U.S. SECURIITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Amendment No. 3
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001, 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
incorporation or organization) No.)
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: Common Stock, Par Value
$0.001
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: $1,870,848.
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, 2002, was $0.
As of March 31, 2002, the Registrant had outstanding 209,272,191 shares of
Common Stock, par value $0.001.
Documents incorporated by reference: None
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.
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. 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 75% 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
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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.
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, and continue to seek to establish, 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.
In June 2001, Racore received a $225,000 order for specially-designed Ethernet
cards for a federal law enforcement agency. In September 2001, Racore submitted
a bid for business with the same agency that, if accepted, would have resulted
in a contract valued at over $2.0 million over three years. This bid was
ultimately not accepted, but Racore remains committed to actively pursuing
government contracts for its Ethernet card technology. These contracts are
generally awarded in September of each year, the last month of the government's
fiscal year.
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. We believe
the trend towards outsourcing manufacturing will continue. OEMs utilize
manufacturing specialists for many reasons including the following:
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.
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
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use of manufacturing specialists allows OEMs to gain access to advanced
manufacturing capabilities while substantially reducing their overall
resource requirements.
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.
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.
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 2001 and 2000, we and our predecessor corporation, Circuit Technology
Inc., spent approximately $159,271 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
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periods, our subsidiary, Racore, spent approximately $148,287 and $248,049 and
, 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,
though we continue to seek 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.
In 2001, 97% of our net sales were derived from pre-existing customers, whereas
during the year ended December 31, 2000, over 80% of our net sales were derived
from customers that were also customers during 1999. Historically, a small
number of customers accounted for a significant portion of our net sales. In
2001, however, no single customer accounted for more than 10% of our total
sales, and our three largest customers accounted for approximately 25% of our
total 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. We are currently involved in settlement negotiations
regarding 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.
During 2001, we operated without a line of credit and many of our vendors
stopped credit sales of components used by us in the manufacture of products,
thus hampering our ability to attract and retain turnkey customer business. In
addition, financial constraints experienced in 2001 mandated a reduction in our
general work force, including our sales department, which experienced a 50%
reduction in size. These factors, as well as general economic conditions during
the second half of 2001 resulted in a significant decrease in sales during the
fiscal year.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. At December 31, 2001, our backlog was
approximately $1,750,000. The backlog was approximately $4.0 million at
December 31, 2000.
In the late summer and early fall of 2001, we announced several promising
developments in our sales and marketing efforts. These developments included:
(i) the receipt of orders from Tempo Research, a wholly-owned subsidiary of
Textron, Inc. for purchases totaling $425,923 over a nine-month period, $194,330
of which had been shipped and recorded as sales by May 2002, the balance being
shipped and recorded as sales by September 15, 2002; (ii) the receipt of orders
from InterMotive Products for $91,000; (iii) the receipt of orders from Nortel
Networks for $28,130; and (iv) the issuance of bids to SPX and Emerson totaling,
which were subsequently not awarded to us.
As part of our effort to improve our competitive position in the electronics
assembly and manufacturing industry, we also announced that we had formed
business relationships with various offshore manufacturers in Singapore and
Malaysia, the purpose of which was to improve our bidding position with respect
to large orders. We had historically concentrated on such large orders and
attempted to process the orders in our own facilities; however, we found that
our high production costs rendered these contracts unprofitable to us. We
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therefore sought to establish subcontracting relationships with offshore
manufacturers, who experience lower production costs, to allow us to once again
seek large-volume orders.
The Company continues to plan to use the Malaysian manufacturer in connection
with any large volume orders the Company receives, and continues to incorporate
the pricing available offshore in its bids for new manufacturing orders.
Additionally, the Company continues to develop its relationship with
Intermotive. The Company has an existing business relationship with Intermotive
and has orders for continuing production. With respect to business to business
("B2B") opportunities, the Company continues to bid for business relationships
using the B2B software the Company implemented in October 2001.
In the last quarter of 2001 and into 2002, we also took steps to increase our
sales volume by adding three new sales representatives, hiring a sales manager,
implementing software to access databases containing potential new customers and
sales opportunities, and continuing our efforts to improve our competitive
position by installing additional surface-mount technology equipment that had
previously been at our Colorado location and by seeking ISO (International
Organization for Standardization) 9002 certification, which we are hopeful of
obtaining by the end of 2002. This certification would allow us to ensure to
prospective customers that we comply with internationally-recognized quality
production standards.
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. Other than as discussed in "Item 3 - Legal Proceedings" concerning
delinquent payroll taxes, we believe we are in substantial compliance with all
relevant regulations applicable to our business and operations.
Employees
We employ 55 persons, five in administrative positions, 3 in engineering and
design, 44 in clerical and manufacturing, and 3 in sales.
Corporate Background
Our core business was commenced by Circuit Technology, Inc., or Circuit, in 1993
6
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, $4,179,654 in 2000
and $2,933,084 in 2001. 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.
We were incorporated in Nevada in 1987, under the name Vermillion Ventures,
Inc., for the purpose of acquiring other operating corporate entities. We were
largely inactive until July 1, 2000, when we issued a total of 10,000,000 shares
of our common stock (150,000,000 of our shares as presently constituted) to
acquire, through our wholly-owned subsidiary, CirTran Corporation (Utah),
substantially all of the assets and certain liabilities of Circuit.
In 1987, Vermillion Ventures, Inc. filed an S-18 registration statement with the
United States Securities and Exchange Commission ("SEC") but did not at that
time become a registrant under the Securities Exchange Act of 1934 ("1934 Act").
From 1989 until 2000, Vermillion did not make any filings with the SEC under the
1934 Act. In July 2000, we commenced filing regular annual, quarterly, and
current reports with the SEC on Forms 10-KSB, 10-QSB, and 8-K, respectively, and
have made all filings required of a public company since that time. In February
2001, we filed a Form 8-A with the SEC and became a registrant under the 1934
Act. We may be subject to certain liabilities arising from the failure of
Vermillion to file reports with the SEC from 1989 to 1990, but we believe these
liabilities are minimal because there was no public market for the common shares
of Vermillion from 1989 until the third quarter of 1990 (when our shares began
to be traded on the Pink Sheets) and it is likely that the statute of
limitations has run on whatever public trades in the shares of our common stock
may have taken place during the period during which Vermillion failed to file
reports.
On 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.
ITEM 2. DESCRIPTION OF PROPERTIES
We lease approximately 40,000 square feet of office and manufacturing space in
West Valley City, Utah, at a monthly lease rate of approximately $16,000. The
lease is renewable in November of 2006 for two additional ten-year periods.
This facility serves as our principal offices and manufacturing facility and is
leased from I&R Properties, LLC, a company owned and controlled by individuals
who are officers, directors and principal stockholders. We believe our lease
for the facility is on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2001, we had accrued liabilities in the amount of $1,982,445
for delinquent payroll taxes, including interest estimated at $215,268 and
penalties estimated at $242,989. Of this amount, approximately $257,510 was due
7
the State of Utah. Concerning the amount owed the State of Utah, during the
first quarter of 2002, we negotiated a monthly payment schedule of $4,000 ,
which did not provide for the forgiveness of any taxes, penalties or interest.
Approximately $1,713,996 is owed to the Internal Revenue Service (IRS). 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.
Approximately $10,939 is owed the State of Colorado. In addition, we have
committed to keeping current on deposits of our federal withholding amounts.
Monthly payments were made during each of the three months in the second quarter
according to the agreed-upon schedule. As of June 30, 2002, a total of $247,556
was owed to the State of Utah and a total of $1,815,191 was owed to the IRS.
Based on our commitment to the IRS to adhere for six months to our agreed-upon
payment schedule, we anticipate being able to enter into a more definitive
payment arrangement with the IRS later in the fall of 2002. If we do not adhere
to our agreed-upon payment schedule to the IRS, the IRS is unlikely to enter
into a more definitive payment arrangement with us and could levy tax liens
against us.
We (as successor to Circuit Technology, Inc.) were a defendant in an action in
El Paso County, Colorado District Court, brought by Sunborne XII, LLC, a
Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Our liability in this action was
originally estimated to range up to $2.5 million, and we subsequently filed a
counter suit in the same court against Sunborne in an amount exceeding $500,000
for missing equipment. Effective January 18, 2002, we entered into a
settlement agreement with Sunborne with respect to the above-described
litigation. The settlement agreement required us to pay Sunborne the sum of
$250,000. Of this amount, $25,000 was paid upon execution of the agreement, and
the balance of $225,000, together with interest at 8% per annum, was payable by
July 18, 2002. As security for payment of the balance, we executed and
delivered to Sunborne a Confession of Judgment and also issued to Sunborne
3,000,000 shares of our common stock, to be held in escrow as security for
performance of our obligations under the settlement agreement. We were also
required, if 75% of the balance owing under the agreement was not paid by May
18, 2002, to prepare and file with the Securities & Exchange Commission, at our
expense, a registration statement with respect to the shares that were escrowed.
The payment was not made, nor was a registration statement filed with respect to
the escrowed shares.
Pursuant to a Termination of Sublease Agreement dated as of May 22, 2002 among
us, Sunborne and other parties, the sublease agreement that was the subject of
our litigation with Sunborne was terminated and a payment of approximately
$109,000 was credited against the amount owed by us to Sunborne under our
settlement agreement with them.
As of July 18, 2002, we were in default of our obligations under our settlement
agreement with Sunborne, and Sunborne is entitled to file the Confession of
Judgment and proceed with execution thereon. We are currently negotiating with
Sunborne in an attempt to settle our remaining obligation under the settlement
agreement. If we are unable to reach a settlement with Sunborne, any attempts
on their part to execute on the judgment could have a material adverse impact on
our business. It is likely that Sunborne would execute on the shares of our
common stock held in the escrow as security for performance of our obligations
under the settlement agreement.
We also assumed certain liabilities of Circuit Technology, Inc. in connection
with our transactions with that entity in the year 2000, and as a result we are
defendant in a number of legal actions involving nonpayment of vendors for goods
and services rendered. We have accrued these payables and have negotiated
settlements with respect to some of the liabilities, including those detailed
below, and are currently negotiating settlements with other vendors.
1. Arrow Electronics, Inc. obtained a judgment against Circuit Technology,
Inc. in the amount of $215,251, plus 8% interest as of March 17, 2000. In
September 2000, we settled this judgment in the amount of $199,678, plus 8%
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interest as of September 23, 2000. The terms of the settlement require us to
make monthly payments of $6,256 to Arrow Electronics until the settlement
amount is paid in full, or approximately three years.
2. Sager Electronics, another trade creditor, brought a claim against
Circuit Technology, Inc., for unpaid goods and services in the amount of
$97,259. In November 2000, we settled this claim in the amount of $97,259
plus 8% interest. The terms of the settlement require CirTran to make
monthly payments of $1,972 to Sager Electronics until the settlement amount
is paid in full, or approximately five years.
3. In November 2000, we entered into a debt settlement agreement with
Future Electronics Corporation ("Future") pursuant to which we issued
5,281,050 shares of our common stock, as currently constituted, in exchange
for $324,284 of trade debt relief. We also granted Future "piggy-back"
registration rights in respect of these shares, pursuant to which we are
required, for a period of three years, i.e., until November 2003, to include
up to 50% of Future's shares in any registration statement filed by us. We
are also obligated to pay the costs of any such registration. These
registration rights are assignable and transferable to any individual or
entity that does not directly compete with us.
On July 31, 2002, we entered into a Mutual Release and Settlement Agreement (the
"Osicom Agreement") with Osicom Technologies, Inc and Entrada Networks, Inc. In
January 2001, we had filed a breach of contract action against Osicom, one of
our customers, seeking damages of $875,000 in respect of Osicom's cancellation
of a portion of a manufacturing contract. Pursuant to the terms of the Osicom
Agreement, we have agreed to dismiss our claims against Osicom and Entrada in
consideration for a series of six payments by Entrada to us in August-October
2002 that total $265,000. Of this amount, approximately $158,000 is allocated
to the purchase of inventory from us and the balance of approximately $107,000
is allocated to amounts owed to us by Osicom and/or Entrada, which amounts
represent a net receivable on our books from Osicom of approximately $94,000
(the difference between an outstanding receivable of $274,000 and an outstanding
payable of $180,000). Entrada also agreed to issue a purchase order to us for
up to $125,000 of inventory, which inventory is deliverable within 90 days
following the last payment to be made under the agreement, due on October 29,
2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of
the year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock traded sporadically on the Pink Sheets under the symbol "CIRT"
from July 2000 to July 2002. Effective July 15, 2002, the NASD approved our
shares of common stock for quotation on the NASD Over-the-Counter Electronic
Bulletin Board. The following table sets forth, for the respective periods
indicated, the prices of our common stock as reported and summarized on the Pink
Sheets. These prices are based on inter-dealer bid and asked prices, without
markup, markdown, commissions, or adjustments and may not represent actual
transactions.
Calendar Quarter Ended High Bid Low Bid
---------------------- -------- -------
March 31, 2002 $0.08 $0.02
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December 31, 2001 $0.10 $0.04
September 30, 2001 (1) $0.36 $0.06
June 30, 2001 $3.500 $1.500
March 31, 2001 $5.500 $3.000
December 31, 2000 $4.000 $4.000
(1) Our 15 for 1 forward stock split was made effective August 6, 2001 and
our stock price decreased accordingly.
As of March 31, 2002, we had 557 shareholders of record holding 209,272,191
shares of common stock.
We have not paid, nor declared, any dividends on our common stock since our
inception and do not intend to declare any such dividends in the foreseeable
future. Our ability to pay dividends is subject to limitations imposed by Nevada
law. Under Nevada law, dividends may be paid to the extent the corporation's
assets exceed its liabilities and it is able to pay its debts as they become due
in the usual course of business.
We did not sell any shares of common stock during 2001 that were not registered
under the Securities Act of 1933.
Penny Stock Rules
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide
that any equity security is considered to be a penny stock unless that security
is registered and traded on a national securities exchange meeting specified
criteria set by the SEC, authorized for quotation from the NASDAQ stock market,
issued by a registered investment company, and excluded from the definition on
the basis of price (at least $5.00 per share), or based on the issuer's net
tangible assets or revenues. In the last case, the issuer's net tangible assets
must exceed $3,000,000 if in continuous operation for at least three years or
$5,000,000 if in operation for less than three years, or the issuer's average
revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-
dealers must make a special suitability determination for the purchase of the
security and must have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving
a penny stock, the rules require the delivery, prior to the first transaction,
of a risk disclosure document relating to the penny stock. A broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the security. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks. These rules may restrict the ability of broker-dealers to trade
or maintain a market in our common stock, to the extent it is penny stock, and
may affect the ability of shareholders to sell their shares.
10
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.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Financial Statements includes
a summary of the significant accounting policies and methods used in the
preparation of our Financial Statements. The following is a brief discussion of
the more significant accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. Returns for defective
items are repaired and sent back to the customer. Historically, expenses
experienced with such returns have not been significant and have been recognized
as incurred.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material and overhead costs. Overhead costs are based on indirect
costs allocated among cost of sales, work-in-process inventory and finished
goods inventory. Overhead costs are subject to management's discretion regarding
which inventory and cost of sale accounts are subject to overhead allocation.
Determining overhead costs also requires estimation based on management's
allocation of indirect costs.
When there is evidence that the inventory's value is less than original cost,
the inventory will be lowered to market value. We evaluate market value on
current resale amounts and whether there is technological obsolescence.
Currently, some of our inventory is over one year old but still considered the
industry standard and will continue to be used in the production process.
11
The Company typically orders inventory on a customer-by-customer basis. In
doing so the Company enters into binding agreements that the customer will
purchase any excess inventory after all orders are complete. Approximately 78%
of the total inventory is secured by these agreements.
Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out more funds
than were in our accounts under existing lines of credit with those banks.
Subsequent to May 2000, when Abacas purchase our line of credit obligation, the
Company no longer had lines of credit with banks, and those loans were no longer
available or made to us.
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item
6 under "Liquidity and Capital Resources - Liquidity and Financing
Arrangements," and in "Item 12 - Certain Relationships and Related
Transactions."
Results of Operations - Comparison of Years Ended December 31, 2001 and 2000
Sales and Cost of Sales
Net Sales decreased 70.6% to $1,870,848 for the year ended December 31, 2001 as
compared to $6,373,096 for the year ended December 31, 2000. The decrease is
partially due to the loss of a major customer, Entrada Networks, Inc., successor
in interest to Osicom Technologies, which generated approximately 30% of our
total revenues in 2000. Additional factors include the following: operating
without a line of credit; the unwillingness of many of our vendors to continue
credit sales of components used by us in the manufacture of products, thus
hampering our ability to attract and retain turnkey customer business; financial
constraints which mandated a reduction in our general work force, including our
sales department, which experienced a 50% reduction in size; and general
economic conditions during the second half of 2001
Cost of sales for the year ended December 31, 2001 was $2,340,273, as compared
to $6,792,393 incurred during the prior year. Those costs as a percentage of
net sales were 125% during 2001 as compared to 106.6% during 2000. We believe
the increase in our already high cost of sales was primarily attributable to
significant write-offs for obsolete inventory resulting from inadequate
inventory control. These costs were offset, to some extent, through our sale,
or use in the production process, of inventory totaling $205,287, which had been
fully allowed against in previous periods. The effect of this is to reduce cost
of sales as a percentage of sales.
Lack of adequate inventory management and control has negatively affected our
gross margins. We 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 2001 was
$340,579, as compared to $545,866 in 2000, and has increased cost of sales. We
have changed our method of managing and controlling our inventory so that we can
12
identify inventory by a general part number, rather than a customer number, and
we have instituted monthly reviews to better update and control our inventory.
We believe these improvements have lead to better inventory control and will
contribute to decreased cost of sales. If we are successful in decreasing our
cost of sales, and if we are able to maintain and increase our levels of sales,
we believe 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 2000 and 2001; 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 Gross Loss
Sales
---- --------- --------- ----------
Electronics 2000 4,686,045 4,972,689 (286,644)
Assembly
2001 1,352,085 1,718,687 (366,602)
Ethernet 2000 1,687,051 1,819,704 (132,653)
Technology
2001 518,763 621,586 (102,823)
Pre-
Total existing New
Year Sales Customers Customers
---- --------- ----------- ---------
Electronics 2000 4,686,045 4,317,668 (368,357)
Assembly
2001 1,352,085 1,311,522 40,563
Ethernet 2000 1,687,051 787,649 899,402
Technology
2001 518,763 462,844 55,919
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, 2001 was 1,773,888 at
December 31, 2001, as compared to $1,755,786 at December 31, 2000. This
marginal increase was due to the net effect of an increase in raw materials in
anticipation of orders to be processed in the first quarter of 2002 and
decreases in work-in-process and finished goods.
Selling, General and Administrative Expenses
During the year ended December 31, 2001, selling, general and administrative
expenses were $1,690,837 versus $2,710,275 for 2000, a 37.6% decrease which was
primarily attributable to an almost 50% reduction in the size of our workforce.
Interest Expense
Interest expense for 2001 was $773,034 as compared to $1,015,027 for 2000, a
decrease of 24%. This decrease is primarily attributable to a decrease in
deliquent payroll tax liabilities, the penalties on which were previously
recorded as part of interest expense. As of December 31, 2000 and 2001, the
amount of our liability for delinquent state and federal payroll taxes and
estimated penalties and interest thereon was $1,309,990 and $1,982,445,
respectively.
Other income declined from $945 in 2000 to $212 in 2001.
13
As a result of the above factors, our overall net loss decreased 29.8% to
$2,933,084 for the year ended December 31, 2001, as compared to $4,179,654 for
the year ended December 31, 2000.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses and our accumulated deficit was $13,080,492 at December 31, 2001 and was
$10,147,408 at December 31, 2000. Our net operating loss for the year ending
December 31, 2001 was $2,933,084, compared to $4,179,654 for the year ending
December 31, 2000. Our current liabilities exceeded our current assets by
$5,664,395 as of December 31, 2000 and $7,832,259 as of December 31, 2001. For
the years ended December 31, 2001 and 2000, we recorded negative cash flows from
operations of $288,724 and $140,961, respectively.
Cash
At December 31, 2001, we had cash on hand of $499, a decrease of $10,569 from
December 31, 2000.
Net cash used in operating activities was $288,724 for the fiscal year ended
December 31, 2001. During 2001, net cash used in operations was primarily
attributable to $2,933,084 in net losses from operations, partially offset by
non-cash charges and increases in accrued liabilities of $808,648 and in
accounts payable of $612,038. The non-cash charges include depreciation and
amortization of $504,090, provision for doubtful trade accounts receivable of
$(16,186), and provision for inventory obsolescence of $(205,287).
Net cash used in investing activities during the fiscal year ended December 31,
2001 consisted of equipment purchases of $2,939.
Net cash provided by financing activities was $281,094 during the fiscal year
ended December 31, 2001. Principal sources of cash were stockholder notes
payable of $301,159, proceeds of $158,255 from long-term notes payable, an
increase of $154,473 in checks written in excess of cash in bank, and proceeds
of $117,660 from the exercise of options to purchase shares of our common stock.
Principal uses of cash during 2001 consisted of $445,903 principal payments of
long-term obligations and $4,550 payments on capital lease obligations.
Accounts Receivable
At December 31, 2001, we had receivables of $369,250, net of a reserve for
doubtful accounts of $66,316, as compared to $874,097 at December 31, 2000, net
of a reserve of $82,502. The smaller reserve for doubtful accounts in 2001 is
attributable to increased efforts to improve the aging and quality of our
current receivables. Of the amount shown for receivables as of December 31,
2001, $273,328, or approximately 63%, was owed to us by Osicom, one of our
former customers against whom we had filed a breach of contract suit in January
2001. Subsequent to year-end, we entered into a settlement agreement with
Osicom which provides for the payment of all amounts owed to us by Osicom. See
"Item 3 - Legal Proceedings."
Accounts Payable
Accounts payable were $2,141,290 at December 31, 2001 as compared to $1,561,752
at December 31, 2000. This increase is primarily attributable to a lack of cash
14
flows available to pay vendors.
Liquidity and Financing Arrangements
We sustained substantial losses from operations in 2001 and 2000. We had an
accumulated deficit of $13,080,492 and a total stockholders' deficit of
$6,942,377 at December 31, 2001. In addition, during 2001 and 2000, we have
used, rather than provided, cash in our operations. As of December 31, 2001,
our monthly operating costs and interest expenses averaged approximately
$205,000 per month. As of June 30, 2002, this amount had decreased to
approximately $187,000 per month. In addition, the total amount per month that
we have committed to paying against accrued liabilities and notes payable
pursuant to various settlements for outstanding debt, litigation and delinquent
payroll taxes is currently approximately $38,000.
Since February 2000, we have operated without a line of credit. Abacas
Ventures, Inc., an entity whose shareholders include the Saliba Private Annuity
Trust, one of our major shareholders (see "Item 11 - Security Ownership of
Certain Beneficial Owners and Management") and a related entity, the Saliba
Living Trust, purchased our line of credit of $2,792,609, and this amount was
converted into a note payable to Abacas 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 Abacas pursuant to this note payable. Subsequent to year-end, we
entered into agreements with the Saliba Private Annuity Trust and the Saliba
Living Trust to exchange 19,987,853 shares of our common stock for $1,499,090 in
principal amount of this debt and to issue an additional 6,666,667 shares to
these trusts for $500,000 cash which was used for working capital for the
Company. See "Item 12 - Certain Relationships and Related Transactions."
During 2001, we converted approximately $32,500 of trade payables into notes and
stock. Subsequent to year-end, in addition to the above-described transactions
with the Saliba trusts, we 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. See "Item 12 - Certain Relationships and
Related Transactions." 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 Abacas 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. The total amount per month that we have committed to paying pursuant
to various settlements for outstanding debt, litigation and delinquent payroll
taxes is currently approximately $38,000, all of which is against accrued
liabilities and notes payable. None of these settlements, however, have
resulted in the forgiveness of any amounts owed, but have simply resulted in a
restructuring in the terms of the various debts.
Management believes that each of the related party transactions were as fair to
the Company as could have been made with unaffiliated third parties.
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
15
company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock was obtained in July 2002.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short- or the long-term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about
our ability to continue as a going concern.
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
Our financial statements appear at the end of this report beginning with the
Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As was disclosed in the information previously filed in our Current Report on
Form 8-K filed on March 14, 2002 and in subsequent amendments to this Form 8-K,
on March 12, 2002, we engaged Hansen, Barnett & Maxwell as our independent
auditor with respect to our fiscal year ending December 31, 2001. Hansen,
Barnett & Maxwell was subsequently retained to also audit and provide a report
on our financial statements for the fiscal year ending December 31, 2000 and is
thus providing a report on all financial statements included in this Annual
Report on Form 10KSB.
16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Officers
The following sets forth the names, ages and positions of our directors and
officers and the officers of our operating subsidiary, CirTran Corporation
(Utah), along with their dates of service in such capacities.
Name Age Positions
------------------ --- -----------------------------------------------
Iehab J. Hawatmeh 35 President, Chief Financial Officer, Secretary
and Director of CirTran Corporation; President
of CirTran Corporation (Utah).
Served since July 2000.
Raed Hawatmeh 37 Director since June 2001.
Trevor Saliba 27 Director since June 2001. Senior Vice-
President, Sales and Marketing since January 2002
Shaher Hawatmeh 36 Executive Vice-President of CirTran Corporation
(Utah). Served since July 2000.
Iehab J. Hawatmeh. Mr. Hawatmeh is our President and Secretary and a member of
our Board of Directors. Mr. Hawatmeh served as the President and Chief
Executive Officer of Circuit Technology, Inc. from 1993 until we acquired it in
July 2000. In this position, he was responsible for all operational, financial,
marketing and sales activities of Circuit Technology. He now performs similar
functions for us and our operating subsidiary, CirTran Corporation (Utah). Mr.
Hawatmeh is the brother of Shaher Hawatmeh.
Shaher Hawatmeh. Shaher Hawatmeh served as the Vice-President and Treasurer of
Circuit Technology, Inc. from 1993 until July 2000 and now serves as Executive
Vice-President of our operating subsidiary, CirTran Corporation (Utah). In such
capacities, he is responsible for budget development, strategic planning, asset
management and marketing. Mr. Hawatmeh is the brother of Iehab Hawatmeh.
Raed Hawatmeh. Raed Hawatmeh, who is not related to Iehab and Shaher Hawatmeh,
has served as a director since June 2001. Mr. Hawatmeh has been a self-employed
investor and venture capitalist for the past five years, specializing in
financing start-up companies in the electronics industry.
Trevor Saliba. Mr. Saliba has served as a director since June 2001 and was
appointed Senior Vice-President, Sales and Marketing in January 2002. In 1997,
Mr. Saliba founded Saliba Corporation, a San Francisco construction company, and
has served as its president since that time. Prior to 1997, Mr. Saliba was
employed as a project engineer for Tutor-Saliba Corporation.
Criminal Proceeding Involving Iehab and Shaher Hawatmeh
Two of our directors and officers, Iehab Hawatmeh and Shaher Hawatmeh, were
subject to a criminal proceeding in Third District Court in Salt Lake City, Utah
(Case No. 991920656FS) that is unrelated to our business and operations.
Messrs. Hawatmeh, along with their parents, were charged with the offenses of
assault and aggravated kidnapping of their sister and daughter, Muna Hawatmeh,
in October 1999. Effective December 18, 2001, Iehab and Shaher Hawatmeh entered
17
into Diversion Agreements with the State of Utah with respect to these
proceedings. These agreements provided that the prosecution of the offenses be
deferred for a period not to exceed two years and, upon satisfactory completion
of the terms of the diversion agreements by the Hawatmehs, the State of Utah
would conduct no further prosecution relating to the offenses. The terms of the
Agreements provided that the Hawatmehs must have no contact with their sister
and must not commit any criminal offenses (excluding minor traffic offenses). On
January 14, 2003, the Third District Court dismissed all charges against
Iehab and Shaher Hawatmeh upon successful completion of the Diversion
Agreements.
Indemnification Provisions
Our Bylaws provide, among other things, that our officers or directors are not
personally liable to us or to our stockholders for damages for breach of
fiduciary duty as an officer or director, except for damages for breach of such
duty resulting from (a) acts or omissions which involve intentional misconduct,
fraud, or a knowing violation of law, or (b) the unlawful payment of dividends.
Our Bylaws also authorize us to indemnify our officers and directors under
certain circumstances. We anticipate we will enter into indemnification
agreements with each of our executive officers and directors pursuant to which
we will agree to indemnify each such person for all expenses and liabilities
incurred by such person in connection with any civil or criminal action brought
against such person by reason of their being an officer or director of the
Company. In order to be entitled to such indemnification, such person must have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the Company and, with respect to criminal actions, such
person must have had no reasonable cause to believe that his conduct was
unlawful.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and long
term compensation for services to us in all capacities (including Circuit
Technologies, Inc.) for the prior fiscal years ended December 31, 2001, 2000,
and 1999, of those persons who were either (i) the chief executive officer
during the last completed fiscal year or (ii) one of the other four most highly
compensated executive officers as of the end of the last completed fiscal year.
The individuals named below received no other compensation of any type, other
than as set out below, during the fiscal years indicated.
18
Annual Compensation Long-Term
Compensation Awards
Name and Year Salary Bonus Restricted Stock
Principal Position ($) ($) Stock Options
Awards (#) All Other
($) Compensation
------------------ ----- --------- ----- ----------- ------- ------------
Iehab J. Hawatmeh 2001 175,000 - - - -
President,
Secretary 2000 175,000 - - - -
Treasurer and
Director 1999 187,230 - - - -
Shaher Hawatmeh 2001 130,000 - - 500,000 -
Executive Vice 2000 109,000 - - - -
President of
CirTran Corporation
(Utah) 1999 86,154 - - - -
Employment Agreements
Iehab Hawatmeh entered into an employment agreement with Circuit in 1993 that
was assigned to us as part of the reverse acquisition of Circuit in July 2000.
This agreement, which is of indefinite term, provides for a base salary for Mr.
Hawatmeh, plus a bonus of 2% of our net profits before taxes, payable quarterly,
and any other bonus our board of directors may approve. The agreement also
provides that, if Mr. Hawatmeh is terminated without cause, we are obligated to
pay him, as a severance payment, an amount equal to five times his then-current
annual base compensation, in one lump-sum payment or otherwise, as Mr. Hawatmeh
may direct.
Trevor Saliba entered into an agreement with us in January 2002 pursuant to
which we retained Mr. Saliba as Senior Vice-President, Sales and Marketing.
The agreement provides for remuneration to Mr. Saliba of $6,000 per month, plus
reimbursement for all pre-approved business expenses. In addition, we agreed to
pay Mr. Saliba an amount equal to 5.0% of all gross investments made into our
company that are generated and arranged by Mr. Saliba. The agreement has an
initial term of one year, renewable upon agreement of the parties, but is
terminable by either party for any reason upon 90 days written notice to the
other party. In addition, we may terminate the agreement upon 30 days written
notice if Mr. Saliba fails to comply with the terms of the agreement.
2001 Stock Plan
On July 25, 2001, our board approved and adopted our 2001 Stock Plan, or the
Plan, subject to shareholder approval. An aggregate of 15,000,000 (post forward
split) shares of our common stock are subject to the Plan, which provides for
grants to employees, officers, directors and consultants of both non-qualified
(or non-statutory) stock options and "incentive stock options" (within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended). The
Plan also provides for the grant of certain stock purchase rights, which are
subject to a purchase agreement between us and the recipient. The purpose of
the Plan is to enable us to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to such
persons, and to promote the success of our business.
All of our and our affiliates' and subsidiaries' employees, officers and
directors are eligible to participate in the Plan. Under the Plan, each or our
current non-employee directors is entitled to receive an initial option covering
375,000 (post forward-split) shares of common stock, and, commencing in 2002,
each non-employee director is entitled to receive an annual grant of an option
covering an additional 375,000 (post forward-split) shares of common stock. No
grants of options were made during 2001 to non-employee directors or to any
other directors. Our non-employee agents, consultants, advisors and independent
contractors are also eligible to participate in our stock plan.
19
The Plan is administered by our board of directors, which designates from time
to time the individuals to whom awards are made under the Plan, the amount of
any such award and the price and other terms and conditions of any such award.
The Plan shall continue in effect until July 25, 2006, subject to earlier
termination by our board. The board may suspend or terminate the Plan at any
time.
The board determines the persons to whom options are granted, the option price,
the number of shares to be covered by each option, the period of each option,
the times at which options may be exercised and whether the option is an
incentive or non-statutory option. No employee may be granted options or stock
purchase rights under the Plan for more than an aggregate of 7,500,000 shares in
any given fiscal year. We do not receive any monetary consideration upon the
granting of options. Options are exercisable in accordance with the terms of an
option agreement entered into at the time of grant.
The board may also award our shares of common stock under the Plan as stock
purchase rights. The board determines the persons to receive awards, the number
of shares to be awarded and the time of the award. Shares received pursuant to
a stock purchase right are subject to the terms, conditions and restrictions
determined by the board at the time the award is made, as evidenced by a
restricted stock purchase agreement. No stock purchase rights have been granted
under the Plan.
The Plan further provides that if the number of outstanding shares of our common
stock is increased or decreased or changed into or exchanged for a different
number or kind of our shares or securities or of another corporation by reason
of any recapitalization, stock split or similar transaction, appropriate
adjustment will be made by the board in the number and kind of shares available
for awards under the Plan.
The following table sets forth certain information concerning options to
purchase our common stock that were granted in 2001 to the named executive
officers pursuant to the Plan:
Individual Grants Potential Realizable
alue At Assumed Annual
Rates Of Stock Price
Appreciation For Option
Term ($)(1)
------------------------
Name Number of Percent Exercise Expiration 5% 10%
Securities of Total Price ($) Date
Underlying Options
Options Granted
Granted to
Employees
In Fiscal
Year
-------------- ------ --------- -------- -------- ---- -----
Iehab Hawatmeh --0--
Shaher Hawatmeh 500,000 43.5 $0.07 9/28/2006
(1) Calculated using the Black Scholes pricing model with the following
assumptions: (a) volatility-100%, (b) risk free rate-5%, (c) dividend yield-0%
and (d) time of exercise-10 years.
The following table sets forth information concerning options exercised during
2001 and the year-end number and value of unexercised options with respect to
each of the named executive officers.
Number of Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
Shares Value At Fiscal Year End (#) At Fiscal Year End ($)(1)
Acquired On Realized -------------------------- --------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
-------------- ------------ -------- ----------- ------------- ----------- -------------
Iehab Hawatmeh - - - - - -
Shaher Hawatmeh 500,000 nil - - - -
20
ITEM 11. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of the 209,272,171
outstanding shares of our common stock which, according to the information
supplied to us, were beneficially owned, as of March 31, 2002, by (i) each
person who is currently a director, (ii) each executive officer, (iii) all
current directors and executive officers as a group and (iv) each person who, to
our knowledge, is the beneficial owner of more than 5% of our outstanding common
stock. None of the individuals listed below own any options or warrants to
purchase our common stock.
Except as otherwise indicated, the persons named in the table have sole voting
and dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable. Beneficial ownership is determined
according to the rules of the Securities and Exchange Commission, and generally
means that person has beneficial ownership of a security if he or she possesses
sole or shared voting or investment power over that security. Each director,
officer, or 5% or more shareholder, as the case may be, has furnished us
information with respect to beneficial ownership. Except as otherwise indicated,
we believe that the beneficial owners of the common stock listed below, based on
the information each of them has given to us, have sole investment and voting
power with respect to their shares, except where community property laws may
apply.
Common Percent of
Name and Address Relationship Shares Class
------------------- ------------ --------- ------------
Cogent Capital Corp. 5%
P.O. Box 1362 Shareholder 11,547,660(1) 5.52
Draper, Utah 84020
Saliba Private Annuity 5% 37,173,990 17.76
Trust (2) Shareholder
115 S. Valley Street
Burbank, CA 91505
Roger Kokozyon 5% 27,715,620 13.24
4539 Haskell Avenue Shareholder
Encino, CA 91436
Iehab J. Hawatmeh Director, 46,415,643 22.18
4125 South 6000 West Officer
West Valley City, Utah & 5%
84128 Shareholder
Raed Hawatmeh Director 28,729,530 13.73
10989 Bluffside Drive & 5%
Studio City, CA 91604 Shareholder
Shaher Hawatmeh Officer 3,775,365 1.8
4125 South 6000 West
West Valley City, Utah
84128
Trevor Saliba (2) Director - 0 - *
5 Thomas Mellon Circle,
Suite 108
San Francisco, California
94134
All Officers and Directors 78,920,538 37.71%
as a Group
(4 persons)
___________________
* Less than 1%.
21
(1) Includes 37,320 shares of stock held by an affiliate of Cogent Capital
Corp. The sole shareholder of Cogent Capital Corp. is Gregory L. Kofford.
(2) Includes 4,664,620 shares held by the Saliba Living Trust.
Thomas L. Saliba and Betty R. Saliba are the trustees of The Saliba Living Trust
and Thomas L. Saliba is the sole trustee of The Saliba Private Annuity Trust.
These persons control the voting and investment decisions of the shares held by
the respective trusts. Mr. Thomas L. Saliba is a nephew of the grandfather of
Mr. Trevor Saliba, one of our directors and officers. Mr. Trevor Saliba is one
of five passive beneficiaries of Saliba Private Annuity Trust and has no control
over its operations or management. Mr. Saliba disclaims beneficial control
over the shares indicated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We lease our principal offices and manufacturing facility from I&R Properties
LLC, a Utah limited liability company, at a monthly lease rate of approximately
$16,000 under a lease that has a current term expiring in November 2006. We
have the option of renewing the lease for two additional 10-year terms. I & R
Properties, LLC is owned and controlled by Iehab J. Hawatmeh, an officer,
director and principal stockholder, Raed Hawatmeh, a principal stockholder and
director, and Shaher Hawatmeh, an officer of CirTran Corporation (Utah), our
operating subsidiary.
As of December 31, 2001, Iehab Hawatmeh had loaned us a total of $1,390,125.
The loans were demand loans, bore interest at 10% per annum and were unsecured.
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. Two of these agreements were with the Saliba Private Annuity Trust, one
of our principal shareholders, and a related entity, the Saliba Living Trust.
The Saliba trusts are also principals of Abacas Ventures, Inc., which entity
purchased our line of credit in May 2000. (See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Liquidity and Financing Arrangements.")
Pursuant to the Saliba agreements, the trusts were issued a total of 26,654,520
shares of common stock in exchange for $500,000 cash and the cancellation of
$1,499,090 of debt. As a result of this transaction, the percentage of our
common stock owned by the Saliba Private Annuity Trust and the Saliba Living
Trust increased from approximately 6.73% to approximately 17.76%%. Mr. Trevor
Saliba, one of our directors and officers, is a passive beneficiary of the
Saliba Private Annuity Trust. Pursuant to the other two agreements made in
January, we issued an aggregate of 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 by two shareholders, Mr. Iehab Hawatmeh (our president, a director
and our principal shareholder) and Mr. Rajai Hawatmeh. Of these shares,
15,333,333 were issued to Iehab Hawatmeh in exchange for the cancellation of
$1,150,000 in debt. As a result of this transaction, the percentage of our
common stock owned by Mr. Hawatmeh increased from 19.9% to approximately 22.18%.
In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a
public company, Circuit Technology, Inc., while still a private entity, redeemed
680,145 shares (as presently constituted) of common stock held by Raed Hawatmeh,
who was a director of Circuit Technology, Inc. at that time, in exchange for
$80,000 of expenses paid on behalf of the director. No other stated or unstated
rights, privileges, or agreements existed in conjunction with this redemption.
This transaction was consistent with other transactions where shares were
offered for cash.
22
In 1999, Circuit entered into an agreement with Cogent Capital Corp., or
"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, we issued 800,000 (pre-
forward split) restricted shares (12,000,000 post-forward split 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
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
Management believed at the time of each of these transactions and continues to
believe that each of these transactions were as fair to the Company as could
have been made with unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Copies of the following documents are included as exhibits to this report
pursuant to Item 601 of Regulation S-B.
Exhibit Document
No.
3.1 Articles of Incorporation (previously filed as Exhibit
No. 2 to our 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 our 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 our 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 our Annual Report filed 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 our Annual
Report filed 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 our
Annual Report filed 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 Abacas Ventures,
Inc. (previously filed as Exhibit No. 5 to our
Annual Report filed 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 Abacas Ventures, Inc.
(previously filed as Exhibit No. 6 to our Annual
Report filed on Form 10-KSB for the year ending
12/31/00, Commission File No. 33-13674-LA, and
incorporated herein by reference).
23
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 our Annual Report filed 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 our Annual Report filed 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 our Annual Report filed 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 our
Annual Report filed 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 our Annual Report filed 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 our Annual Report filed 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 our Annual Report
filed 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 our Annual Report filed 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 our Annual Report
filed 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 our Annual Report filed on Form 10-KSB for
the year ending 12/31/00, Commission File No. 33-
13674-LA, and incorporated herein by reference).
10.17 Sublease dated 30 November 1998 between Colorado
Electronics Corporation, LLC and Circuit
Technology Corporation (previously filed as
Exhibit No. 10.17 to our Registration Statement
on Form SB-2, Amendment No. 1, dated October 29,
2001, and incorporated herein by reference).
24
10.18 Attornment Agreement dated 30 November 1998
among Sun Borne XII, LLC et al, Colorado
Electronics Corporation LLC and Circuit
Technology Corporation (previously filed as
Exhibit No. 10.17 to our Registration Statement
on Form SB-2, Amendment No. 1, dated October 29,
2001, and incorporated herein by reference).
10.19 Form of Subscription Agreement entered into
between CirTran Corporation and various
subscribers pursuant to a debt settlement and
private placement completed in January 2002
(previously filed as Exhibit 10.2 to our Current
Report on Form 8-K dated March 19, 2002, and
incorporated herein by this reference).
10.20 Settlement Agreement entered into on January 18,
2002 among Sunborne XII, LLC, CirTran
Corporation et al. (previously filed as Exhibit
10.1 to our Current Report on Form 8-K dated
March 19, 2002, and incorporated herein by this
reference).
21. Subsidiaries of the Registrant
23. Consent of Hansen, Barnett & Maxwell
99* Certification pursuant to 18 U.S.C. Section 1350
_______________
* Filed herewith.
We did not file any reports on Form 8-K during the last quarter of 2001.
25
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: January 21, 2003 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: January 21, 2003 By: /s/ Iehab J. Hawatmeh
-----------------------------
Iehab J. Hawatemeh
President, Chief Financial
Officer and Director
Date: January 21, 2003 By: /s/ Raed Hawatmeh
-----------------------------
Raed Hawatmeh, Director
Date: January 21, 2003 By: /s/ Trevor Saliba
-----------------------------
Trevor Saliba, Director
26
CERTIFICATION
I, Iehab J. Hawatmeh, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of CirTran
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
January 21, 2003 By: /s/ IEHAB J. HAWATMEH
----------------------------
Iehab J. Hawatmeh, President,
Chief Financial Officer and Director
27
INDEX TO CONSOLIDATED 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 F-2
Consolidated Balance Sheets as of December 31, F-3
2001 and 2000
Consolidated Statements of Operations for the Years F-4
Ended December 31, 2001 and 2000
Consolidated Statement of Stockholders' Deficit F-5
for the Years Ended December 31, 2000 and 2001
Consolidated Statements of Cash Flows for the F-6
Years Ended December 31, 2001 and 2000
Notes to Consolidated Financial Statements F-8
F-1
HANSEN, BARNETT & MAXWELL (801) 532-22
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the of Directors and the Stockholders
CirTran Corporation
We have audited the accompanying consolidated balance sheets of CirTran
Corporation and Subsidiary as of December 31, 2001 and 2000, 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 audits 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 financial position of CirTran Corporation
and Subsidiary, as of December 31, 2001 and 2000, and the results of their
operations and their 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 2 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 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 24, 2002
F-2
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
CIRTRAN CORPORATION AND SUBSIDIARY
December 31,
--------------------------
2001 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 499 $ 11,068
Trade accounts receivable, net of allowance for
doubtful accounts of $66,316 and $82,502 in
2001 and 2000, respectively 369,250 874,097
Inventories 1,773,888 1,755,786
Other 97,037 94,176
------------ ------------
Total current assets 2,240,674 2,735,127
Property and equipment, at cost, net 1,333,925 1,871,076
Other assets, net 10,887 10,587
------------ ------------
Total Assets $ 3,585,486 $ 4,616,790
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ 159,964 $ 5,491
Accounts payable 2,141,290 1,561,752
Accrued liabilities 3,071,191 2,339,949
Notes payable to stockholders 1,390,125 1,088,966
Notes payable to related parties 2,405,507 2,435,007
Current maturities of capital lease obligations 41,206 39,274
Current maturities of long-term notes payable 863,650 929,083
------------ ------------
Total current liabilities 10,072,933 8,399,522
------------ ------------
Long-Term Liabilities
Long-term notes payable, less current maturities 447,155 529,964
Capital lease obligations, less current maturities 7,775 14,257
------------ ------------
Total long-term liabilities 454,930 544,221
------------ ------------
Commitments
Stockholders' Deficit
Common stock, par value $0.001; authorized
750,000,000 shares; issued and outstanding
160,951,005 and 156,301,005 in 2001 and
2000, respectively 160,951 156,301
Additional paid-in capital 5,977,164 5,664,154
Accumulated deficit (13,080,492) (10,147,408)
------------ ------------
Total Stockholders' Deficit (6,942,377) (4,326,953)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 3,585,486 $ 4,616,790
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended,
December 31,
--------------------------
2001 2000
------------ ------------
Net sales $ 1,870,848 $ 6,373,096
Cost of sales (2,340,273) (6,792,393)
------------ ------------
Gross Loss (469,425) (419,297)
Selling, general and administrative expenses (1,690,837) (2,710,275)
------------ ------------
Loss From Operations (2,160,262) (3,129,572)
------------ ------------
Other income (expense)
Interest (773,034) (1,051,027)
Other, net 212 945
------------ ------------
(772,822) (1,050,082)
------------ ------------
Net Loss $ (2,933,084) $ (4,179,654)
============ ============
Basic and diluted loss per common share $ (0.02) $ (0.03)
============ ============
Basic and diluted weighted-average
common shares outstanding 157,556,073 142,765,555
============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
Common Stock
------------------------ Additional Receivable
Number Paid-in from Accumulated
Shares Amount Capital Stockholders Deficit Total
------------ ---------- ----------- ---------- ------------ ------------
Balance -
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
Redemption of
common stock (680,145) (680) (79,320) - - (80,000)
Issuance of
common stock
to acquire the
monetary assets
of CTISI 14,153,505 14,145 (14,154) - - -
Common stock
issued for
conversion of
debt 5,281,050 5,281 319,003 - - 324,284
Redemption of
common stock for
debt (1,133,550) (1,134) (143,866) - - (145,000)
Payment from
stockholders - - - 86,000 - 86,000
Net loss - - - - (4,179,654) (4,179,654)
------------ ---------- ----------- ---------- ------------ ------------
Balance -
December 31, 2000 156,301,005 156,301 5,664,154 - (10,147,408) (4,326,953)
Warrants issued
as a sales
sales commission - - 200,000 - - 200,000
Exercise of
warrants 3,000,000 3,000 (990) - - 2,010
Exercise of
employee options 1,650,000 1,650 114,000 - - 115,650
Net loss - - - - (2,933,084) (2,933,084)
------------ ---------- ----------- ---------- ------------ ------------
Balance -
December 31, 2001 160,951,005 $ 160,951 $ 5,977,164 - $(13,080,492) $ (6,942,377)
============ ========== =========== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended,
December 31,
------------------------
2001 2000
----------- -----------
Cash flows from operating activities
Net loss $(2,933,084) $(4,179,654)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 540,090 961,506
Provision for doubtful trade accounts receivables (16,186) 78,978
Provision for inventory obsolescence - 55,963
Warrants issued as a sales commission 200,000 -
Changes in assets and liabilities:
Trade accounts receivable 521,033 20,276
Inventories (18,102) 1,244,634
Prepaid expenses (3,411) -
Other assets 250 23,302
Accounts payable 612,038 (87,129)
Accrued liabilities 808,648 1,741,163
----------- -----------
Total adjustments 2,644,360 4,038,693
----------- -----------
Net cash used in operating activities (288,724) (140,961)
Cash flows from investing activities
Purchase of property and equipment (2,939) (12,770)
----------- -----------
Net cash used in investing activities (2,939) (12,770)
----------- -----------
Cash flows from financing activities
Increase (decrease) in checks written in
excess of cash in bank 154,473 (72,165)
Proceeds from notes payable to stockholders 301,159 86,000
Payments on notes payable to stockholders - (15,000)
Principal payments on long-term notes payable (445,903) (825,593)
Proceeds from long-term notes payable 158,255 254,663
Payments on capital lease obligations (4,550) (129,706)
Purchase and retirement of common stock - (80,000)
Proceeds from exercise of options to
purchase common stock 117,660 -
Proceeds from issuance of common stock - 946,100
----------- -----------
Net cash provided by financing activities 281,094 164,299
----------- -----------
Net increase (decrease) in cash and cash equivalents (10,569) 10,568
Cash and cash equivalents at beginning of year 11,068 500
----------- -----------
Cash and cash equivalents at end of year $ 499 $ 11,068
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Years Ended,
December 31,
------------------------
2001 2000
----------- -----------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 270,065 $ 622,266
Noncash investing and financing activities
Common stock issued for conversion of debt $ - $ 324,284
Notes issued for accounts payable 32,500 393,022
Redemption of common stock for debt - 145,000
Accrued interest converted to note payable 77,406 -
The accompanying notes are an integral part of these financial statements.
F-6
CIRTRAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
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 Utah corporation and a wholly owned subsidiary of
Vermillion Ventures, Inc. (VVI), an inactive corporation. CTISI had no assets or
operations at the date of acquisition. The stockholders of Circuit received
138,000,000 shares of VVI common stock in the transaction. VVI had 2,153,505
common shares outstanding at the time of the acquisition, and an additional
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 (Utah), and VVI subsequently changed its name to
CirTran Corporation (Nevada).
The acquisition was accounted for as a reverse acquisition of VVI by Circuit.
Although VVI was the surviving legal entity, for accounting purposes Circuit was
treated as the surviving accounting entity, and its historical financial
statements are presented for the period prior to the acquisition. Circuit had
11,404 common shares outstanding prior to the acquisition. The shares issued to
the shareholders of Circuit have been accounted for as a 756-for-1 stock split,
and the accompanying financial statements have been restated for the effects of
the stock split for all periods presented. Neither VVI or CTISI had any assets
or operations at the date of acquisition; accordingly, the acquisition of VVI
was accounted for as the issuance of 14,153,505 shares of common stock for the
monetary assets of VVI, of which there were none.
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.
In 1997, Circuit acquired the assets and assumed certain liabilities of Racore
Technology Corporation. The purchase price was $1,870,911, consisting of 938
shares of Circuit's common stock (10,632,824 post-acquistion, post-merger
shares) valued at $977,725; a non-interest bearing note payable of $103,191;
accrued acquisition costs of $27,434; and the assumption of $762,561 in
liabilities and obligations of Racore. The assets of Racore consisted of
accounts receivable, inventories, equipment and intellectual property. The
acquisition was accounted for as a purchase.
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.
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.
F-8
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.
Inventories - Inventories are stated at the lower of average cost or market
value. Costs include labor, material and overhead costs. Overhead costs are
based on indirect costs allocated among cost of sales, work-in-process inventory
and finished goods inventory. Overhead costs are subject to management's
discretion regarding which inventory and cost of sale accounts are subject to
overhead allocation. Determining overhead costs also requires estimation based
on management's allocation of indirect costs.
When there is evidence that the inventory's value is less than original cost,
the inventory will be lowered to market value. The Company evaluates market
value on current resale amounts and whether there is technological obsolescence.
Currently, some of the Company's inventory is over one year old but still
considered the industry standard and will continue to be used in the Company's
production process.
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 operating results.
Impairment of Long-Lived Assets -The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. The Company
evaluates, at each balance sheet date, whether events and circumstances have
occurred which indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
over their remaining life in measuring whether the assets are recoverable. As of
December 31, 2001, the Company does not consider any of its long-lived assets to
be impaired.
Checks Written in Excess of Cash in Bank-Historically, banks have temporarily
lent funds to us by paying out more funds than were in our accounts under
existing lines of credit with those banks. Subsequent to May 2000, when Abacas
purchase our line of credit obligation, the Company no longer had lines of
credit with banks, and those loans were no longer available or made to us.
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Income Taxes -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.
F-9
The Company operated, for tax purposes, as a corporation under provisions of
Subchapter S of the Internal Revenue Code through May 10, 2000.
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.
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, 2001 and 2000, this allowance was $66,316 and $82,502, 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 had accounts payable to the Baltimore, Maryland company of approximately
78 percent of the balance of the accounts receivable owed by the customer at
December 31, 2000. Sales to these same customers accounted for 30 percent and 4
percent of 2000 net sales, respectively. The Baltimore, Maryland customer no
longer does business with the Company.
At December 31, 2001, accounts receivable from the former customer located in
Baltimore, Maryland and a customer in Mountain View, California represented
approximately 63 percent and 12 percent, respectively, of total trade accounts
receivable. Sales to these same customers accounted for 0% and 3% of 2001 net
sales, respectively. Subsequent to year-end, the Baltimore, Maryland customer
("customer") and the Company reach a tentative settlement which would provide
for the payment of all amounts owed to the Company by the customer.
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.
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
would include common shares that may be issued subject to existing rights with
dilutive potential when applicable.
Reclassifications Not Material -Certain reclassifications have been made to the
2000 financial statements to conform with the 2001 presentation.
NOTE 2 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company sustained losses from operations of $2,933,084 and
$4,179,654 for the years ended December 31, 2001 and 2000, respectively. As of
December 31, 2001 and 2000, the Company had an accumulated deficit of
$13,080,492 and $10,147,408, respectively and a total stockholders' deficit of
F-10
$6,942,377 and $4,326,953, respectively. In addition, the Company used, rather
than provided, cash in its operations in the amounts of $288,724 and $140,961
for the years ended December 31, 2001 and 2000, 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 a 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.
Abacas Ventures, Inc. (Abacas) purchased the Company's line of credit from the
lender. Subsequent to year-end, the Company has entered into an agreement
whereby the Company has issued common stock to certain principals of Abacas in
exchange for a portion of the debt. The Company's plans include working with
vendors to convert trade payables into long-term notes payable and common stock
and cure defaults with lenders through forbearance agreements that the Company
will be able to service. During 2001 and 2000, the Company successfully
converted approximately $32,500 and $800,000, respectively 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.
There is no assurance that these transactions will occur.
NOTE 3 - INVENTORIES
Inventories consist of the following:
2001 2000
----------- -----------
Raw materials $ 1,223,160 $ 1,088,312
Work-in process 142,048 169,676
Finished goods 408,680 497,798
----------- -----------
$ 1,773,888 $ 1,755,786
=========== ===========
F-11
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
Estimated
Service Lives
2001 2000 in Years
----------- ----------- -----------
Production equipment $ 3,141,992 $ 3,140,450 5-10
Leasehold improvements 958,940 957,845 7-10
Office equipment 628,824 628,522 5-10
Other 118,029 118,029 3-7
----------- ----------- -----------
4,847,785 4,844,846
Less accumulated depreciation
and amortization 3,513,860 2,973,770
----------- -----------
$ 1,333,925 $ 1,871,076
=========== ===========
NOTE 5 - 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 of long-term notes payable.
NOTE 6 - NOTES PAYABLE
Notes Payable consist of the following:
2001 2000
---------- ----------
Note payable to a financial institution, due in monthly
installments of $9,462, interest at 8.61%, with a
maturity date of April 2004, collateralized by
equipment 305,090 377,235
Note payable to a company, due in monthly installments
of $6,256, interest at 8%, until paid,
collateralized by equipment, in default 183,429 181,431
Note payable to a financial institution, due in monthly
installments of $20,000, interest at 4% over prime
(8.25% at December 31, 2001), with a maturity date
of July 2001, collateralized by equipment, in default 179,951 197,285
Note payable to a company, due in two installments of
$83,000 plus accrued interest at 10%, paid in full - 166,000
Note payable to a shareholder, due in monthly
installments of $12,748 until paid, interest at 10%
unsecured, in default 130,000 130,000
Note payable to a company, due in monthly installments
of $1,972 until paid, interest at 8%, unsecured,
in default 87,632 93,307
F-12
Note payable to an individual, due in monthly
installments of $5,000, interest at a rate of 9.5%,
matured May 2000, collateralized by all assets of
the Company, in default 85,377 85,377
Note payable to a finance corporation, due in monthly
installments of $50 to $5,000, interest at
prime plus 3% (7.75% at December 31, 2001) with
a maturity date of April 2004, collateralized by
equipment 86,522 78,105
Note payable to a company, due in 18 monthly
installments of $1,460 followed by six monthly
installments of $2,920, interest at 6%,
with a maturity date of April 2003, unsecured 65,973 73,000
Note payable to a finance corporation, due in monthly
installments of $50 to $3,843, interest at
9%, with a maturity date of December 2002,
collateralized by equipment and trade accounts
receivable 55,499 50,619
Note payable to a finance corporation, due in monthly
installments of $50 to $4,800, interest at
12%, matures July 2002, collateralized
by equipment and trade accounts receivable 18,883 15,083
Note payable to a finance corporation, due in monthly
installments of $50 to $8,000, interest at 9%,
matures July 2002, collateralized by
equipment and trade accounts receivable 12,866 11,605
Note payable to a company, due in monthly installments
of $2,827, interest at 8%, unsecured 21,732 -
Note payable to a bank, payable on demand,
interest at 10%, unsecured 39,367 -
Note payable to a finance corporation, due in monthly
installments of $50 to $5,443, interest at
12%, matures August 2002, collateralized
by equipment and trade accounts receivable 38,484 -
---------- ----------
Total Notes Payable 1,310,805 1,459,047
Less current maturities 863,650 929,083
---------- ----------
Long-Term Notes Payable $ 447,155 $ 529,964
========== ==========
F-13
The Company's notes payable at December 31, 2001 mature as follows:
Year Ending December 31,
------------------------
2002 $ 863,650
2003 333,263
2004 96,956
2005 16,936
Thereafter -
-----------
$ 1,310,805
===========
Certain of the Company's notes payable 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. The Company is out of compliance on several notes
payable, primarily due to a failure to make monthly payments. In instances
where the Company is out of compliance, these amounts have been shown as
current.
NOTE 7 - 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, 2001:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ --------- ---------
2002 $ 51,054 $ 223,050
2003 8,522 196,941
2004 2,475 191,688
2005 - 191,688
2006 - 175,714
Thereafter - -
--------- ---------
Future minimum lease payments 62,051 $ 979,081
Amounts representing interest 13,070 =========
---------
Present value of net minimum
lease payments 48,981
Less current maturities 41,206
---------
$ 7,775
=========
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. Rental expense for operating leases totaled $233,875 and $325,552 for
2001 and 2000, 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.
F-14
Property and equipment includes $126,195 of equipment under capital leases at
both December 31, 2001 and 2000. Accumulated amortization amounted to $89,503
and $66,842 at December 2001 and 2000, respectively, for equipment under capital
leases.
NOTE 8 - 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. The terms of the
lease include monthly payments to the lessor of $15,974 through November 2006,
after which the lease is renewable for two additional ten-year periods.
Notes Payable -The Company had amounts due to stockholders from two separate
notes. The balance due to stockholders at December 31, 2001 and 2000 was
$1,390,125 and $1,088,966, respectively. Interest associated with amounts due to
stockholders is accrued at 10 percent, was $205,402 and $103,305 at December 31,
2001 and 2000, respectively, and is included in accrued liabilities. These
notes are due on demand.
The Company had amounts due to Abacas Ventures, Inc., a related party. The
balance due to Abacas at December 31, 2001 and 2000 was $2,405,507 and
$2,435,007, respectively. Interest associated with amounts due to Abacas is
accrued at 10 percent, was $380,927 and $142,042 at December 31, 2001 and 2000,
respectively, and is included in accrued liabilities. The amounts owed
are due on demand with no required monthly payments. This note is
collateralized by assets of the Company.
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 common stock to Cogent in July 2000 in
connection with the 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 9 - ACCRUED LIABILITIES
As of December 31, 2001, the Company had accrued liabilities in the amount of
$1,982,445 for delinquent payroll taxes, including interest estimated at
$215,268 and penalties estimated at $242,989. Of this amount, approximately
$257,510 was due the State of Utah. Concerning the amount owed the State of
Utah, during the first quarter of 2002, the Company negotiated a monthly payment
schedule of $4,000 , which did not provide for the forgiveness of any taxes,
penalties or interest. Approximately $1,713,996 is owed to the Internal Revenue
Service (IRS). During the first quarter of 2002, the Company negotiated a
payment schedule with respect to this amount, pursuant to which the Company is
currently making monthly payments of $25,000. Approximately $10,939 is owed the
State of Colorado.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation - Circuit (the surviving accounting entity, Note 1) was a defendant
in an alleged breach of a facilities sublease agreement in Colorado. A lawsuit
was filed in which the plaintiff sought to recover past due rent, future rent,
and other lease charges. 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 was included in accrued liabilities. Subsequent to
year-end, the Company settled the lawsuit as discussed in Note 17.
F-15
In March 2002, 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 contest the action.
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.
Registration Rights -In connection with the conversion of certain debt to
equity, the Company has granted the holders of 5,281,050 shares of common stock
the right to include 50% of the common stock of the holders in any registration
of common stock of the Company, under the Securities Act for offer to sell to
the public (subject to certain exceptions). The Company has also agreed to keep
any filed registration statement effective for a period of 180 days at its own
expense.
NOTE 11 - LOSS PER COMMON SHARE
The following data show the shares used in computing loss per common share:
2001 2000
----------- -----------
Common shares outstanding during entire period 156,301,005 129,271,560
Net weighted-average common shares issued
during period 1,255,068 13,493,995
----------- -----------
Weighted-average number of common shares
used in basic and diluted loss per share 157,556,073 142,765,555
=========== ===========
The Company has no potentially issuable common shares, therefore basic and
diluted loss per share are the same.
NOTE 12 - 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. The Company is not entitled to any
benefit from the operating loss carry forwards incurred prior to the termination
of the S election.
Income tax expense at December 31, 2001 and 2000, consists of the following:
2001 2000
------- -------
Current $ - $ -
Deferred - -
------- -------
$ - $ -
======= =======
F-16
The tax effects of temporary differences which gave rise to deferred tax assets
and liabilities at December 31, 2001 and 2000, are as follows:
2001 2000
----------- -----------
Deferred Income Tax Assets:
Inventory reserve $ 188,880 $ 262,297
Bad debt reserve 24,736 30,773
Vacation reserve 12,569 13,591
Inventory Section 263A calculation 147,131 148,617
Research and development 55,579 55,579
Net operating loss carryforward 2,566,156 1,446,233
Intellectual property 188,050 200,053
----------- -----------
Total Deferred Income Tax Assets 3,183,101 2,157,143
Valuation allowance (3,119,594) (2,082,429)
----------- -----------
63,507 74,714
Deferred Income Tax Liability - depreciation (63,507) (74,714)
----------- -----------
Net Deferred Income Tax Asset $ - $ -
=========== ===========
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 years ended December 31,
2001 and 2000.
As of December 31, 2001, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $6,879,774 expiring in various years
through 2021. Utilization of approximately $1,791,000 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.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2001 and 2000:
2001 2000
----------- ------------
Benefit at statutory rate (34%) $ (997,249) $ (1,421,082)
Non-deductible expenses 56,876 49,171
Change in valuation allowance 1,037,165 1,509,840
State tax benefit, net of federal tax benefit (96,792) (137,929)
----------- ------------
Net Benefit From Income Taxes $ - $ -
=========== ============
F-17
NOTE 13 - STOCKHOLDER'S EQUITY
Forward Stock Split - On August 6, 2001, the Company effected a 15-for-1 forward
stock split of its outstanding shares of common stock. The Company also
increased authorized common shares from 500,000,000 to 750,000,000 shares. The
stock split has been retroactively reflected in the accompanying consolidated
financial statements for all periods presented.
Redemption of Common Stock - In February 2000, the Company redeemed 680,145
shares of common stock held by a director in exchange for $80,000 of expenses
paid on behalf of the director. No other stated or unstated rights, privileges,
or agreements existed in conjunction with this redemption.
Also during 2000, the Company redeemed 1,133,550 shares of common stock held by
an unrelated party for a note payable in the amount of $145,000, which was the
amount of the original investment by the unrelated party. No other stated or
unstated rights, privileges, or agreements existed in conjunction with this
redemption.
Common Stock Issued for Conversion of Debt - The Company entered into a
settlement related to a lawsuit involving amounts owed to a vendor. The total
amount owed to the vendor was $646,284. This amount was satisfied through the
payment of $83,000 cash, the issuance of notes payable totaling $239,000 and the
issuance of 5,281,050 shares of common stock at $0.06 per share for the
remaining $324,284. The $0.06 per share was the fair value of the stock based
on the closing stock price on the date of the settlement.
NOTE 14 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. For options that provide for cashless
exercise or that have been modified, the measurement date is considered the date
the options are exercised or expire. Those options are accounted for as variable
options with compensation adjusted each period based on the difference between
the market value of the common stock and the exercise price of the options at
the end of the period. The Company accounts for options and warrants issued to
non-employees at their fair value in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Non-Employee Grant - During 2001, the Company granted options to purchase
3,000,000 shares of common stock to a non-employee sales consultant as the
settlement of a $200,000 prepaid sales commission agreement. The options vested
on the date granted and expire in September 2006. The exercise price of these
options was $.00067 per share. Because there is not an active market for the
Company's common stock, in this case the fair value of the sales commission
agreement is more reliably measurable, and the value of the options was
determined to be $200,000 in accordance with the provisions of SFAS No. 123. By
December 31, 2001, the sales consultant had not generated any sales and
management felt the probability that the sales consultant would generate any
future sales was remote. Accordingly, the $200,000 was expensed December 31,
2001. All 3,000,000 options were exercised during 2001 for cash proceeds of
$2,010. There were no non-employee options outstanding at December 31, 2001.
F-18
Employee Grants - On July 26, 2001 the Company adopted the 2001 Stock Option
Plan (the "2001 Plan") with 15,000,000 shares of common stock reserved for
issuance there under. The Company's Board of Directors administers the plan and
has discretion in determining the employees, directors, independent contractors
and advisors who receive awards, the type of awards (stock, incentive stock
options or non-qualified stock options) granted, and the term, vesting and
exercise prices.
During the year ended December 31, 2001, the Company granted options to purchase
1,650,000 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 all options was $0.07 per share, the fair value of the Company's
common stock on the date of grant. The options are exercisable through September
2006. During 2001, all employee options granted were exercised. There were no
employee options outstanding at December 31, 2001.
Compensation Expense - During the year ended December 31, 2001, the Company
recognized no compensation expense relating to stock options and warrants. SFAS
123 requires the presentation of pro forma operating results as if the Company
had accounted for stock options granted to employees under the fair value method
prescribed by SFAS 123. The Company estimated the fair value of the employee
stock options at the grant date using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used in the Black-Scholes model
to determine the fair value of the employee options of $0.03 per option to
purchase a share of common stock: risk-free interest rate of 3.94 percent,
dividend yield of 0 percent, volatility of 411.44 percent, and expected lives of
..01 years.
Following are the pro forma disclosures and the related impact on the net
losses:
Years Ended December 31,
----------------------------
2001 2000
------------ ------------
Net loss as reported $ (2,933,084) $ (4,179,654)
Net loss pro forma (2,989,179) (4,179,654)
Basic and diluted loss per common
share as reported (0.02) (0.03)
Basic and diluted loss per common
share pro forma (0.02) (0.03)
Due to the nature and timing of option grants, the resulting pro forma
compensation cost may not be indicative of future years.
NOTE 15 -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:
F-19
Electronics Ethernet
2001 Assembly Technology Total
---- ----------- ----------- -----------
Sales to external customers $ 1,352,085 $ 518,763 $ 1,870,848
Intersegment sales 309,374 - 309,374
Segment loss (2,336,084) (597,000) (2,933,084)
Segment assets 3,152,815 434,471 3,587,286
Depreciation and amortization 519,217 20,873 540,090
2000
----
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 (2,950,406) (1,229,248) (4,179,654)
Segment assets 3,916,774 854,806 4,771,580
Depreciation and amortization 687,802 273,704 961,506
Sales 2001 2000
----- ----------- -----------
Total sales for reportable segments $ 2,180,222 $ 7,428,868
Elimination of intersegment sales (309,374) (1,055,772)
----------- -----------
Consolidated net sales $ 1,870,848 $ 6,373,096
=========== ===========
Net Loss
--------
Net loss for reportable segments $(2,933,084) $(4,179,654)
Elimination of intersegment losses - -
----------- -----------
$(2,933,084) $(4,179,654)
=========== ===========
Total Assets
------------
Total assets for reportable segments $ 3,587,286 $ 4,771,580
Adjustment for intersegment amounts (1,800) (154,790)
----------- -----------
Consolidated total assets $ 3,585,486 $ 4,616,790
=========== ===========
F-20
NOTE 16 - 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:
2001 2000
----------- -----------
United States of America $ 1,820,700 $ 5,921,890
Mexico - 45,216
Canada 338 -
Europe/Africa/Middle East 49,810 390,808
Asia/Australia - 15,182
----------- -----------
$ 1,870,848 $ 6,373,096
=========== ===========
NOTE 17 - SIGNIFICANT FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 2001, the Company determined that an insufficient
amount of overhead had been applied to the cost of sales for the year. The
Company reclassified $777,421 from selling, general and administrative expenses
to cost of sales. This adjustment results in $257,105, $186,726, $191,510 and
$136,080 of general and administrative expenses being reclassified to cost of
sales for the quarters ended March 31, 2001, June 30, 2001, September 30, 2001
and December 31, 2001.
NOTE 18 - SUBSEQUENT EVENTS
Settlement of Litigation - As discussed in Note 10, 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. This
amount did not exceed the amount of rent accrued and payable at December 31,
2000, therefore this was treated as a conversion of accrued liabilities to notes
payable. The remainder, $170,000, was treated as a reduction of rent during the
year ended December 31, 2001, due to a change in estimate of rent expense. 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 July 18, 2002.
As security for payment of the balance, the Company executed and delivered to
the plaintiff a Confession of Judgment and also issued 3,000,000 shares of
common stock, which are currently held in escrow. 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 July 18,
2002, the registration of the escrowed shares of the Company's common stock is
not completed and such shares are not replaced with registered, free-trading
common stock in an amount sufficient to cover the liability to Sunborne,
Sunborne may file the Confession of Judgment and proceed with execution thereon.
F-21
Common Stock issued for 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 on the
date of the agreements as determined by market prices, for $500,000 in cash and
the cancellation of $2,749,090 of notes payable. 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.
Employee Stock Options - Subsequent to year-end, the Company issued employees
options to purchase 5,000,000 shares of common stock at prices ranging from
$0.045 to $0.05. These options vest immediately and expire five years from the
grant date. The employees have exercised all 5,000,000 options to purchase
shares of common stock.
F-22