U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of
the Securities Exchange act of 1934 for the transition period
from to
Commission File No. 33-13674-LA
CIRTRAN CORPORATION
(Exact name of small business issuer as specified in its
charter)
Nevada 68-0121636
(State or other jurisdiction of (IRS Employer Identification
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: None
Check whether the issuer (1) filed all reports required to be
filed by sections 13 or 15(d) of the Exchange Act during the past
12 months (or such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year:
$6,373,096.
Due to the absence of a trading market for the common stock of
the Registrant, the aggregate market value of voting stock held
by non-affiliates as of March 31, 2001, was $0.
As of March 31, 2000, the Registrant had outstanding 10,495,637
shares of Common Stock, par value $0.001.
Documents incorporated by reference: None
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Description of Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
Part II
5. Market for Common Equity and Related Stockholder Matters 8
6. Management's Discussion and Analysis of Financial Condidtion 9
and Results of Operations
7. Financial Statements 11
8. Changes in and Disagreements with Accountants 12
on Accounting and Financial Disclosure
Part III
9. Directors, Executive Officers, Promoters and Control 12
Persons; Compliance with Section 16(a) of the Exchange Act
10. Executive Compensation 13
11. Security Ownership of Certain Beneficial Owners and Management 14
12. Certain Relationships and Related Transactions 15
13. Exhibits and Reports on Form 8-K 15
Signatures 17
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
CirTran Corporation provides a mixture of high and medium
size volume turnkey manufacturing services using surface mount
technology (SMT), ball-grid array (BGA) assembly, pin-through-
hole (PTH) and custom injection molded cabling for electronics
OEMs in the communications, networking, peripherals, gaming,
consumer products, telecommunications, automotive, medical, and
semiconductor industries. CirTran provides a wide variety of pre-
manufacturing, manufacturing and post-manufacturing services.
Through its subsidiary, Racore Technology Corporation, CirTran
designs, manufactures, and markets high performance Local Area
Network products with emphasis on Fiber Optics and 10/100
Ethernet technologies. 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.
The Market and Strategy
CirTran is benefiting from increased market acceptance of,
and reliance upon, the use of manufacturing specialists by many
electronics OEMs. It is estimated by IPC--Association Connecting
Electronics Industries that the U.S. electronics manufacturing
services industry market increased from $22.5 billion in 1998 to
$34 billion in 2000. The Company believes the trend towards
outsourcing manufacturing will continue. OEMs utilize
manufacturing specialists for many reasons including the
following:
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. OEMs can
reduce their time to market by using a manufacturing specialist's
manufacturing expertise and infrastructure.
Reduce Investment. As electronic products have become more
technologically advanced and are shipped in greater unit volumes,
the necessary investment required for internal manufacturing has
increased significantly for working capital, capital equipment,
labor, systems and infrastructure. Use of manufacturing
specialists enables OEMs to gain access to advanced manufacturing
capabilities while substantially reducing overall resource
requirements.
Focus Resources. Because the electronics industry is
experiencing greater levels of competition and more rapid
technological change, many OEMs are seeking to focus their
resources on activities and technologies in which they add the
greatest value. By offering comprehensive electronics assembly
and related manufacturing services, manufacturing specialists
allow OEMs to focus on their own core competencies such as
product development and marketing.
Access to 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. OEMs are motivated to work with a
manufacturing specialist in order to gain access to the
specialist's expertise in interconnect, test and process
technologies.
3
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
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.
Our goal is to offer our customers the 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. To achieve this goal,
CirTran's strategy emphasizes the following key elements:
Quality. CirTran believes that product quality is a critical
success factor in the electronics manufacturing market. We strive
for continuous improvement of our processes and have adopted a
number of quality improvement and measurable quality standards
for design, manufacturing and distribution management systems.
Manufacturing Partnerships. An important element of CirTran's
strategy is to establish partnerships with major and emerging OEM
leaders in diverse segments across the electronics industry. Our
customer base consists of leaders in industry segments such as
the communications, networking, peripherals, gaming, consumer
products, telecommunications, automotive, medical, and
semiconductor industries. Due to the costs inherent in
supporting customer relationships, CirTran focuses its efforts on
customers with which the opportunity exists to develop long-term
business partnerships. Our goal is to provide its customers with
total manufacturing solutions for both new and more mature
products, as well as across product generations. CirTran's
manufacturing services include: providing 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, servicing OEMs that require price-
sensitive, high-volume production.
Turnkey Capabilities. 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. CirTran believes 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. A substantial portion of our
revenue is from turnkey business. CirTran believes 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, CirTran believes 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, resulting in greater
stability of our customer base and in closer working
relationships. CirTran has been successful in establishing sole
source positions with many of its customers for certain of their
products.
Advanced Manufacturing Process Technology. CirTran intends to
continue to offer its customers the most advanced manufacturing
process technologies, including surface mount technology (SMT),
ball-grid array (BGA) assembly, pin-through-hole (PTH)
technology, manufacturing and test engineering
4
support and design for manufacturability, and in-circuit and
functional test and full-system mechanical assembly. CirTran has
developed substantial SMT expertise including advanced, vision-
based component placement equipment. CirTran believes that the
cost of SMT assembly facilities and the technical capability
required to operate a high-yield SMT operation are significant
competitive factors in the market for electronic assembly.
CirTran also has the capability to manufacture cables, harnesses
and plastic injection molding systems.
Manufacturing and Services
To achieve excellence in manufacturing, CirTran combines
advanced manufacturing technology, such as computer-aided
manufacturing and testing, with manufacturing techniques
including just-in-time manufacturing, total quality management,
statistical process control and continuous flow manufacturing.
Just-in-time manufacturing is a production technique, which
minimizes work-in-process inventory and manufacturing cycle time
while enabling the Company to deliver products to customers in
the quantities and time frame required. Total quality management
is a management philosophy that seeks to impart high levels of
quality in every operation of CirTran and is accomplished by the
setting of quality objectives for every operation, tracking
performance against those objectives, identifying work flow and
policy changes required to achieve higher quality levels and a
commitment by executive management to support changes required to
deliver higher quality. CirTran also provides turnkey
manufacturing to meet its customers' requirements, including
procurement and materials management and consultation on board
design and manufacturability.
Statistical process control is a set of analytical and
problem-solving techniques based on statistics and process
capability measurements through which CirTran can track process
inputs and resulting quality and determine whether a process is
operating within specified limits. The goal is to reduce
variability in the process, as well as eliminate aberrations that
contribute to quality below the acceptable range of each process
performance standard.
CirTran's electronics assembly activities consist primarily
of the placement and attachment of electronic and mechanical
components on printed circuit boards and flexible cables. We
also assemble higher-level sub-systems and systems incorporating
printed circuit boards and complex electromechanical components,
in some cases manufacturing and packaging products for shipment
directly to its customers' distributors. In addition, CirTran
provides other manufacturing services including refurbishment and
remanufacturing. CirTran manufactures on a turnkey basis,
directly procuring some or all of the components necessary for
production and on a consignment basis, where the OEM customer
supplies all or some components for assembly.
In conjunction with its assembly activities, CirTran also
provides computer-aided testing of printed circuit boards, sub-
systems and systems, which contributes significantly to our
ability to deliver high quality products on a consistent basis.
CirTran has developed specific strategies and routines to test
board and system level assemblies. In-circuit tests verify that
all components have been properly inserted and that the
electrical circuits are complete. Functional tests determine if
the board or system assembly is performing to customer
specifications. CirTran either designs and procures test
fixtures and develops its own test software or utilizes its
customers' existing test fixtures and test software. In
addition, CirTran provides environmental stress tests of the
board or system assembly.
Through Racore Technology, CirTran designs, manufactures,
and distributes Ethernet cards based on fiber optic technology
that are used to connect computers through fiber optic networks.
CirTran markets its products through an international network of
distributors, value added resellers, and
5
systems integrators. In addition, CirTran produces private label,
custom designed networking products and technologies on an OEM
basis.
Sales and Marketing
Sales and marketing at CirTran is an integrated process
involving direct salespersons and project managers, as well as
CirTran's senior executives. Our sales resources are directed at
multiple management and staff levels within targeted accounts.
CirTran also uses independent sales representatives in certain
geographic areas. CirTran receives unsolicited inquiries
resulting from advertising and public relations activities, as
well as referrals from current customers. These opportunities are
evaluated against CirTran's customer selection criteria and are
assigned to direct salespersons or independent sales
representatives, as appropriate. Historically, CirTran has had
substantial recurring sales from existing customers.
In the sale process, a customer provides to CirTran
specifications for the product and CirTran develops a bid price
for manufacturing a minimum quantity that includes manufacture
engineering, parts, labor, testing, and shipping. If the bid is
accepted, the customer is required to purchase the minimum
quantity and additional product is sold through purchase orders
issued under the original contract. Special engineering services
are provided at either an hourly rate or at a fixed contract
price for a specified task.
Over 78% of our net sales during the year ended December 31,
2000, were derived from customers that were also customers during
1999. Although CirTran seeks to diversify its customer base, a
small number of customers currently are responsible for a
significant portion of our net sales. During the year ended
December 31, 2000, CirTran's two largest customers accounted for
59% of consolidated net sales. Osicom Technology accounted for
46% of net sales during the year, and General Cable accounted for
the other 13%. Andrew Corporation represented 30% and 48.8% of
net sales in 1999 and 1998, respectively. No other individual
customer accounted for more than 10% of CirTran's net sales in
any of these years.
Backlog consists of contracts or purchase orders with
delivery dates scheduled within the next twelve months. At
December 31, 2000, CirTran's backlog was approximately $4
million. The backlog was approximately $4.5 million at December
31, 1999.
Competition
The electronic manufacturing services industry is comprised
of a large number of companies, several of which have achieved
substantial market share. CirTran also faces competition from
current and prospective customers that evaluate CirTran's
capabilities against the merits of manufacturing products
internally. CirTran competes with different companies depending
on the type of service or geographic area. Certain of CirTran's
competitors may have greater manufacturing, financial, research
and development and marketing resources than CirTran. We believe
that the primary basis of competition in its targeted markets is
manufacturing technology, quality, responsiveness, the provision
of value-added services and price. To remain competitive,
CirTran 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. CirTran currently
may be at a competitive disadvantage as to price when compared to
manufacturers with lower cost structures, particularly with
respect to manufacturers with established facilities where labor
costs are lower.
6
Regulation
CirTran's operations are not subject to any significant
federal, state or local regulation.
Employees
CirTran currently employs 101 persons, five in executive
positions, 14 in engineering and design, 76 in clerical and
manufacturing, and six in sales.
History
CirTran was incorporated in Nevada on March 23, 1987 under
the name Vermillion Ventures, Inc., for the purpose of acquiring
other operating corporate entities. On March 15, 1998, the
Company acquired all of the outstanding stock of BMC Incorporated
by issuing 129,000,000 shares of common stock. BMC was
unsuccessful in its proposed bingo satellite operations and was
dissolved. In May 2000, we effected a 3,000-to-1 reverse split
in the common stock, reducing the issued and outstanding shares
to 116,004. On July 1, 2000, we issued 10,000,000 shares of
common stock to acquire substantially all of the assets of
Circuit Technology, Inc., a Utah corporation. The shares issued
to Circuit Technology represented approximately 98.6% of the
issued and outstanding common stock of the Company immediately
following the acquisition. In connection with the transaction,
the former directors of CirTran appointed Iehab J. Hawatmeh a
director and resigned all of their positions with CirTran as
officers and directors.
ITEM 2. DESCRIPTION OF PROPERTIES
CirTran leases approximately 40,000 square feet of office
and manufacturing space in West Valley City, Utah, at a monthly
lease rate of $16,000, which serves as the principal offices and
manufacturing facility for the Company. This facility is leased
from I&R Properties, LLC, a company owned and controlled by Iehab
J. Hawatmeh, an officer, director, and principal stockholder of
the Company, Raed Hawatmeh, a principal stockholder of the
Company, and Shaher Hawatmeh, an executive officer of the
Company's subsidiary. CirTran leases 4,000 square feet of space
in West Valley City, Utah, for Racore, where it conducts design
and engineering work, for $2,700 per month. CirTran leases a
sales office in Newark, California, which is near Santa Clara, at
a monthly lease rate of $850. The facilities in Utah and
California are adequate for the current needs of the Company.
ITEM 3. LEGAL PROCEEDINGS
CirTran's subsidiary has accrued liabilities in the amount
of $1,044,936 for delinquent payroll taxes. CirTran has
negotiated a payment schedule with the state of Utah, which
requires monthly payments over 12 months of $10,863, and is
currently negotiating a similar payment plan with the federal
government.
Circuit Technology, Inc., is a defendant in an alleged
breach of a facilities sublease agreement in Colorado. The
management and their attorneys estimate liability between $0 and
$2,500,000. The wide range is due to two rent calculation
methods written in the master lease. CirTran filed a suit in an
amount exceeding $500,000 for missing equipment. All parties are
currently negotiating a settlement, however, no settlement has
been reached.
7
Circuit Technology, Inc., is also a defendant in numerous
other legal actions resulting, primarily, from the nonpayment of
vendors for goods and services received, all of which were
assumed by CirTran. CirTran has negotiated settlements, as
detailed below, and is currently negotiating settlements with
these 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, CirTran
settled this judgment in the amount of $199,678, plus 8%
interest as of September 23, 2000. The terms of the
settlement require CirTran to make monthly payments of
$6,256 to Arrow Electronics until the settlement amount is
paid in full.
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,
CirTran 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.
3. In January 2000, Future Electronics Corporation filed an
action against Circuit Technology, Inc., in the amount of
$646,284, and an affiliate, Iehab Hawatmeh. The claim was
based on nonpayment of goods and services rendered by Future
Electronics, and in November 2000, CirTran settled the claim
in exchange for:
i. The immediate payment of $83,000;
ii. A promissory note consisting of the payment of $83,000 in
February 2001 (which was made) and $83,000 in May 2001;
iii. A second promissory note in the amount of $73,000, plus 6%
interest as of November 3, 2000, requiring eighteen monthly
installments in the amount of $1,460;
iv. The issuance of 352,070 shares of CirTran restricted common
stock;
v. A lock up agreement whereby Iehab Hawatmeh, Raed Hawatmeh
and Roger Kokozyan agree to not sell their shares of CirTran
common stock until June 27, 2002.
vi. A participation right whereby Future Electronics is entitled
to purchase its pro rata share of any subsequent offering of
CirTran's equity securities, subject to certain limitations
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, 2000.
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of CirTran has traded sporadically on the
Pink Sheets under the symbol "CIRT" since July 2000. The
following table sets forth for the respective periods indicated
the prices of the common stock as reported and summarized on the
Pink Sheets. Such 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
September 30, 2000 $0.001 $0.001
December 31, 2000 $4.000 $0.001
As of March 31, 2001, the Company had 528 shareholders
holding 10,495,637 shares of common stock. The Company has never
declared a dividend on its Common Stock. The Company has not
paid, nor declared, any dividends since its inception and does
not intend to declare any such dividends in the foreseeable
future. The Company's ability to pay dividends is subject to
limitations imposed by Nevada law. Under Nevada law, dividends
may be paid to the extent that 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.
Recent Sales of Unregistered Securities
In July 2000, CirTran issued 10,027,333 shares of restricted
common stock in exchange for assets and services as follows:
Name Amount Nature
Circuit Technology, Inc. 10,000,000 Acquired substantially
all of the assets of
Circuit Technology
Milagro Holdings, Inc. 25,333 Services rendered on
behalf of CirTran
Kurt Hughes 1,000 Services rendered on
behalf of CirTran
John Lambert 1,000 Services rendered on
behalf of CirTran
In January 2000, CirTran issued 352,070 shares of restricted
common stock to Future Electronics Corporation in exchange for
$324,284 in debt relief.
The securities were sold in a private transaction, without
registration in reliance on the exemption provided by Section
4(2) of the Securities Act. Each investor had access to all
material information pertaining to the Company and its financial
condition. No broker was involved and no commissions were paid
in the transaction.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
CirTran Corporation provides a mixture of high and medium
size volume turnkey manufacturing services using surface mount
technology (SMT), ball-grid array (BGA) assembly, pin-through-
hole (PTH) and custom injection molded cabling for leading
electronics OEMs in the communications, networking, peripherals,
gaming, consumer products, telecommunications, automotive,
medical, and semiconductor industries. CirTran provides a wide
variety of pre-manufacturing, manufacturing and post-
manufacturing services. Through its subsidiary, Racore
Technology Corporation, CirTran designs, manufactures, and
markets high performance Local Area Network products with
emphasis on Fiber Optics and 10/100 Ethernet technologies. Our
goal is to offer customers the significant competitive advantages
that can be obtained from manufacture outsourcing, such as access
to advanced manufacturing technologies, shortened product time-to-
market, reduced cost of production, more effective asset
utilization, improved inventory management, and increased
purchasing power.
Results of Operations
Net Sales decreased 35.4% to $6,373,096 for the year ended
December 31, 2000 as compared to $9,860,489 for 1999. The
decrease is substantially due to loss of a major customer, Andrew
Corporation, which accounted for approximately 30% of CirTran's
net sales in 1999. Cost of sales for the year ended December 31,
2000 was $6,191,724, a 40.6% decrease as compared to $10,427,294
incurred during the prior year. Such costs as a percentage of
revenue were 97.2% during 2000 as compared to 105.7% during 1999.
Sales to Andrew Corporation in 1999 accounted for a large volume
of sales through large orders averaging 35,000 pieces, but these
orders resulted in very low or negative margins, which was
substantially responsible for CirTran's negative gross profit for
the year ended December 31, 1999. Since the first quarter of
2000, CirTran has shifted its marketing effort to small and mid-
sized customers that place orders of 100 to 5,000 pieces, which
produce a higher gross profit.
This redirection of CirTran's marketing effort began to see
success in the last six months of 2000. In the last two quarters
of 2000, CirTran had net sales of $3,693,058 as compared to
$2,702,286 in the last two quarters of 1999, a 37% improvement
over net sales during the 1999 period. Cost of sales was
$3,680,445 for the last six months of 2000 as compared to
$3,440,048 for the comparable period in 1999. Gross profit
(loss) increased from a negative $737,762 for the six months
ended December 31, 1999, to a positive gross profit of $12,613
for the comparable period in 2000.
CirTran uses just-in-time manufacturing, which is a
production technique that minimizes work-in-process inventory and
manufacturing cycle time while enabling the Company to deliver
products to customers in the quantities and time frame required.
This manufacturing technique requires CirTran to maintain an
inventory of component parts to meet customer orders. Inventory
at December 31, 2000, was $2,056,686 as compared to $3,056,893 at
December 31, 1999. The decrease of approximately 32.7% in
inventory is attributable to the decreased sales in 2000 that
reduced CirTran's need to replace inventory at the same level as
in 1999. Management believes the amount of its inventory that
may be considered obsolete or slow moving is properly reserved
and that CirTran will be able to maintain a gross profit of at
least 15% through the first 9 months of 2001 based on current
prices for assembled circuit boards and the cost of inventory.
10
During the year ended December 31, 2000, selling, general
and administrative expenses were $1,909,790, versus $2,594,430
for 1999, a 26.4% decrease. The change in marketing strategy to
small and medium sized clients enabled CirTran to reduce staff,
especially in the areas of mid-level management and assembly
staff, and to implement other cost savings measures. Management
believes that a significant portion of the losses in 1999 are
attributable to expenses related to opening and subsequently
closing of Circuit Technology, Inc.'s Colorado Springs facility.
The Colorado Springs facility was opened in November of 1998 and
a decision to close the facility was made in June of 1999. The
closing process was completed in February of 2000. As a result,
CirTran recognized a one-time plant closure expense of $292,000
in 2000, that diminished the benefits of CirTran's cost saving
measures in 2000, but management expects CirTran will realize the
full benefit of these cost saving measures in 2001. Interest
expense for 2000 was $843,069 as compared to $764,486 for 1999,
which was not a significant change in view of the fact that our
total interest bearing liabilities remained approximately the
same from the end of 1999 to the end of 2000.
As a result of the above factors, the overall net loss
decreased 25.9% to $2,791,888 for the year ended December 31,
2000 as compared to $3,768,905 for the year ended December 31,
1999.
Liquidity and Capital Resources
CirTran's current ratio during the year ended December 31,
2000, deteriorated to 0.41:1 from 0.55:1 at December 31, 1999.
The primary reason for the negative change was the reduction of
inventory from $3,056,383 at December 31, 1999, to $2,056,686 at
December 31, 2000, which was not offset by any meaningful
reduction in total current liabilities. CirTran has a working
capital deficit of $4,312,114 at December 31, 2000, and has
recognized a substantial net loss from operations through 2000.
These factors raise substantial doubt about the ability of
CirTran to continue as a going concern.
To address this issue, CirTran plans on working with vendors
to convert approximately 72 percent of trade payables into long-
term notes and common stock and cure defaults with lenders
through forbearance agreements that the Company will be able to
service. Also, Abacus Ventures, Inc., purchased the Company's
line of credit from the lending institution and, based on certain
criteria, has indicated its willingness to exchange the debt for
common stock. If successful, these plans will add significant
equity to the Company. During the last six months of 2000,
CirTran successfully extended payment terms on $940,000 of trade
payables to monthly installment obligations with interest
accruing at the rate of 8% per annum. It settled $646,283 of
trade payables with another creditor by paying $83,000 in cash,
issuing a non-interest bearing note in the principal amount of
$166,000 due in two installments in December 2000 and March 2001,
issuing a promissory note in the principal amount of $73,000
bearing interest at 6% per annum payable in 18 monthly
installments, and converting the remaining $324,283 to 352,070
shares of common stock. CirTran will continue to pursue these
restructuring efforts to improve its financial condition, but
there is no assurance that management will be successful in these
efforts.
Year 2000 Compliance
CirTran experienced no significant disruptions in mission
critical information technology and manufacturing systems and
believes those systems successfully responded to the Year 2000
date change. The costs associated with Year 2000 compliance were
nominal. CirTran is not aware of any material problems resulting
from Year 2000 issues with its internal systems or the services
of third parties. CirTran will continue to monitor its mission
critical computer applications and those of its supplier and
11
vendors throughout the year to ensure that any latent Year 2000
matters that may arise are addressed properly.
Forward-looking statements
The Private Securities Litigation Reform Act of 1985
provides a safe harbor for forward-looking statements made by
CirTran. All statements, other than statements of historical
fact, which address activities, actions, goals, prospects, or new
developments that CirTran expects or anticipates will or may
occur in the future, including such things as expansion and
growth of its operations and other such matters are forward-
looking statements. Any one or a combination of factors could
materially affect CirTran's 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 CirTran are based on
knowledge of its business and the environment in which it
operates as of the date of this report. Because of the factors
listed above, as well as other factors beyond its control, actual
results may differ from those in the forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of CirTran 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
Following the acquisition of the assets of Circuit
Technology by Cirtran in July 2000, the independent accountants
of Circuit Technology for the year ended December 31, 1999, Grant
Thornton LLP, continued as the independent accountants of CirTran
for the year ended December 31, 2000. The decision to continue
with Grant Thornton, LLP was made by CirTran's board of
directors.
The former accountant for CirTran, Pritchett, Siler & Hardy,
P.C., reported on the financial statements of CirTran for the
fiscal year ended December 31, 1999. The report of the former
accountant included a statement that CirTran was a development
stage company, with no revenues, that has sustained losses from
operations since inception. The former accountant stated that
there was a substantial doubt about the ability of CirTran to
continue as a going concern. CirTran did not disagree with such
statements. Except for the going concern uncertainty, the report
of the former accountant did not contain any adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principle.
During CirTran's two most recent fiscal years and subsequent
interim periods through the date of this report, there were no
disagreements with the former accountant on any matter of
accounting principles or practice, financial statement
disclosure, or auditing scope or procedure, which disagreements
if not resolved to the satisfaction of the former accountant
would have caused it to make reference thereto in its report on
the financial statements for such years.
12
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 table sets forth the names, ages, and
positions with CirTran for each of the directors and officers.
Name Age Positions (1) Since
Iehab J. Hawatmeh 34 President, Secretary, Director of CirTran, and July 2000
President of CirTran's Operating Subsidiary,
CirTran Corporation, a Utah Corporation
Shaher Hawatmeh 35 Vice President and Treasurer of CirTran's July 2000
Operating Subsidiary, CirTran Corporation,
a Utah Corporation
All directors hold office until the next annual meeting of
stockholders and until their successors are elected and qualify.
Officers serve at the discretion of the Board of Directors.
The following is information on the business experience of
each director and officer.
Iehab J. Hawatmeh. Mr. Hawatmeh is now the president,
secretary, and sole director of the Company. Mr. Hawatmeh served
as the President and Chief Executive Officer of Circuit
Technology since 1993. In this position he was responsible for
all operational, financial, marketing, and sales activities of
Circuit Technology. He will continue to perform similar
functions for CirTran.
Shaher Hawatmeh. Mr. Hawatmeh served as the Vice President
and Treasurer of Circuit Technology since 1993, and now serves as
executive vice president and treasurer of CirTran's operating
subsidiary. In these positions he is responsible for budget
development, strategic planning, asset management, and marketing.
Shaher Hawatmeh is the brother of Iehab J. Hawatmeh.
Section 16(a) Filing Compliance
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION
Annual Compensation
The table on the following page sets forth certain
information regarding the annual and long-term compensation for
services in all capacities to CirTran for the prior fiscal years
ended December 31, 2000, 1999, and 1998, 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 (collectively, the "Named Executive
Officers").
13
Annual Compensation
Name and Principal Position Year Salary ($)
Iehab J. Hawatmeh 2000 175,000
President, Secretary, 1999 187,230
Treasurer and Director 1998 128,923
Shaher Hawatmeh 2000 109,000
Executive Vice President 1999 86,154
1998 74,157
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 31, 2001, the
number and percentage of the 10,495,637 outstanding shares of
common stock which, according to the information supplied to
CirTran, were beneficially owned 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 the knowledge of CirTran, is the beneficial owner
of more than 5% of the outstanding 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.
Common Percent of
Name Shares Class
Cogent Capital Corp. 769,844 7.33
11444 South 1780 East
Sandy, Utah 84092
Iehab J. Hawatmeh (1) 2,072,154 19.74
4125 South 6000 West
West Valley City, Utah 84128
Raed Hawatmeh 1,926,302 18.35
10989 Bluffside Drive
Studio City, CA 91604
Shaher Hawatmeh (1) 223,691 2.13
4125 South 6000 West
West Valley City, Utah 84128
Roger Kokozyon 1,847,708 17.60
4539 Haskell Avenue
Encion, CA 91436
Saliba Private Annuity Trust 695,453 6.8
115 S. Valley Street
Burbank, CA 91505
All Officers and Directors as 2,295,845 22.0
a Group (2 persons)
14
(1) These persons are all of the named executive officers and
directors of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion includes certain relationships and
related transactions that occurred during the Company's fiscal
year ended December 31, 2000.
The Company leases its principal offices and manufacturing
facility from I & R Properties LLC, a Utah limited liability
company, at a monthly lease rate of $16,000 under a lease that
expires November 2006. The Company has 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 of the Company, Raed Hawatmeh,
a principal stockholder of the Company, and Shaher Hawatmeh, an
officer of Circuit Technology.
During 2000, Iehab J. Hawatmeh loaned an additional $50,000
to the Company in exchange for a promissory demand note with an
interest rate of 10%.
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Copies of the following documents are included as exhibits
to this report pursuant to Item 601 of Regulation S-B.
SEC Title of Document Location*
Ref. No.
(2.1) Asset Purchase Agreement with Circuit Technology (1)
dated June 12, 2000, with exhibits.
(3.1) Articles of Incorporation (2)
(3.2) Articles of Incorporation, as amended (1)
(3.3) By-Laws (1)
(10.1) Lease Agreement for West Valley City, Utah facility (1)
(10.2) Financial Advisory Agreement with Cogent Capital Page E-1
Corp. dated May 12, 1999.
(10.3) Form of Product Representative Agreement Page E-6
(10.4) Imperial Bank Security Line of Credit Agreement Page E-14
dated April 6, 1998
(10.5) Abacas Ventures Purchase Agreement of Line of Page E-18
Credit from Imperial Bank, dated May 1, 2000
15
(10.6) Imperial Bank's Assignment of Loan and Loan Page E-30
Documents to Abacas Ventures, dated May 1, 2000
(10.7) Promissory Note of $73,000 with Future Page E-33
Electronics Corporation, dated November 3, 2000
(10.8) Promissory Note of $166,000 with Future Page E-36
Electronics Corporation, dated November 3, 2000
(10.9) Lock Up Agreement between Iehab Hawatmeh and Page E-38
Future Electronics Corporation, dated
November 3, 2000
(10.10) Lock Up Agreement between Raed Hawatmeh and Page E-39
Future Electronics Corporation, dated
November 3, 2000
(10.11) Lock Up Agreement between Roger Kokozyan and Page E-40
Future Electronics Corporation, dated
November 3, 2000
(10.12) Registration Rights Agreement with Future Page E-41
Electronics Corporation, dated November 3, 2000
(10.13) Promissory Note and Confession of Judgment with Page E-51
Arrow Electronics, Inc., dated September 26, 2000
(10.14) Promissory Note and Confession of Judgment with Page E-55
Sager Electronics, Inc. dated November 16, 2000
(10.15) Confession of Judgment, with Future Electronics Page E-59
Corporation, dated November 3, 2000
(10.16) Settlement Agreement and Release of all Claims Page E-62
with Future Electronics Corporation,
dated November 3, 2000.
(16.1) Letter on Change of Certifying Accountants Page E-70
(1) Filed on Form 8-K with the SEC on July 17, 2000, and
incorporated herein by this reference.
(2) Filed on Form 10-KSB for the fiscal year ended December 31,
2000 with the SEC on May 30, 2000, and incorporated herein by
this reference.
Form 8-K Filings
None
16
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: April 30, 2001 By:/s/Iehab J. Hawatmeh, President
In accordance with the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: April 30, 2001 /s/Iehab J. Hawatmeh,
President
17
Index to Financial Statements
Page
Report of Independent Certified Public
Accountants F-2
Balance Sheets as of September 30,
2000 and 1999 (unaudited) F-3
Statements of Operations for the Three
Months and Nine Months Ended September
30, 2000 (unaudited) and 1999 (unaudited) F-4
Statements of Stockholders' Deficit F-5
Statements of Cash Flows for the Nine
Months ended September 30, 2000 (unaudited)
and 1999 (unaudited) F-6
Notes to Condensed Consolidated
Financial Statements (unaudited) F-8
F-1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CirTran Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of
CirTran Corporation and Subsidiary as of December 31, 2000 and
1999, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of CirTran Corporation and Subsidiary, as of
December 31, 2000 and 1999, and the consolidated results of their
operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note B to the consolidated financial
statements, the Company has an accumulated deficit, has suffered
losses from operations and has negative working capital that
raises substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also
described in Note B. The consolidated financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
/s/ GRANT THORNTON LLP
Salt Lake City, Utah
March 9, 2001
F-2
CirTran Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
2000 1999
CURRENT ASSETS (Note G)
Cash and cash equivalents $ 11,068 $ 500
Trade accounts receivable, net of allowance for doubtful
accounts of $72,774 in 2000 and $360,493 in 1999 883,825 973,351
Inventories, net (Note C) 2,056,686 3,056,383
Other 94,176 93,621
Total current assets 3,045,755 4,123,855
PROPERTY AND EQUIPMENT, AT COST, NET
(Notes D, G and H) 1,871,076 2,603,022
OTHER ASSETS, NET (Notes E and G) 46,072 251,234
$ 4,962,903 $ 6,978,111
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Checks written in excess of cash in bank $ 5,491 $ 77,656
Accounts payable 1,166,057 2,366,187
Accrued liabilities (Note J) 1,711,991 598,786
Line of credit (Note F) - 2,792,609
Current maturities of long-term obligations (Note G) 3,414,090 475,385
Current maturities of capital lease obligations (Note H) 39,274 100,920
Notes payable to stockholders (Note I) 1,020,966 1,035,966
Total current liabilities 7,357,869 7,447,509
LONG-TERM OBLIGATIONS, less current maturities (Note G) 529,964 726,968
CAPITAL LEASE OBLIGATIONS, less current maturities (Note H) 14,257 82,317
COMMITMENTS (Notes F, H and K) - -
STOCKHOLDERS' DEFICIT (Notes B, I and L)
Common stock, par value $0.001; Authorized 50,000,000
shares; issued and outstanding; 10,420,067 in 2000
and 8,618,104 in 1999 10,420 8,618
Additional paid-in capital 5,810,035 4,766,453
Receivable from stockholders (Note I) - (86,000)
Accumulated deficit (8,759,642) (5,967,754)
Total stockholders' deficit (2,939,187) (1,278,683)
$ 4,962,903 $ 6,978,111
The accompanying notes are an integral part of these statements.
F-3
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2000 1999
Net sales $ 6,373,096 $ 9,860,489
Cost of sales 6,191,724 10,427,294
Gross profit (loss) 181,372 (566,805)
Selling, general and administrative expenses 1,909,790 2,594,430
Plant closure expenses 292,000 -
Loss from operations (2,020,418) (3,161,235)
Other income (expense)
Interest (843,069) (764,486)
Other, net 71,599 156,816
(771,470) (607,670)
Loss before income taxes (2,791,888) (3,768,905)
Income taxes (Note M) - -
NET LOSS $(2,791,888) $ (3,768,905)
Loss per common share
Basic $ (0.29) $ (0.47)
Diluted (0.29) (0.47)
Weighted-average common shares outstanding
Basic 9,584,735 7,953,080
Diluted 9,584,735 7,953,080
The accompanying notes are an integral part of these statements.
F-4
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Years ended December 31, 2000 and 1999
Common Stock Additional Receivable
Number paid-in from Accumulated
of shares Amount capital stockholders deficit Total
Balances at January 1, 1999 7,325,842 $ 7,326 $ 2,831,510 $ (225,000) $ (2,198,849) $ 414,987
Issuance of common stock 1,421,488 1,421 2,169,814 - - 2,171,235
Repurchase and retirement of
common stock (129,226) (129) (234,871) 225,000 - (10,000)
Net loss - - - - (3,768,905) (3,768,905)
Receivable from stockholders - - - (86,000) - (86,000)
stockholders
Balances at December 31, 1999 8,618,104 8,618 4,766,453 (86,000) (5,967,754) (1,278,683)
Issuance of common stock 627,238 627 945,473 - - 946,100
Repurchase and retirement of
common stock (45,343) (45) (79,955) - - (80,000)
Recapitalization of
company (Note A1) 943,568 944 (944) - - -
Stock issued for debt 352,070 352 323,932 - - 324,284
Purchase and retirement of
common stock for debt (75,570) (76) (144,924) - - (145,000)
Net loss - - - - (2,791,888) (2,791,888)
Payment from stockholders - - - 86,000 - 86,000
Balances at December 31, 2000 10,420,067 $ 10,420 5,810,035 $ - $(8,759,642) $ (2,939,187)
The accompanying notes are an integral part of this statement.
F-5
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2000 1999
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (2,791,888) $(3,768,905)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 961,506 1,080,193
Loss on disposal of property and equipment - 85,209
Provision for doubtful trade receivables 69,250 285,743
Provision for inventory obsolescence (87,595) 329,561
Changes in assets and liabilities
Trade accounts receivable 20,276 514,333
Inventories 1,087,292 (93,889)
Other assets (12,183) 129,492
Accounts payable (636,846) (289,282)
Accrued liabilities 1,113,205 346,686
Total adjustments 2,514,905 2,388,046
Net cash used in
operating activities (276,983) (1,380,859)
Cash flows from investing activities
Purchase of property and equipment (12,770) (453,351)
Acquisition costs - (47,857)
Net cash used in
investing activities (12,770) (501,208)
(Continued)
F-6
CirTran Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
2000 1999
Cash flows from financing activities
Decrease in checks written in excess of cash in bank (72,165) (124,759)
Payments from stockholders 86,000 -
Borrowings from stockholders (15,000) 1,035,966
Net change in line of credit - (1,194,580)
Principal payments on long-term obligations (825,593) (291,266)
Proceeds from long-term obligations 390,685 606,719
Payments on capital lease obligations (129,706) (226,987)
Purchase and retirement of common stock (80,000) (10,000)
Issuance of common stock 946,100 2,085,235
Net cash provided by financing activities 300,321 1,880,328
Net increase (decrease) in cash and cash equivalents 10,568 (1,739)
Cash and cash equivalents at beginning of year 500 2,239
Cash and cash equivalents at end of year $ 11,068 $ 500
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 622,266 $ 764,486
Noncash investing and financing activities
Capital lease obligation incurred for equipment (Note H) - 26,954
Common stock retired as payment of receivables
from stockholders - 225,000
Receivable from stockholders for purchase of stock - 86,000
Stock issued for debt 324,284 -
Notes issued for accounts payable 239,000 -
Stock converted to debt 145,000 -
Conversion of line of credit to convertible note payable 2,792,609 -
The accompanying notes are an integral part of these statements.
F-7
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently
applied in the preparation of the accompanying financial
statements follows.
1. Business activity
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.
Effective July 1, 2000, all of the assets and certain
liabilities of Circuit Technology Corporation (Circuit) were
acquired by CTI Systems, Inc. (CTISI), a wholly owned
subsidiary of Vermillion Ventures, Inc. (VVI), an inactive
corporation. The stockholders of Circuit received 10,000,000
shares of VVI common stock in the transaction of which
800,000 shares were paid by Circuit to Cogent Capital Corp.
for services performed in facilitating the transaction.
CTISI subsequently changed its name to CirTran Corporation.
The merger was accounted for as a reverse acquisition of
CirTran Corporation by Circuit. Although CirTran Corporation
will be the surviving legal entity, for accounting purposes
Circuit was treated as the surviving accounting entity.
2. Principles of consolidation
The consolidated financial statements include the accounts of
CirTran Corporation and its wholly-owned subsidiary, Racore
Technology Corporation. All significant intercompany
transactions have been eliminated in consolidation.
3.Revenue recognition
Revenue is recognized when products are shipped to customers.
4.Cash and cash equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to
be cash equivalents.
5. Inventories
Raw material inventories consist primarily of circuit boards,
components and cables and are valued at the lower of average
cost or market. Work in process and finished goods include
materials, labor and overhead.
F-8
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6.Property and equipment
Depreciation is provided in amounts sufficient to relate the
cost of depreciable assets to operations over the estimated
service lives. Leasehold improvements are amortized over the
shorter of the life of the lease or the service life of the
improvements. The straight-line method of depreciation and
amortization is followed for financial reporting purposes.
Maintenance, repairs and renewals which neither materially
add to the value of the property nor appreciably prolong its
life are charged to expense as incurred. Gains or losses on
dispositions of property and equipment are included in
earnings.
7.Other assets
Other assets consist of intellectual property, financing
costs and acquisition costs. Intellectual property is
recorded at cost and amortized over the period proceeds are
received or on a straight-line basis over three years,
whichever is shorter. Financing and acquisition costs are
amortized on a straight-line basis over one to five years.
Intangible assets are evaluated periodically as events or
circumstances indicate a possible inability to recover the
carrying amount. Such evaluation is based on various
analyses, including undiscounted cash flows and profitability
projections. Impairment would be recognized in operating
results if expected future operating undiscounted cash flows
are less than the carrying value of intangible assets.
Amortization expense totaled $216,790 and $269,930 for 2000
and 1999, respectively.
8.Checks written in excess of cash in bank
Under the Company's cash management system, checks issued but
not presented to banks frequently result in overdraft
balances for accounting purposes. Additionally, at times
banks may temporarily lend funds to the Company by paying out
more funds than are in the Company's account. These
overdrafts are included as a current liability in the balance
sheets.
9. Income taxes
As of December 31, 2000, the Company utilizes the liability
method of accounting for income taxes. Under the liability
method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. An allowance against
deferred tax assets is recorded when it is more likely than
not that such tax benefits will not be realized. Research
tax credits are recognized as utilized.
The Company operated, for tax purposes, as a corporation
under provisions of Subchapter S of the Internal Revenue Code
through May 10, 2000 (Note M).
F-9
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Use of estimates
In preparing the Company's financial statements in accordance
with accounting principles generally accepted in the United
States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates
(Note B).
11. Concentrations of risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of trade
accounts receivable. The Company sells substantially to
recurring customers wherein the customer's ability to pay has
previously been evaluated. The Company generally does not
require collateral. Allowances are maintained for potential
credit losses, and such losses have been within management's
expectations. At December 31, 2000 and 1999, this allowance
was $72,774 and $360,493, respectively.
At December 31, 2000, accounts receivable from customers
located in Baltimore, Maryland and Eagle Pass, Texas,
represented approximately 49 percent and nine percent,
respectively, of total trade accounts receivable. The
Company has accounts payable to the Baltimore, Maryland
company of approximately 78 percent of the accounts
receivable balance (with a right of offset). Sales to these
customers accounted for 46 percent and 13 percent of 2000
revenues, respectively.
12. Fair value of financial instruments
The carrying value of the Company's cash and cash equivalents
and trade accounts receivable, approximates their fair values
due to their short-term nature. The fair value of certain of
the trade and notes payable in default is not determinable.
13. Net loss per share
Basic Earnings Per Share (EPS) are calculated by dividing
earnings (loss) available to common shareholders by the
weighted-average number of common shares outstanding during
each period. Diluted EPS are similarly calculated, except
that the weighted-average number of common shares outstanding
includes common shares that may be issued subject to existing
rights with dilutive potential. Diluted EPS is not
calculated for periods of net loss because to do so would be
anti-dilutive.
14. Reclassifications not material
Certain reclassifications have been made to the 1999
financial statements to conform with the 2000 presentation.
F-10
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in
the United States of America, which contemplate continuation
of the Company as a going concern. However, the Company has
sustained substantial losses from operations in 2000 and
1999. The Company also has an accumulated deficit of
$8,759,642 and total stockholders' deficit of $2,939,187 at
December 31, 2000. In addition, the Company has used, rather
than provided, cash in its operations.
Since February of 2000, the Company has operated without a
line of credit. Many of the Company's vendors stopped credit
sales of components used by the Company to manufacture
products and as a result, the Company converted certain of
its turnkey customers to customers that provide consigned
components to the Company for production.
In view of the matters described in the preceding paragraphs,
recoverability of a major portion of the recorded asset
amounts shown in the accompanying consolidated balance sheets
is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or
replace present financing, to acquire additional capital from
investors, and to succeed in its future operations. The
financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue
in existence.
Abacus Ventures, Inc. purchased the Company's line of credit
(Note F) from the lender. Management has indicated that the
lender, based on certain criteria, is willing to exchange the
debt for common stock. The Company's plans include working
with vendors to convert approximately 72 percent of trade
payables into long-term notes and common stock and cure
defaults with lenders through forbearance agreements that the
Company will be able to service. Approximately $940,000 of
trade payables have been converted. The Company has
initiated new credit arrangements for smaller dollar amounts
with many vendors and will pursue a new line of credit after
negotiations with vendors are complete. If successful, these
plans will add significant equity to the Company.
In the future, significant amounts of additional cash will be
needed to reduce debt and to fund losses until the Company
becomes profitable. During 2000, the Company has raised
approximately $946,000 of additional capital from investors.
During 2000, the Company's president also loaned the Company
an additional $50,000 (Note G). The Company is continuing to
seek infusions of capital from investors and is also
attempting to replace its line of credit. Management has
made changes in operations to reduce labor and other costs
and believes that if adequate cash and capital as described
above are obtained, the Company can become profitable.
F-11
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE C - INVENTORIES
Inventories consist of the following:
2000 1999
Raw materials $ 1,791,520 $ 1,677,554
Work-in process 169,676 1,015,925
Finished goods 497,798 852,807
2,458,994 3,546,286
Less reserve for obsolescence 402,308 489,903
$ 2,056,686 $ 3,056,383
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of
the following:
Estimated
2000 1999 service lives
Production equipment $ 3,140,450 $ 3,138,908 5-10
Leasehold improvements 957,845 954,170 7-10
Office equipment 628,522 620,969 5-10
Other 118,029 118,029 3-7
4,844,846 4,832,076
Less accumulated depreciation
and amortization 2,973,770 2,229,054
$ 1,871,076 $ 2,603,022
NOTE E - OTHER ASSETS
Other assets consist of the following:
2000 1999
Intellectual property $ 586,843 $ 582,540
Financing and acquisition costs 156,874 150,939
Other 10,587 9,197
754,304 742,676
Less accumulated amortization 708,232 491,442
$ 46,072 $ 251,234
F-12
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE F - LINE OF CREDIT
During 2000, the Company's line of credit was assumed by
Abacas Ventures, Inc. Abacas Ventures, Inc. converted the
amount owing into a note payable, which will be convertible
into shares of common stock. The entire amount of the note
is included in current maturities. The conversion date and
price have not been determined.
NOTE G - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
2000 1999
Note payable to a company, payable in 2,435,007 -
full, due on demand, interest at 10%,
collateralized by all assets of the
Company. Interest associated with
this note of $142,042 was accrued and
included in accrued liabilities at
December 31, 2000.
Note payable to a financial 377,235 446,352
institution, due in monthly
installments of $9,462, including
interest at 8.61%, with a maturity
date of April 2004, collateralized by
equipment
Note payable to a company, due in 181,431 143,437
monthly installments of $6,256,
including interest at 8%, until paid,
collateralized by equipment
Note payable to a financial
institution, due in monthly
installments of $20,000, including
interest at 4% over prime (12.5% at 197,285 301,504
December 31, 2000), with a maturity
date of July 2001, collateralized by
equipment
Note payable to a company, due in two 166,000 -
installments of $83,000 plus accrued
interest at 10% with a maturity of
June 2001, unsecured
Note payable to a shareholder, due in 130,000 -
monthly installments of $12,748 until
paid, including interest at 10%,
unsecured
Note payable to a company, due in 93,307 -
monthly installments of $1,972 until
paid, including interest at 8%,
unsecured
F-13
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
2000 1999
Note payable to an individual, due in 85,377 104,212
monthly installments of $5,000,
including interest at a rate of 9.5%,
with a maturity date of May 2000,
collateralized by all assets of the
Company, past due
Note payable to a finance corporation, 78,105 82,083
due in monthly installments of $3,280,
including interest at prime (11.5% at
December 31, 2000) plus 3%, with a
maturity date of January 2002,
collateralized by equipment
Note payable to a company, due in 18 73,000 -
monthly installments of $1,460
followed by six monthly installments
of $2,920, including interest at 6%,
with a maturity date of April 2003,
unsecured
Note payable to a stockholder/officer, 50,000 -
payable in full on demand, interest
rate 10%, unsecured
Note payable to a finance corporation, 50,619 63,176
due in monthly installments of $4,152,
including interest at 9%, with a
maturity date of July 2000,
collateralized by equipment and trade
accounts receivable, past due
Note payable to a finance corporation, 15,083 35,761
due in monthly installments of $3,114,
including interest at 9%, with a
maturity date of March 2000,
collateralized by equipment and trade
accounts receivable, past due
Note payable to a finance corporation, 11,605 25,828
due in monthly installments of $3,114,
including interest at 9%, with a
maturity date of May 2001,
collateralized by equipment and trade
accounts receivable
3,944,054 1,202,353
Less current maturities 3,414,090 475,385
$ 529,964 $ 726,968
F-14
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
The Company's long-term obligations mature as follows:
Year ending December 31,
2001 $ 3,414,090
2002 296,558
2003 174,454
2004 39,935
2005 19,017
Thereafter -
$ 3,944,054
Certain of the Company's long-term obligations contain
various covenants and restrictions. The agreements provide
for the acceleration of principal payments in the event of a
covenant violation or a material adverse change in the
operations of the Company. As of December 31, 2000, the
Company was not in compliance with certain of these
covenants.
NOTE H - LEASES
The Company conducts a substantial portion of its operations
utilizing leased facilities and equipment consisting of sales
office, warehouses, manufacturing plant, and transportation
and computer equipment. Generally, the leases provide for
renewal for various periods at stipulated rates.
The following is a schedule by year of future minimum lease
payments under operating and capital leases, together with
the present value of the net lease payments as of December
31, 2000:
Capital Operating
Year ending December 31, leases leases
2001 $ 46,718 $ 320,526
2002 8,523 324,713
2003 4,389 329,037
2004 3,657 226,298
2005 - 191,688
Thereafter - 175,714
Future minimum lease payments 63,287 $ 1,567,976
Amounts representing interest (9,756)
Present value of net minimum lease payments 53,531
Less current maturities 39,274
$ 14,257
F-15
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE H - LEASES - CONTINUED
The building leases provide for payment of property taxes,
insurance and maintenance costs by the Company. One of the
buildings is leased from related parties (Note I). Rental
expense for operating leases totaled $325,722 and $743,552
for 2000 and 1999, respectively.
The Company has an option to renew one building lease for two
additional ten-year periods upon expiration of the term in
2006 (Note I).
Property and equipment includes $1,034,551 of equipment under
capital leases at both December 31, 2000 and 1999.
Accumulated amortization amounted to $364,525 and $266,472 at
December 31, 2000 and 1999, respectively, for equipment under
capital leases.
NOTE I - RELATED PARTY TRANSACTIONS
Lease
The Company entered into a lease for manufacturing and office
space with another company owned by certain stockholders of
the Company (Note H). The terms of the lease include monthly
payments to the lessor of $15,974 for a period of ten years
after which the lease is renewable for two additional ten-
year periods.
Note payable
At various times during 2000 the Company had amounts due to
stockholders. The balance due to stockholders at December
31, 2000 and 1999 was $1,020,966 and $1,035,966,
respectively. Interest associated with amounts due to
stockholders was $103,305 at December 31, 2000 and is
included in accrued liabilities. The Company also has an
additional balance due to its president of $50,000 at
December 31, 2000 (Note G).
NOTE J - ACCRUED LIABILITIES
Accrued liabilities include approximately $1,044,936 of
delinquent payroll taxes. The Company has negotiated a
payment schedule with the state of Utah requiring 12 monthly
payments of $10,863. Negotiations are underway with the
federal government to set up a similar payment schedule for
the balance.
F-16
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE K - LITIGATION
Circuit (the surviving accounting entity, Note A1) is a
defendant in an alleged breach of a facilities sublease
agreement in Colorado. A lawsuit was filed in which the
plaintiff seeks to recover past due rent, future rent, and
other lease charges. The management and their attorneys have
estimated the range of potential loss to be between $0 and
$2,500,000. The wide range is due to two rent calculation
methods written in the master lease. Under one calculation,
the amount would be minimal. Under the other calculation,
the amount would represent all future rent (reduced by rent
received from future tenants). Currently, a new tenant on a
short-term lease occupies the premises. The Company filed a
suit against the landlord for an amount in excess of $500,000
for missing equipment.
Circuit is also the defendant in numerous legal actions
primarily resulting from nonpayment of vendors for goods and
services received. The Company has accrued the payables and
is currently in the process of negotiating settlements with
these vendors.
NOTE L - LOSS PER COMMON SHARE
The following data show the shares used in computing loss per
common share:
2000 1999
Common shares outstanding during
entire period 8,618,104 7,325,842
Net weighted average common
shares issued during period 966,631 627,238
Weighted average number of
common shares used in basic EPS 9,584,735 7,953,080
NOTE M - INCOME TAXES
The Company operated, for tax purposes, as a corporation
under provisions of Subchapter S of the Internal Revenue Code
through May 10, 2000. During this period, taxes on income of
the Company flowed through to the stockholders. Accordingly,
the Company was not subject to federal income taxes on
Company operating results for the period in which the S
election was in existence, and no provision or current
liability or asset for federal or state income taxes for
those periods has been reflected.
F-17
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE M - INCOME TAXES - CONTINUED
On May 10, 2000, the Company revoked their S election and
became a taxable entity. Effective with the change, in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," income taxes
are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between
the basis of assets and liabilities for financial and income
tax reporting.
Income tax expense at December 31, 2000, consists of the
following:
Current $ -
Deferred -
$ -
The tax effects of temporary differences which gave rise to
deferred tax assets and liabilities at December 31, 2000, are
as follows:
Current deferred tax assets
Inventory reserve $ 482,149
Bad debt reserve 85,498
Vacation reserve 13,591
LIFO Inv. 263A calculation 95,550
676,788
Long-term deferred tax assets (liabilities)
R & D credit 53,974
R & D capitalized 1,605
Net operating loss carryforward 475,435
Intangible 200,053
Depreciation (74,714)
656,353
1,333,141
Valuation allowance (1,333,141)
$ -
F-18
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE M - INCOME TAXES - CONTINUED
The Company has sustained net operating losses in each of the
periods presented. There were no deferred tax assets or
income tax benefits recorded in the financial statements for
net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the
related tax benefits cannot be established. Accordingly, a
valuation allowance has been recorded to reduce the net
deferred tax asset to zero and consequently, there is no
income tax provision or benefit presented for the year ended
December 31, 2000. The increase in the valuation allowance
was $995,766 for the year ended December 31, 1999.
As of December 31, 2000, the Company had net operating loss
carryforwards for tax reporting purposes of approximately
$2,937,679 expiring in various years through 2017.
Utilization of approximately $1,194,000 of the total net
operating loss is dependent on the future profitable
operation of Racore Technology Corporation under the separate
return limitation rules and limitations on the carryforward
of net operating losses after a change in ownership.
F-19