as of March
31, 2001, was $0.
As of March 31, 2001, the Registrant had outstanding 10,495,637 shares of Common
Stock (156,301,005 shares as constituted on October 31, 2001), par value $0.001.
Documents incorporated by reference: None
The registrant hereby files this Annual Report on Form 10-KSB/A to
amend Items 1, 6, 7 and 13 of its Annual Report on Form 10-KSB for the year
ended December 31, 2000 to amend the description of its business and to include
restated financial statements and accompanying Management's Discussion and
Analysis of Operating Results. No other items in the registrant's Annual Report
on Form 10-KSB for the year ended December 31, 2000 are amended. Except as
otherwise specifically noted, all information in this Form 10-KSB/A is as of
December 31, 2001 and does not reflect any subsequent information or events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
We are a full-service contract electronics manufacturer servicing OEMs in the
following industries: communications, networking, peripherals, gaming, law
enforcement, consumer products, telecommunications, automotive, medical and
semi-conductor. We conduct our operations through two main divisions: circuit
board manufacturing and assembly and Ethernet card design and manufacture.
Industry Background
The contract electronics manufacturing industry specializes in providing the
program management, technical and administrative support and manufacturing
expertise required to take an electronic product from the early design and
prototype stages through volume production and distribution. The goal is to
provide a quality product, delivered on time and at the lowest cost, to the OEM.
This full range of services gives the OEM an opportunity to avoid large capital
investments in plant, inventory, equipment and staffing and to concentrate
instead on innovation, design and marketing. By using our contract electronics
manufacturing services, our customers have the ability to improve the return on
their investment with greater flexibility in responding to market demands and
exploiting new market opportunities. Many OEMs now consider contract
manufacturers an integral part of their business and manufacturing strategy.
Accordingly, the contract electronics manufacturing industry has experienced
significant growth as OEMs have established long-term working arrangements with
contract manufacturers such as us.
We believe two important trends have developed in the contract electronics
manufacturing industry. First, we believe OEMs increasingly require contract
manufacturers to provide complete turnkey manufacturing and material handling
services, rather than working on a consignment basis where the OEM supplies all
materials and the contract manufacturer supplies only labor. Turnkey contracts
involve design, manufacturing and engineering support, the procurement of all
materials, and sophisticated in-circuit and functional testing and distribution.
The manufacturing partnership between OEMs and contract manufacturers involves
an increased use of "just-in-time" inventory management techniques that minimize
the OEM's investment in component inventories, personnel and related facilities,
thereby reducing costs.
We believe a second trend in the industry has been the increasing shift from
pin-through-hole, or PTH, to surface mount technology, or SMT, interconnection
technologies. Surface mount and pin-through-hole printed circuit board
assemblies are printed circuit boards on which various electronic components,
such as integrated circuits, capacitors, microprocessors and resistors are
mounted. These assemblies are key functional elements of many types of
electronic products. PTH technology involves the attachment of electronic
components to printed circuit boards with leads or pins that are inserted into
pre-drilled holes in the boards. The pins are then soldered to the electronic
circuits. The drive for increasingly greater functional density has resulted in
the emergence of SMT, which eliminates the need for holes and allows components
to be placed on both sides of a printed circuit, contributing to size reductions
of up to 50%. SMT requires expensive, highly automated assembly equipment and
significantly more operational expertise than PTH technology. We believe the
shift to SMT from PTH technology has increased the use of contract manufacturers
by OEMs seeking to avoid the significant capital investment required for
development and maintenance of SMT expertise.
Electronics Assembly and Manufacture
Approximately 80% of our revenues are generated by our electronics assembly
activities, which consist primarily of the placement and attachment of
electronic and mechanical components on printed circuit boards and flexible
(i.e., bendable) cables. We also assemble higher-level sub-systems and systems
incorporating printed circuit boards and complex electromechanical components
that convert electrical energy to mechanical energy, in some cases manufacturing
and packaging products for shipment directly to our customers' distributors. In
addition, we provide other manufacturing services, including refurbishment and
remanufacturing. We manufacture on a turnkey basis, directly procuring any of
the components necessary for production where the OEM customer does not supply
all of the components that are required for assembly. We also provide design and
new product introduction services, just-in-time delivery on low to medium volume
turnkey and consignment projects and projects that require more value-added
services, and price-sensitive, high-volume production. Our goal is to offer
customers significant competitive advantages that can be obtained from
manufacturing 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.
We intend to continue to offer our customers the most advanced manufacturing
process technologies, including SMT, ball-grid array, or BGA, assembly, PTH
technology, manufacturing and test engineering support and design for
manufacturability, and in-circuit and functional test and full-system mechanical
assembly. We believe we have developed substantial SMT expertise, including
advanced, vision-based component placement equipment, which are machines that
use integrated cameras controlled by computer software for precise placement of
components on circuit boards. We believe that the cost of SMT assembly
facilities and the technical capability required to operate a high-yield SMT
operation are significant competitive factors in the market for electronic
assembly. We also have the capability to manufacture cables, harnesses and
plastic injection molding systems.
Ethernet Technology
Through our subsidiary, Racore Technology Corporation, we design, manufacture,
and distribute Ethernet cards. These components are used to connect computers
through fiber optic networks. In addition, we produce private label, custom
designed networking products and technologies on an OEM basis. Our products
serve major industrial, financial, and telecommunications companies worldwide.
We market our products through an international network of distributors, value
added resellers, and systems integrators who sell, install, and support our
entire product catalogue.
Additionally, we have established key business alliances with major
multinational companies in the computing and data communications industries for
which we produce private label, custom designed networking products and
technologies on an OEM basis. These alliances generally require that Racore
either develop custom products or adapt existing Racore products to become part
of the OEM customer's product line. Under a typical contract, Racore provides a
product with the customer's logo, packaging, documentation, and custom software
and drivers to allow the product to appear unique and proprietary to the OEM
customer. Contract terms generally provide for a non-recurring engineering
charge for the development and customization charges, together with a
contractual commitment for a specific quantity of product over a given term.
Market and Business Strategy
Our goal is to benefit from the increased market acceptance of, and reliance
upon, the use of manufacturing specialists by many electronics OEMs. It is
estimated by the IPC--Association Connecting Electronics Industries that the
United States electronics manufacturing services industry market increased from
$22.5 billion in 1998 to $34 billion in 2000. We believe the trend towards
outsourcing manufacturing will continue. OEMs utilize manufacturing specialists
for many reasons including the following:
o To Reduce Time to Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and, therefore, have a growing need to reduce the time required
to bring a product to market. We believe OEMs can reduce their time to
market by using a manufacturing specialist's manufacturing expertise and
infrastructure.
o To Reduce Investment. The investment required for internal manufacturing
has increased significantly as electronic products have become more
technologically advanced and are shipped in greater unit volumes. We
believe use of manufacturing specialists allows OEMs to gain access to
advanced manufacturing capabilities while substantially reducing their
overall resource requirements.
o To Focus Resources. Because the electronics industry is experiencing
greater levels of competition and more rapid technological change, many
OEMs are focusing their resources on activities and technologies which add
the greatest value to their operations. By offering comprehensive
electronics assembly and related manufacturing services, we believe
manufacturing specialists allow OEMs to focus on their own core
competencies such as product development and marketing.
o To Access Leading Manufacturing Technology. Electronic products and
electronics manufacturing technology have become increasingly sophisticated
and complex, making it difficult for OEMs to maintain the necessary
technological expertise to manufacture products internally. We believe OEMs
are motivated to work with a manufacturing specialist to gain access to the
specialist's expertise in interconnect, test and process technologies.
o To Improve Inventory Management and Purchasing Power. Electronics industry
OEMs are faced with increasing difficulties in planning, procuring and
managing their inventories efficiently due to frequent design changes,
short product life-cycles, large required investments in electronic
components, component price fluctuations and the need to achieve economies
of scale in materials procurement. OEMs can reduce production costs by
using a manufacturing specialist's volume procurement capabilities. In
addition, a manufacturing specialist's expertise in inventory management
can provide better control over inventory levels and increase the OEM's
return on assets.
An important element of our strategy is to establish partnerships with major and
emerging OEM leaders in diverse segments across the electronics industry. Due to
the costs inherent in supporting customer relationships, we focus our efforts on
customers with which the opportunity exists to develop long-term business
partnerships. Our goal is to provide our customers with total manufacturing
solutions for both new and more mature products, as well as across product
generations.
Another element of our strategy is to provide a complete range of manufacturing
management and value-added services, including materials management, board
design, concurrent engineering, assembly of complex printed circuit boards and
other electronic assemblies, test engineering, software manufacturing, accessory
packaging and post-manufacturing services. We believe that as manufacturing
technologies become more complex and as product life cycles shorten, OEMs will
increasingly contract for manufacturing on a turnkey basis as they seek to
reduce their time to market and capital asset and inventory costs. We believe
that the ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it serves. In
addition, we believe that due to the difficulty and long lead-time required to
change manufacturers, turnkey projects generally increase an OEM's dependence on
its manufacturing specialist, which can result in a more stable customer base.
Suppliers; Raw Materials
Our sources of components for our electronics assembly business are either
manufacturers or distributors of electronic components. These components include
passive components, such as resisters, capacitors and diodes, and active
components, such as integrated circuits and semi-conductors. Our suppliers
include Siemens, Muriata-Erie, Texas Instruments, Fairchild, Harris and
Motorola. Distributors from whom we obtain materials include Avnet, Future
Electronics, Arrow Electronics, Digi-key and Force Electronics. Although we have
experienced shortages of various components used in our assembly and
manufacturing processes, we typically hedge against such shortages by using a
variety of sources and, to the extent possible, by projecting our customer's
needs.
Research and Development
During 1999 and 2000, we and our predecessor corporation, Circuit Technology
Inc., spent approximately $366,245 and $217,395, respectively, on research and
development of new products and services. The costs of that research and
development were paid for by our customers. In addition, during the same
periods, our subsidiary, Racore, spent approximately $323,962 and $248,049,
respectively. None of Racore's expenses were paid for by its customers. We
remain committed, particularly in the case of Racore, to continuing to develop
and enhance our product line as part of our overall business strategy.
Sales and Marketing
Historically, we have had substantial recurring sales from existing customers,
but we are now actively seeking out new customers to generate increased sales.
We treat sales and marketing as an integrated process involving direct
salespersons and project managers, as well as senior executives. We also use
independent sales representatives in certain geographic areas.
During the sale process, a customer provides us with specifications for the
product it wants, and we develop a bid price for manufacturing a minimum
quantity that includes manufacture engineering, parts, labor, testing, and
shipping. If the bid is accepted, the customer is required to purchase the
minimum quantity and additional product is sold through purchase orders issued
under the original contract. Special engineering services are provided at either
an hourly rate or at a fixed contract price for a specified task.
Over 80% of our net sales during the year ended December 31, 2000, were derived
from customers that were also customers during 1999. Although we are
aggressively seeking to diversify our customer base, a small number of customers
have typically been responsible for a significant portion of our net sales.
During the year ended December 31, 2000, our largest customer, Osicom Technology
and its successor, Entrada Networks, Inc., accounted for 30% of consolidated net
sales. Andrew Corporation represented 30% and 48.8% of net sales in 1999 and
1998, respectively. No other individual customer accounted for more than 10% of
our net sales in any of these years. We are currently involved in a breach of
contract proceeding with Osicom Technology and its successor, Entrada Networks,
which late in 2000 cancelled a significant portion of a large outstanding order
with us.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. At December 31, 2000, our backlog was
approximately $4 million. The backlog was approximately $4.5 million at December
31, 1999.
Material Contracts and Relationships
We generally use form agreements with standard industry terms as the basis for
our contracts with our customers. The form agreements typically specify the
general terms of our economic arrangement with the customer (number of units to
be manufactured, price per unit and delivery schedule) and contain additional
provisions that are generally accepted in the industry regarding payment terms,
risk of loss and other matters. We also use a form agreement with our
independent marketing representatives that features standard terms typically
found in such agreements.
Competition
The electronic manufacturing services industry is large and diverse and is
serviced by many companies, including several that have achieved significant
market share. Because of our market's size and diversity, we do not typically
compete for contracts with a discreet group of competitors. We compete with
different companies depending on the type of service or geographic area. Certain
of our competitors may have greater manufacturing, financial, research and
development and marketing resources. We also face competition from current and
prospective customers that evaluate our capabilities against the merits of
manufacturing products internally.
We believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
Regulation
We are subject to typical federal, state and local regulations and laws
governing the operations of manufacturing concerns, including environmental
disposal, storage and discharge regulations and laws, employee safety laws and
regulations and labor practices laws and regulations. We are not required under
current laws and regulations to obtain or maintain any specialized or
agency-specific licenses, permits, or authorizations to conduct our
manufacturing services. We believe we are in substantial compliance with all
relevant regulations applicable to our business and operations.
Employees
We employ 101 persons, five in administrative positions, 14 in engineering and
design, 76 in clerical and manufacturing, and six in sales.
Corporate Background
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. On March
15, 1998, Vermillion issued 129,000,000 shares of common stock to acquire all of
the outstanding stock of BMC Incorporated. This entity was unsuccessful in its
bingo satellite business and was dissolved. In May 2000, Vermillion effected a
3,000-to-1 reverse split of its common stock, reducing the number of issued and
outstanding shares to 116,004.
On July 1, 2000, we issued a total of 10,000,000 shares of our common stock
(150,000,000 shares post-forward split), representing approximately 98.6% of our
total issued and outstanding common stock following such issuance, to acquire,
through our wholly-owned subsidiary, CirTran Corporation (Utah), substantially
all of the assets and certain liabilities of Circuit Technology, Inc., or
Circuit. Of these shares, 800,000 (12,000,000 shares post-forward split) were
issued to Cogent Capital Corporation, a Utah corporation that provided financial
and other consulting services to us in connection with the above-described
acquisition.
Effective August 6, 2001, we effected a 1:15 forward split and stock
distribution which increased the number of our issued and outstanding shares of
common stock from 10,420,067 to 156,301,005. We also increased our authorized
capital from 500,000,000 to 750,000,000 shares.
Our core business was commenced by Circuit in 1993 by our president, Iehab
Hawatmeh. Circuit enjoyed increasing sales and growth in the subsequent five
years, going from $2.0 million in sales in 1994 to $15.4 million in 1998,
leading to the purchase of two additional SMT assembly lines in 1998 and the
acquisition of Racore Computer Products, Inc. in 1997. During that period,
Circuit hired additional management personnel to assist in managing its growth,
and Circuit executed plans to expand its operations by acquiring a second
manufacturing facility in Colorado. Circuit subsequently determined in early
1999, however, that certain large contracts that accounted for significant
portions of our total revenues provided insufficient profit margins to sustain
the growth and resulting increased overhead. Furthermore, internal accounting
controls then in place failed to apprise management on a timely basis of our
deteriorating financial position. During the last several years, we have
experienced significant losses, including $3,768,905 in 1999, and $4,179,654 in
2000. We have also experienced increasing levels of debt. Our management has
been addressing this situation by, among other things, re-directing our sales
and manufacturing efforts to smaller contracts with higher profit margins and
negotiating debt forbearance arrangements with many of our creditors.
PART II
ITEM 6. 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, 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.
Results of Operations - Comparison of Years Ended December 31, 2000 and 1999
Sales and Cost of Sales
Net Sales decreased 35.4% to $6,373,096 for the year ended December 31, 2000 as
compared to $9,860,489 for 1999. The decrease is substantially due to the loss
of a major customer, Andrew Corporation, which accounted for approximately 30%
of our net sales in 1999. Sales to Andrew Corporation in 1999 amounted to
$3,314,104, whereas sales to the same customer in 2000 were only $29,250. In
addition, in the last half of 2000, Entrada Networks, Inc., successor in
interest to Osicom Technologies, a customer that generated approximately 30% of
our total revenues for 2000, cancelled completion of a large order due to a
downturn in Entrada's business. We are litigating the exact size of the order
and the circumstances surrounding its cancellation, but we believe the gross
amount of the order was approximately $3.8 million, of which $1.8 million was
actually completed and shipped in 2000. A substantial portion of the remaining
$2.0 million would have been recorded as sales in 2000.
Cost of sales for the year ended December 31, 2000 was $6,792,393, a 34.9%
decrease as compared to $10,427,294 incurred during the prior year. Those costs
as a percentage of net sales were 106.6% during 2000 as compared to 105.7%
during 1999. We believe our high cost of sales was attributable to three main
factors: (i) high-volume orders which produced low or negative margins; (ii)
cancellation of the Entrada order, discussed above, in preparation for which we
acquired a large amount of inventory; and (iii) significant write-offs for
obsolete inventory resulting from inadequate inventory control.
Our sales to Andrew Corporation in 1999 accounted for a large volume of sales
through large orders averaging 35,000 pieces, but these orders resulted in very
low or negative margins, which led to our negative gross profit for the year
ended December 31, 1999. We have shifted our marketing effort to small and
mid-sized customers that place orders of 100 to 5,000 pieces. We believe these
small and mid-sized orders produce a higher gross profit, primarily because we
are competing with other domestic manufacturers whose cost of sales is
comparable to our own, whereas large orders force us to compete with off-shore
manufacturers who typically enjoy significantly lower labor costs.
Among other things, lack of adequate inventory management and control has
negatively affected our gross margins. We have traditionally tracked inventory
by customer rather than by like-inventory item, and, as a result, we often
purchased new inventory to produce products for a new customer, when we likely
may have had the necessary inventory on hand under a different customer name.
This practice has led to a reserve for obsolescence and excess inventory, which
for the year 2000 was $545,866, up from $489,903 in 1999, and has increased cost
of sales. We are changing our method of managing and controlling our inventory
so that we can identify and use existing inventory and thereby reduce our costs
of sales. We have experienced improvement in this regard and believe that, if we
are able to maintain and increase our levels of sales, we will be successful in
generating sufficient gross profit to cover our selling, general and
administrative expenses.
The following charts present (i) comparisons of sales, cost of sales and gross
profit generated by our two main areas of operations, i.e., electronics assembly
and Ethernet technology, during 1999 and 2000; and (ii) comparisons during these
two years for each division between sales generated by pre-existing customers
and sales generated by new customers.
------------------ -------------- ------------------- ------------------ ----------------------
Year Sales Cost of Sales Gross Loss
------------------ -------------- ------------------- ------------------ ----------------------
Electronics 1999 $ 7,954,824 $ 8,504,509 $(549,685)
Assembly 2000 4,645,622 4,972,689 (327,067)
------------------ -------------- ------------------- ------------------ ----------------------
Ethernet 1999 1,905,665 2,008,968 (103,303)
Technology 2000 1,727,474 1,819,704 (92,230)
------------------ -------------- ------------------- ------------------ ----------------------
------------------ -------------- ------------------- ------------------ ----------------------
Year Total Pre-existing New
Sales Customers Customers
------------------ -------------- ------------------- ------------------ ----------------------
Electronics 1999 $ 7,954,824 $ 6,392,977 $ 1,561,847
Assembly 2000 4,645,622 4,317,668 327,954
------------------ -------------- ------------------- ------------------ ----------------------
Ethernet 1999 1,905,665 1,488,264 417,401
Technology 2000 1,727,474 787,649 939,825
------------------ -------------- ------------------- ------------------ ----------------------
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 December 31, 2000, was $1,755,786 as
compared to $3,056,383 at December 31, 1999. The decrease of approximately 42.6%
in inventory is attributable to our decreased sales in 2000 which reduced our
need to replace inventory at the same level as in 1999, as well as an increase
in our reserve for obsolete inventory. Work in-process as a component of
inventory decreased from $1,015,925 at December 31, 1999 to $169,676 at December
31, 2000. Again, this decrease reflects our decreased sales in 2000,
particularly at year-end. As discussed above, our management is currently taking
steps to improve our inventory control and believes the amount of our inventory
that may be considered obsolete or slow moving is properly reserved.
General and Administrative Expenses
During the year ended December 31, 2000, selling, general and administrative
expenses were $2,710,275, versus $2,594,430 for 1999, a 4.5% increase. Though
our change in marketing strategy to small and medium sized clients allowed us to
reduce staff, especially in the areas of mid-level management and assembly
staff, and to implement other cost savings measures, we still experienced an
increase in overall expenses that is primarily attributable to write-offs at
fiscal year-end of approximately $508,000.
Our management believes that a significant portion of our losses in 1999 are
attributable to expenses related to opening and subsequently closing of
Circuit's Colorado Springs facility. The Colorado Springs facility was opened in
November of 1998, we decided in June 1999 to close the facility, and the closing
process was completed in December of 1999. We decided to close the facility
after we discovered, in early 1999, serious deficiencies in our cost accounting
procedures and controls that had failed to apprise our management on a timely
basis of our deteriorating financial position, significant losses and increasing
debt. As a result of our decision to close the Colorado Springs facility, we
recognized substantial plant closure expense in 2000, including accrual of rent,
that diminished any benefits resulting from cost saving measures in 2000. As the
majority of the closing expenses were incurred in prior periods, management
expects we will realize the full benefit of these cost saving measures in 2001
and subsequent periods. This assumes, however, a satisfactory resolution of the
lawsuit with the lessor of the Colorado facility, Sunborne XII, LLC.
Interest expense for 2000 was $1,015,027 as compared to $764,486 for 1999, an
increase of 33% and a reflection of our accrual of interest on nonremitted
payroll taxes and our significant debt load that we were not able to adequately
service in 2000.
As a result of the above factors, our overall net loss increased 10.9% to
$4,179,654 for the year ended December 31, 2000 as compared to $3,768,905 for
the year ended December 31, 1999.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses and our accumulated deficit was $10,147,408 at December 31, 2000. Our net
operating loss for the year ending December 31, 2000 was $4,179,654, compared to
$3,768,905 for the year ending December 31, 1999. Our current liabilities
exceeded our current assets by $3,323,654 as of December 31, 1999 and $5,664,395
as of December 31, 2000. For the year ended December 31, 2000 we recorded
negative cash flows from operations of $140,961.
Cash
At December 31, 2000, we had $11,068 cash on hand, an increase of $10,568 from
December 31, 1999.
Net cash used in operating activities was $140,961 for the fiscal year ended
December 31, 2000. During 2000, net cash used in operations was primarily
attributable to $4,179,654 in net losses from operations, partially offset by
non-cash charges, an increase in accrued liabilities of $1,741,163 and a net
decrease in accounts payable of $87,129. The non-cash charges include
depreciation and amortization of $961,506, provision for doubtful trade accounts
receivable of $78,978, and provision for inventory obsolescence of $55,963.
Net cash used in investing activities during the fiscal year ended December 31,
2000 consisted of equipment purchases of $12,770.
Net cash provided by financing activities was $164,299 during the fiscal year
ended December 31, 2000. Principal sources of cash were shareholder loans of
$86,000, proceeds of $254,663 from long-term obligations, and proceeds of
$946,100 from the private sale of 830 restricted shares of common stock of
Circuit Technology, Inc. prior to its acquisition by us effective July 1, 2000.
These shares, pursuant to the terms of the acquisition, were subsequently
exchanged into 627,238 (pre-forward-split) shares of our common stock, or
9,408,585 post-forward-split shares of our common stock. Principal uses of cash
during 2000 consisted of $825,593 principal payments of long-term obligations
and $129,706 payments on capital lease obligations.
Accounts Receivable
At December 31, 2000, we had receivables of $874,097, net of a reserve
for doubtful accounts of $82,502, as compared to $973,351 at December 31, 1999,
net of a reserve of $360,493. The reserve for doubtful accounts was
significantly larger in 1999 because approximately $426,000 of the total
receivables were over 90 days old. We subsequently wrote off approximately
$351,000 of accounts receivable in 2000 as uncollectable, while at the same time
increasing our efforts to improve the aging and quality of our current
receivables. These efforts resulted in a significantly smaller reserve for
doubtful accounts at the end of 2000.
Accounts Payable
Accounts payable were $1,561,752 at December 31, 2000 as compared to $2,366,187
at December 31, 1999. This decrease is primarily attributable to the issuance in
2000 of stock and notes in payment of, respectively, $324,284 and $393,022 of
accounts payable.
Liquidity and Financing Arrangements
We sustained substantial losses from operations in 2000 and 1999. We had an
accumulated deficit of $10,147,408 and a total stockholders' deficit of
$4,326,953 at December 31, 2000. In addition, during 2000 and 1999, we have
used, rather than provided, cash in our operations.
Since December 1999, we have operated without a line of credit. Abacus Ventures,
Inc. 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%. We have had, and
are continuing to have, discussions with Abacus concerning their willingness to
exchange the principal amount of the note and accrued interest for shares of our
common stock, and while we believe that these negotiations may ultimately be
successful, we can offer no assurance that it will agree to any such exchange of
debt for equity or upon what terms such exchange would occur.
During 2000, we were not in compliance with certain covenants relating to our
long-term financing. We obtained waivers from the creditors in all cases except
one, relating to a note for $85,000, in which our payments are in arrears. Some
of our notes are collateralized by our assets. We successfully converted
approximately $800,000 in trade payables in 2000 into notes and common stock,
and 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. 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 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 7. FINANCIAL STATEMENTS
See Item 13(a) for an index to the consolidated financial statements
that are attached hereto.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of CirTran Corporation and related
notes thereto and auditors' report thereon are filed as part of this Form
10-KSB:
Audited Financial Statements: Page
Report of Independent Certified Public Accountants 14
Consolidated Balance Sheets as of December 31, 2000
and 1999 15
Consolidated Statements of Operations for Years
Ended December 31, 2000 and 1999 16
Consolidated Statement of Stockholders' Deficit 17
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000 and 1999 18
Notes to Consolidated Financial Statements 20
2. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby
incorporated by reference into, this Form 10-KSB.
(b) Reports on Form 8-K During the Last Quarter of 2000
CirTran filed one Form 8-K/A during the last quarter of fiscal 2000, on
October 5, 2000, along with the following financial statements of Circuit
Technology Corporation:
Unaudited Consolidated Financial Statements - June 30, 2000 and
1999
Balance Sheet - June 30, 2000
Statements of Operations - Six Months Ended June 30, 2000 and
1999
Statements of Cash Flows - Six Months Ended June 30, 2000
and 1999
Notes To Unaudited Consolidated Financial Statements
Audited Consolidated Financial Statements - December 31, 1999 and
1998
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1999 and 1998
Statements Of Operations - Years Ended December 31, 1999 and
1998
Statements Of Cash Flows - Years Ended December 31, 1999 and
1998
Notes To Consolidated Financial Statements
Unaudited Combined Pro Forma Financial Statements
Balance Sheet - June 30, 2000
Statement of Operations - Six Months Ended June 30, 2000
Statements of Operations - Year Ended December 31, 1999
Notes to Unaudited Combined Pro Forma Financial
Statements
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CirTran Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CirTran
Corporation and Subsidiary, as of December 31, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
consolidated financial statements, the Company has an accumulated deficit, has
suffered losses from operations and has negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note B. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note Q to the financial statements, the 2000 financial
statements have been restated to correct a previously reported overstatement of
inventory and understatement of accounts payable and accrued liabilities.
Salt Lake City, Utah
September 15, 2001
CirTran Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
Assets
2000 1999
--------------- --------------
(Restated)
CURRENT ASSETS
Cash and cash equivalents $ 11,068 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $82,502 in 2000 and $360,493 in 1999 874,097 973,351
Inventories, net 1,755,786 3,056,383
Other 94,176 93,621
--------------- --------------
Total current assets 2,735,127 4,123,855
PROPERTY AND EQUIPMENT, AT COST, NET 1,871,076 2,603,022
OTHER ASSETS, NET 10,587 251,234
--------------- --------------
$ 4,616,790 $ 6,978,111
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Checks written in excess of cash in bank $ 5,491 $ 77,656
Accounts payable 1,561,752 2,366,187
Accrued liabilities 2,339,949 598,786
Line of credit - 2,792,609
Notes payable to stockholders 1,020,966 1,035,966
Current maturities of capital lease obligations 39,274 100,920
Current maturities of long-term obligations 3,432,090 475,385
--------------- --------------
Total current liabilities 8,399,522 7,447,509
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 529,964 726,968
CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES 14,257 82,317
COMMITMENTS - -
Stockholders' DEFICIT
Common stock, par value $0.001; Authorized 750,000,000 shares;
issued and outstanding; 156,301,005 in 2000 and 129,271,560 in 1999 156,301 129,272
Additional paid-in capital 5,664,154 4,645,799
Receivable from stockholders - (86,000)
Accumulated deficit (10,147,408) (5,967,754)
--------------- -------------
Total stockholders' deficit (4,326,953) (1,278,683)
--------------- --------------
$ 4,616,790 $ 6,978,111
=============== ==============
The accompanying notes are an integral part of these statements.
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2000 1999
--------------- ---------------
(Restated) (Restated)
Net sales $ 6,373,096 $ 9,860,489
Cost of sales 6,792,393 10,427,294
--------------- ---------------
Gross loss (419,297) (566,805)
Selling, general and administrative expenses 2,710,275 2,594,430
--------------- ---------------
Loss from operations (3,129,572) (3,161,235)
Other income (expense)
Interest (1,051,027) (764,486)
Other, net 945 156,816
--------------- ---------------
(1,050,082) (607,670)
--------------- ---------------
Loss before income taxes (4,179,654) (3,768,905)
Income taxes - -
--------------- ---------------
Net loss $ (4,179,654) $ (3,768,905)
=============== ===============
Loss per common share
Basic $ (0.03) $ (0.03)
Diluted (0.03) (0.03)
Weighted-average common shares outstanding
Basic 142,765,555 119,296,580
Diluted 142,765,555 119,296,580
The accompanying notes are an integral part of these statements.
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Years ended December 31, 2000 and 1999
(Restated)
Common Stock
---------------------------- Additional Receivable
Number paid-in From Accumulated
of shares Amount capital stockholders deficit Total
------------- ------------- ----------- --------------- -------------- --------------
Balances at January 1, 1999 109,887,630 $ 109,888 $ 2,728,948 $ (225,000) $ (2,198,849) $ 414,987
Issuance of common stock 21,322,320 21,322 2,149,913 - - 2,171,235
Repurchase and retirement of
common stock (1,938,390) (1,938) (233,062) 225,000 - (10,000)
Net loss - - - - (3,768,905) (3,768,905)
Receivable from stockholders - - - (86,000) - (86,000)
------------- ------------- ----------- --------------- -------------- --------------
Balances at December 31, 1999 129,271,560 129,272 4,645,799 (86,000) (5,967,754) (1,278,683)
Issuance of common stock
for cash 9,408,585 9,408 936,692 - - 946,100
Repurchase and retirement of
common stock (680,145) (680) (79,320) - - (80,000)
Recapitalization of Company 14,153,505 14,154 (14,154) - - -
Common stock issued for debt 5,281,050 5,281 319,003 - - 324,284
Purchase and retirement of common
stock for debt (1,133,550) (1,134) (143,866) - - (145,000)
Net loss - - - - (4,179,654) (4,179,654)
Payment from stockholders - - - 86,000 - 86,000
------------- ------------- ----------- --------------- -------------- --------------
Balances at December 31, 2000 156,301,005 $ 156,301 5,664,154 $ - $ (10,147,408) $ (4,326,953)
============= ============= =========== =============== ============== ==============
The accompanying notes are an integral part of this statement.
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2000 1999
--------------- ----------------
(Restated)
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (4,179,654) $ (3,768,905)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 961,506 1,080,193
Loss on disposal of property and equipment - 85,209
Provision for doubtful trade accounts receivables 78,978 285,743
Provision for inventory obsolescence 55,963 368,649
Changes in assets and liabilities
Trade accounts receivable 20,276 514,333
Inventories 1,244,634 (132,977)
Other assets 23,302 129,492
Accounts payable (87,129) (289,282)
Accrued liabilities 1,741,163 346,686
--------------- ----------------
Total adjustments 4,038,693 2,388,046
--------------- ----------------
Net cash used in
operating activities (140,961) (1,380,859)
--------------- ----------------
Cash flows from investing activities
Purchase of property and equipment (12,770) (453,351)
Acquisition costs - (47,857)
--------------- ----------------
Net cash used in
investing activities (12,770) (501,208)
--------------- ----------------
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
2000 1999
------------- --------------
(Restated)
Cash flows from financing activities
Decrease in checks written in excess of cash in bank (72,165) (124,759)
Payment from stockholders 86,000 -
Payments on notes payable to stockholders (15,000) 1,035,966
Proceeds from line of credit - 11,307,621
Principal payments on line of credit - (12,502,201)
Principal payments on long-term obligations (825,593) (291,266)
Proceeds from long-term obligations 254,663 606,719
Payments on capital lease obligations (129,706) (226,987)
Purchase and retirement of common stock (80,000) (10,000)
Proceeds from issuance of common stock 946,100 2,085,235
------------- --------------
Net cash provided by
financing activities 164,299 1,880,328
------------- --------------
Net increase (decrease) in cash and cash equivalents 10,568 (1,739)
Cash and cash equivalents at beginning of year 500 2,239
------------- --------------
Cash and cash equivalents at end of year $ 11,068 $ 500
============= ==============
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 622,266 $ 764,486
Noncash investing and financing activities
Capital lease obligation incurred for equipment - 26,954
Common stock retired as payment of receivables from
stockholders - 225,000
Receivable from stockholders for purchase of stock - 86,000
Stock issued for debt 324,284 -
Notes issued for accounts payable 393,022 -
Stock converted to debt 145,000 -
Conversion of line of credit to note payable 2,792,609 -
The accompanying notes are an integral part of these statements.
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Business activity
Effective July 1, 2000, all of the assets and certain liabilities of
Circuit Technology Corporation (Circuit) were acquired by CTI Systems,
Inc. (CTISI), a wholly owned subsidiary of Vermillion Ventures, Inc.
(VVI), an inactive corporation. The stockholders of Circuit received
150,000,000 shares of VVI common stock in the transaction of which
12,000,000 shares were paid by Circuit to Cogent Capital Corp. (Cogent)
for services performed in facilitating the transaction. CTISI
subsequently changed its name to CirTran Corporation.
The merger was accounted for as a reverse acquisition of CirTran
Corporation by Circuit. Although CirTran Corporation will be the
surviving legal entity, for accounting purposes Circuit was treated as
the surviving accounting entity.
CirTran Corporation (the Company) provides 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. The Company provides a wide variety of
pre-manufacturing, manufacturing and post-manufacturing services. The
Company also designs, develops, manufactures and markets a full line of
local area network products, with emphasis on token ring and Ethernet
connectivity.
2. Principles of consolidation
The consolidated financial statements include the accounts of CirTran
Corporation and its wholly-owned subsidiary, Racore Technology
Corporation. All significant intercompany transactions have been
eliminated in consolidation.
3. 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.
4. Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
5. Inventories
Raw material inventories consist primarily of circuit boards, components
and cables and are valued at the lower of average cost or market. Work in
process and finished goods include materials, labor and overhead.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Property and equipment
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over the estimated service lives.
Leasehold improvements are amortized over the shorter of the life of the
lease or the service life of the improvements. The straight-line method
of depreciation and amortization is followed for financial reporting
purposes. Maintenance, repairs and renewals which neither materially add
to the value of the property nor appreciably prolong its life are charged
to expense as incurred. Gains or losses on dispositions of property and
equipment are included in earnings.
7. Other assets
Included in other assets are intellectual property and financing costs.
Intellectual property is recorded at cost and amortized over the period
that proceeds are received or on a straight-line basis over three years,
whichever is shorter. Financing costs are amortized over the period of
the related debt.
Intangible assets are evaluated periodically as events or circumstances
indicate a possible inability to recover the carrying amount. Such
evaluation is based on various analyses, including undiscounted cash
flows and profitability projections. Impairment would be recognized in
operating results if expected future operating undiscounted cash flows
are less than the carrying value of intangible assets.
Amortization expense totaled $216,790 and $269,930 for 2000 and 1999,
respectively.
8. Checks written in excess of cash in bank
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for accounting
purposes. Additionally, at times banks may temporarily lend funds to the
Company by paying out more funds than are in the Company's account. These
overdrafts are included as a current liability in the balance sheets.
9. Income taxes
As of December 31, 2000, the Company utilizes the liability method of
accounting for income taxes. Under the liability method, deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. An allowance against deferred
tax assets is recorded when it is more likely than not that such tax
benefits will not be realized. Research tax credits are recognized as
utilized.
The Company operated, for tax purposes, as a corporation under provisions
of Subchapter S of the Internal Revenue Code through May 10, 2000 (Note
M).
10. Use of estimates
In preparing the Company's financial statements in accordance with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates (Note B).
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
11. Concentrations of risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. The Company sells substantially to recurring customers
wherein the customer's ability to pay has previously been evaluated. The
Company generally does not require collateral. Allowances are maintained
for potential credit losses, and such losses have been within
management's expectations. At December 31, 2000 and 1999, this allowance
was $82,502 and $360,493, respectively.
At December 31, 2000, accounts receivable from a customer located in
Baltimore, Maryland and a customer located in Nampa, Idaho, represented
approximately 29 percent and 16 percent, respectively, of total trade
accounts receivable. The Company has accounts payable to the Baltimore,
Maryland company of approximately 78 percent of the accounts receivable
balance at December 31, 2000. Sales to these same customers accounted for
30 percent and 4 percent of 2000 revenues, respectively. The Baltimore,
Maryland customer no longer does business with the Company.
12. Fair value of financial instruments
The carrying value of the Company's cash and cash equivalents and trade
accounts receivable, approximates their fair values due to their
short-term nature. The fair value of certain of the notes payable in
default is not determinable.
13. Net loss per share
Basic Earnings Per Share (EPS) are calculated by dividing earnings (loss)
available to common shareholders by the weighted-average number of common
shares outstanding during each period. Diluted EPS are similarly
calculated, except that the weighted-average number of common shares
outstanding includes common shares that may be issued subject to existing
rights with dilutive potential.
14. Reclassifications not material
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation.
NOTE B - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a
going concern. However, the Company has sustained substantial losses from
operations in 2000 and 1999. The Company also has an accumulated deficit
of $10,147,408 and a total stockholders' deficit of $4,326,953 at
December 31, 2000. In addition, the Company has used, rather than
provided, cash in its operations.
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.
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
(Note F) from the lender. Although the Company has had discussions with
Abacus concerning their willingness to exchange the debt for common stock
at an undetermined future date, no agreement has been entered into
between the Company and Abacus. 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. During 2000, the Company
successfully converted approximately $800,000 in trade payables into
notes and common stock. 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.
In the future, significant amounts of additional cash will be needed to
reduce debt and to fund losses until the Company becomes profitable.
During 2000, the Company raised approximately $946,000 of additional
capital from investors. During 2000, the Company's president also loaned
the Company an additional $68,000 (Note G). The Company is continuing to
seek infusions of capital from investors and is also attempting to
replace its line of credit. Management has made changes in operations to
reduce labor and other costs and believes that if adequate cash and
capital as described above are obtained, the Company can become
profitable.
NOTE C - INVENTORIES
Inventories consist of the following:
2000 1999
------------ ------------
Raw materials $ 1,634,178 $ 1,677,554
Work-in process 169,676 1,015,925
Finished goods 497,798 852,807
------------ ------------
2,301,652 3,546,286
Less reserve for obsolescence 545,866 489,903
------------ ------------
$ 1,755,786 $ 3,056,383
============ ============
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the
following:
Estimated
2000 1999 service lives
------------ ------------- -------------
Production equipment $ 3,140,450 $ 3,138,908 5-10
Leasehold improvements 957,845 954,170 7-10
Office equipment 628,522 620,969 5-10
Other 118,029 118,029 3-7
------------ -------------
4,844,846 4,832,076
Less accumulated depreciation
and amortization 2,973,770 2,229,054
------------ -------------
$ 1,871,076 $ 2,603,022
============ =============
NOTE E - OTHER ASSETS
Other assets consist of the following:
2000 1999
------------ ------------
Intellectual property $ - $ 582,540
Financing costs - 150,939
Deposits 10,587 9,197
------------ ------------
10,587 742,676
Less accumulated amortization - 491,442
------------ ------------
$ 10,587 $ 251,234
============ ============
NOTE F - LINE OF CREDIT
During 2000, the Company's line of credit of $2,792,609 was assumed by
Abacas Ventures, Inc. Abacas Ventures, Inc. converted the amount owing
into a note payable. Interest has been accrued at an interest rate of 10
percent. The entire amount of the note is included in current maturities.
NOTE G - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
2000 1999
------------ -------------
Note payable to a company, payable in full, due on demand, interest at
10%, collateralized by all assets of the Company. Interest associated
with this note of $142,042 was accrued and included in accrued
liabilities at December 31, 2000 $ 2,435,007 $ -
Note payable to a financial institution, due in monthly
installments of $9,462, including interest at 8.61%, with a
maturity date of April 2004, collateralized by equipment 377,235 446,352
Note payable to a company, due in monthly installments of $6,256,
including interest at 8%, until paid, collateralized by
equipment 181,431 143,437
Note payable to a financial institution, due in monthly installments of
$20,000, including interest at 4% over prime (12.5% at December 31,
2000), with a maturity date of July
2001, collateralized by equipment 197,285 301,504
Note payable to a company, due in two installments of $83,000 plus
accrued interest at 10% with a maturity of June 2001,
unsecured 166,000 -
Note payable to a shareholder, due in monthly installments of
$12,748 until paid, including interest at 10%, unsecured 130,000 -
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
2000 1999
------------ -------------
Note payable to a company, due in monthly installments of $1,972
until paid, including interest at 8%, unsecured 93,307 -
Note payable to an individual, due in monthly installments of $5,000,
including interest at a rate of 9.5%, with a maturity date of May
2000, collateralized by all assets of the Company,
past due 85,377 104,212
Note payable to a finance corporation, due in monthly installments of
$3,280, including interest at prime plus 3% (11.5% at December 31,
2000) with a maturity date of January
2002, collateralized by equipment 78,105 82,083
Note payable to a company, due in 18 monthly installments of $1,460
followed by six monthly installments of $2,920, including interest at
6%, with a maturity date of April 2003,
unsecured 73,000 -
Note payable to a stockholder/officer, payable in full on demand,
interest at 10%, unsecured 68,000 -
Note payable to a finance corporation, due in monthly installments of
$4,152, including interest at 9%, with a maturity date of July 2000,
collateralized by equipment and
trade accounts receivable, past due 50,619 63,176
Note payable to a finance corporation, due in monthly installments of
$3,114, including interest at 9%, with a maturity date of March 2000,
collateralized by equipment and
trade accounts receivable, past due 15,083 35,761
Note payable to a finance corporation, due in monthly installments of
$3,114, including interest at 9%, with a maturity date of May 2001,
collateralized by equipment and
trade accounts receivable 11,605 25,828
------------ -------------
3,962,054 1,202,353
Less current maturities 3,432,090 475,385
------------ -------------
$ 529,964 $ 726,968
============ =============
The Company's long-term obligations at December 31, 2000 mature as
follows:
Year ending December 31,
2001 $ 3,432,090
2002 296,558
2003 174,454
2004 39,935
2005 19,017
Thereafter -
-------------
$ 3,962,054
=============
Certain of the Company's long-term obligations contain various covenants
and restrictions. The agreements provide for the acceleration of
principal payments in the event of a covenant violation or a material
adverse change in the operations of the Company. At times during the year
and as of December 31, 2000, the Company was not in compliance with
certain of these covenants. In instances where the Company is out of
compliance, these amounts have been shown as current.
NOTE H - LEASES
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment consisting of sales office, warehouses,
manufacturing plant, and transportation and computer equipment.
Generally, the leases provide for renewal for various periods at
stipulated rates.
The following is a schedule by year of future minimum lease payments
under operating and capital leases, together with the present value of
the net lease payments as of December 31, 2000:
Capital Operating
Year ending December 31, leases leases
------------------------ ----------- -------------
2001 $ 46,718 $ 320,526
2002 8,523 324,713
2003 4,389 329,037
2004 3,657 226,298
2005 - 191,688
Thereafter - 175,714
----------- -------------
Future minimum lease payments 63,287 $ 1,567,976
=============
Amounts representing interest (9,756)
-----------
Present value of net minimum lease 53,531
payments Less current maturities 39,274
-----------
$ 14,257
===========
The building leases provide for payment of property taxes, insurance and
maintenance costs by the Company. One of the buildings is leased from
related parties (Note I). Rental expense for operating leases totaled
$325,722 and $743,552 for 2000 and 1999, respectively.
The Company has an option to renew one building lease with related
parties, for two additional ten-year periods upon expiration of the term
in 2006 (Note I).
Property and equipment includes $271,423 of equipment under capital
leases at both December 31, 2000 and 1999. Accumulated amortization
amounted to $181,881 and $138,951 at December 31, 2000 and 1999,
respectively, for equipment under capital leases.
NOTE I - RELATED PARTY TRANSACTIONS
Lease
The Company entered into a lease for manufacturing and office space with
another company owned by certain stockholders of the Company (Note H).
The terms of the lease include monthly payments to the lessor of $15,974
for a period of ten years after which the lease is renewable for two
additional ten-year periods.
NOTE I - RELATED PARTY TRANSACTIONS - CONTINUED
Note payable
At various times during 2000 the Company had amounts due to stockholders.
The balance due to stockholders at December 31, 2000 and 1999 was
$1,020,966 and $1,035,966, respectively. Interest associated with amounts
due to stockholders is accrued at 10 percent, was $103,305 at December
31, 2000 and is included in accrued liabilities. The Company also has an
additional 10 percent note due to its president for $68,000 at December
31, 2000 (Note G).
Common Stock
In 1999, Circuit entered into an agreement with Cogent, a financial
consulting firm, whereby Cogent agreed to assist and provide consulting
services to Circuit in connection with a possible merger or acquisition.
Pursuant to the terms of this agreement, the Company issued 12,000,000
restricted shares of our common stock to Cogent in July 2000 in
connection with our acquisition of the assets and certain liabilities of
Circuit. The principal of Cogent was a director of Circuit from 1999
through July 1, 2000.
NOTE J - ACCRUED LIABILITIES
Accrued liabilities include $1,316,645 of delinquent payroll taxes
including estimated interest and penalties of $95,604 and $111,004,
respectively. As of December 31, 2000, the Company has negotiated a
payment schedule with the state of Utah requiring 12 monthly payments of
$10,863.
NOTE K - LITIGATION
Circuit (the surviving accounting entity, Note A1) is a defendant in an
alleged breach of a facilities sublease agreement in Colorado. A lawsuit
was filed in which the plaintiff seeks to recover past due rent, future
rent, and other lease charges. Management and the Company's attorneys
have estimated the range of potential loss to be between $0 and
$2,500,000. The wide range is due to two rent calculation methods written
in the master lease. Under one calculation, the amount would be minimal.
Under the other calculation, the amount would represent all future rent
(reduced by rent received from future tenants). The Company filed a suit
against the landlord for an amount in excess of $500,000 for missing
equipment. Rent has been accrued through December 31, 2000 and is
included in accrued liabilities.
Circuit is also 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.
NOTE L - LOSS PER COMMON SHARE
The following data show the shares used in computing loss per common
share:
2000 1999
-------------- ---------------
Common shares outstanding during entire period 129,271,560 109,887,630
Net weighted-average common shares issued during period 13,493,995 9,408,950
-------------- ---------------
Weighted-average number of common shares used in basic
and diluted EPS 142,765,555 119,296,580
============== ===============
NOTE L - LOSS PER COMMON SHARE - CONTINUED
The Company has no common stock equivalents and therefore basic and
diluted EPS are the same.
NOTE M - INCOME TAXES
The Company operated, for tax purposes, as a corporation under provisions
of Subchapter S of the Internal Revenue Code through May 10, 2000. During
this period, taxes on income of the Company flowed through to the
stockholders. Accordingly, the Company was not subject to federal income
taxes on Company operating results for the period in which the S election
was in existence, and no provision or current liability or asset for
federal or state income taxes for those periods has been reflected.
On May 10, 2000, the Company revoked their S election and became a
taxable entity. Effective with the change, in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the basis of
assets and liabilities for financial and income tax reporting.
Income tax expense at December 31, 2000, consists of the following:
Current $ -
Deferred -
-------------
$ -
=============
The tax effects of temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 2000, are as follows:
Current deferred tax assets
Inventory reserve $ 262,297
Bad debt reserve 30,773
Vacation reserve 13,591
LIFO Inv. 263A calculation 148,617
-------------
455,278
-------------
Long-term deferred tax assets (liabilities)
Research and development credit 53,974
Research and development capitalized 1,605
Net operating loss carryforward 1,446,233
Intellectual property 200,053
Depreciation (74,714)
-------------
1,627,151
-------------
2,082,429
Valuation allowance (2,082,429)
-------------
$ -
=============
NOTE M - INCOME TAXES - CONTINUED
The Company has sustained net operating losses in both of the periods
presented. There were no deferred tax assets or income tax benefits
recorded in the financial statements for net deductible temporary
differences or net operating loss carryforwards because the likelihood of
realization of the related tax benefits cannot be established.
Accordingly, a valuation allowance has been recorded to reduce the net
deferred tax asset to zero and consequently, there is no income tax
provision or benefit presented for the year ended December 31, 2000.
As of December 31, 2000, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $3,877,300 expiring in
various years through 2020. Utilization of approximately $1,194,000 of
the total net operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate return
limitation rules and limitations on the carryforward of net operating
losses after a change in ownership.
NOTE N - 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:
Electronics Ethernet
2000 Assembly Technology Total
---- -------------- ------------- --------------
Sales to external customers $ 4,686,045 $ 1,687,051 $ 6,373,096
Intersegment sales 1,015,349 40,423 1,055,772
Segment loss (4,179,654) (1,229,248) (5,408,902)
Segment assets 3,916,774 854,806 4,771,580
Depreciation and amortization 687,802 273,704 961,506
1999
Sales to external customers $ 7,954,824 $ 1,905,665 $ 9,860,489
Intersegment sales 1,531,642 7,174 1,538,816
Segment loss (3,818,927) (1,280,627) (5,099,554)
Segment assets 6,655,078 1,216,921 7,871,999
Depreciation and amortization 807,113 273,080 1,080,193
Sales 2000 1999
----- -------------- --------------
Total sales for reportable segments $ 7,428,868 $ 11,399,305
Elimination of intersegment sales (1,055,772) (1,538,816)
-------------- --------------
Consolidated net sales $ 6,373,096 $ 9,860,489
============== ==============
Net Loss
Net loss for reportable segments $ (5,408,902) $ (5,099,554)
Elimination of intersegment losses 1,229,248 1,330,649
-------------- --------------
Consolidated net loss $ (4,179,654) $ (3,768,905)
============== ==============
NOTE N - SEGMENT INFORMATION - CONTINUED
Total Assets
Total assets for reportable segments $ 4,771,580 $ 7,871,999
Elimination of intersegment amounts (154,790) (893,888)
-------------- --------------
Consolidated total assets $ 4,616,790 $ 6,978,111
============== ==============
NOTE O - REVENUES
All revenue-producing assets are located in North America. Revenues are
attributed to the geographic areas based on the location of the customers
purchasing the products.
The Company's net sales by geographic area are as follows:
2000 1999
-------------- --------------
North America $ 5,967,106 $ 8,674,051
Europe/Africa/Middle East 390,808 789,906
Asia/Australia 15,182 396,532
-------------- --------------
$ 6,373,096 $ 9,860,489
============== ==============
NOTE P - FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 2000, the Company recorded various adjustments
that approximated $1.9 million in additional expense that affect, in
part, previous quarters of 2000. The adjustments were recorded as
follows:
1) Adjustments to inventory of $462,280,
2) Additional depreciation expense of $136,706,
3) Additional payable accruals of $815,695,
4) Additional interest expense of $257,600, and
5) Payroll penalties and interest on nonremitted payroll withholdings of
$206,608.
NOTE Q - RESTATEMENT
The financial statements at and for the year ended December 31, 2000 have
been restated to reflect corrections to recognize $300,900 reduction in
inventory, $45,213 write off of accounts receivable and other assets, and
$1,041,653 of additional accounts payable and accrued liabilities. It has
been determined that adjustments are necessary to write down inventory
purchased for specific customers that does not have alternative use and
record accounts payable and accrued liabilities that should have been
recognized in 2000. Accordingly, the cost of sales has been increased by
$600,669, selling, general and administrative expenses has been increased
by $508,485, interest expense has been increased by $207,958, and other
income decreased by $70,654 in the consolidated statement of operations
for the year ended December 31, 2000.
EXHIBIT INDEX
Copies of the following documents are filed with this annual report as
exhibits:
Exhibit No. Document
3.1 Articles of Incorporation, as amended (previously filed as
Exhibit No. 2 to the Company's 8-K dated July 1, 2000,
Commission File No. 33-13674-LA, and incorporated herein by
reference).
3.2 Bylaws (previously filed as Exhibit No. 3 to the Company's
8-K dated July 1, 2000, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10. Material Contracts:
10.1 Lease Agreement dated 2 November 1996 between I &
R Properties, LLC and Circuit Technology, Inc.
(previously filed as Exhibit No. 4 to the
Company's 8-K dated July 1, 2000, Commission File
No. 33-13674-LA, and incorporated herein by
reference).
10.2 Financial Advisory Agreement dated 12 May 1999
between Circuit Technology, Inc. and Cogent
Capital Corp. (previously filed as Exhibit No. 2
to the Company's Annual Report filed May 8, 2001
on Form 10-KSB for the year ending 12/31/00,
Commission File No. 33-13674-LA, and incorporated
herein by reference).
10.3 Form of Product Representative Agreement between
CirTran Corporation and a Representative
(previously filed as Exhibit No. 3 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
10.4 Security and Loan Agreement dated April 6, 1998
between Imperial Bank and Circuit Technology, Inc.
(previously filed as Exhibit No. 4 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
10.5 Line of Credit Purchase Agreement dated May 1,
2000 between Imperial Bank and Abacus Ventures,
Inc. (previously filed as Exhibit No. 5 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
10.6 Assignment of Loan dated May 1, 2000 from Imperial
Bank to Abacus Ventures, Inc. (previously filed as
Exhibit No. 6 to the Company's Annual Report filed
May 8, 2001 on Form 10-KSB for the year ending
12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
10.7 Unsecured Promissory Note for $73,000.00 dated
November 3, 2000 from CirTran Corporation to
Future Electronics Corporation (previously filed
as Exhibit No. 7 to the Company's Annual Report
filed May 8, 2001 on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.8 Unsecured Promissory Note for $166,000.00 dated
November 3, 2000 from CirTran Corporation to
Future Electronics Corporation (previously filed
as Exhibit No. 8 to the Company's Annual Report
filed May 8, 2001 on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.9 Lock-Up Agreement dated November 3, 2000 between
Iehab Hawatmeh and Future Electronics Corporation
(previously filed as Exhibit No. 9 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
10.10 Lock-Up Agreement dated November 3, 2000 between
Raed Hawatmeh and Future Electronics Corporation
(previously filed as Exhibit No. 10 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
10.11 Lock-Up Agreement dated November 3, 2000 between
Roger Kokozyon and Future Electronics Corporation
(previously filed as Exhibit No. 11 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
10.12 Registration Rights Agreement dated November 3,
2000 between CirTran Corporation and Future
Electronics Corporation (previously filed as
Exhibit No. 12 to the Company's Annual Report
filed May 8, 2001 on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.13 Promissory Note and Confession of Judgment dated
September 26, 2000 by Circuit Technology Corp. in
favor of Arrow Electronics, Inc. (previously filed
as Exhibit No. 13 to the Company's Annual Report
filed May 8, 2001 on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.14 Promissory Note and Confession of Judgment dated
November 16, 2000 by Circuit Technology Corp. in
favor of Sager Electronics (previously filed as
Exhibit No. 14 to the Company's Annual Report
filed May 8, 2001 on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.15 Confession of Judgment dated November 3, 2000 by
CirTran Corporation and Iehab Hawatmeh in favor of
Future Electronics Corporation (previously filed
as Exhibit No. 15 to the Company's Annual Report
filed May 8, 2001 on Form 10-KSB for the year
ending 12/31/00, Commission File No. 33-13674-LA,
and incorporated herein by reference).
10.16 Settlement Agreement and Release of Claims dated
November 3, 2000 between CirTran Corporation,
Iehab Hawatmeh and Future Electronics Corporation
(previously filed as Exhibit No. 16 to the
Company's Annual Report filed May 8, 2001 on Form
10-KSB for the year ending 12/31/00, Commission
File No. 33-13674-LA, and incorporated herein by
reference).
21.* Subsidiaries of the Registrant
23.1* Consent of Grant Thornton LLP
---------------
* Filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRTRAN CORPORATION
Date: November 5, 2001 By: /s/ Iehab J. Hawatmeh, President
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: November 5, 2001 /s/ Iehab J. Hawatmeh
Iehab J. Hawatemeh
President, Chief Financial Officer
and Director
Date: November 5, 2001 /s/ Raed Hawatmeh
Raed Hawatmeh, Director
Date: November 5, 2001 /s/ Trevor Saliba
Trevor Saliba, Director