SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Commission File No. 333-70156
CIRMAKER TECHNOLOGY CORPORATION
-------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 98-0228169
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
No. 8, Lane 377, Chung Cheng Road, Feng Yeh Li, Yang Mei
Taoyuan 326, Taiwan
Republic of China
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(Address of Principal Executive Offices)
+886-3-282-1006
----------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
The number of shares outstanding of each of the issuer's classes of common
equity, as of May 10, 2004 are as follows:
Class of Securities Shares Outstanding
------------------- ------------------
Common Stock, $0.001 par value 26,393,443
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET (Unaudited)
MARCH 31, 2004
Assets
------
Current assets:
Cash and cash equivalents $ 223,275
Restricted cash 653,240
Trade receivables, net 7,036,934
Inventory 1,839,762
Deferred tax asset 200,151
Other current assets 626,380
------------
Total current assets 10,579,742
Property, plant and equipment, net 6,144,207
Equity investments 677,076
Deferred tax asset 295,761
Other assets 393,427
------------
Total assets $ 18,090,213
============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank notes $ 4,777,309
Trade payables 3,413,915
Accrued liabilities 1,343,566
Due to stockholder 541,657
Current portion of long-term debt 237,028
------------
Total current liabilities 10,313,475
Bank notes, long-term 1,436,639
Accrued pension liability 282,363
------------
Total liabilities 12,032,477
Minority interest 1,777,376
Commitments and contingencies - Note 2
Stockholders' equity:
Preferred stock; 50,000,000 shares authorized,
no shares issued and outstanding -
Common stock; 100,000,000 shares authorized,
25,808,000 shares issued and outstanding 25,808
Additional paid-in capital 6,353,729
Accumulated deficit (2,103,272)
Accumulated other comprehensive income 4,095
------------
Total stockholders' equity 4,280,360
------------
Total liabilities and stockholders' equity $ 18,090,213
============
See notes to unaudited consolidated financial statements.
1
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (Unaudited)
For the Three Months Ended
March 31,
---------
2004 2003
---- ----
(Restated)
Net sales $ 3,921,263 $ 3,738,202
Cost of sales 3,547,637 3,218,394
----------- -----------
Gross profit 373,626 519,808
Operating expenses:
Research and development 32,932 18,825
Sales and marketing 140,461 106,246
General and administrative 635,731 189,407
----------- -----------
Total operating expenses 809,124 314,478
----------- -----------
Income (loss) from operations (435,498) 205,330
Other income (expense):
Interest expense (84,007) (41,831)
Foreign currency transaction gains (losses) (73,205) (27,369)
Other income, net 24,323 64,792
----------- -----------
Total other expense (132,889) (4,408)
----------- -----------
Income (loss) before income taxes
And minority interest (568,387) 200,922
Provision (benefit) for income taxes (74,467) 50,231
----------- -----------
Income (loss) before minority interest (493,920) 150,691
Minority interest in net income (loss)
of consolidated subsidiaries (56,296) 37,236
----------- -----------
Net income (loss) (437,624) 113,455
Foreign currency translation adjustment 146,310 38,460
----------- -----------
Comprehensive income (loss) $ (291,314) $ 151,915
=========== ===========
Basic and diluted income (loss) per share $ (.02) $ .01
=========== ===========
Weighted average number of common
shares outstanding 25,808,000 10,692,000
=========== ===========
See notes to unaudited consolidated financial statements.
2
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended
March 31,
---------
2004 2003
---- ----
(Restated)
Cash flows from operating activities:
Net income (loss) $ (437,624) $ 113,455
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 136,341 114,866
Provision for losses on receivables 53,983 23,568
Inventory reserves 5,998 -
Minority interest (56,296) 37,236
Other, net (27,124) 45,562
Changes in operating assets and liabilities:
Trade receivables (492,206) (1,286,972)
Inventory (194,198) 610,244
Other current assets (88,214) (437,035)
Trade payables 1,039,230 (117,769)
Accrued liabilities and taxes payable 71,848 79,811
----------- -----------
Net cash provided by (used in) operating activities 11,738 (817,034)
----------- -----------
Cash flows from investing activities:
Change in restricted cash 27,192 127,748
Purchase of property and equipment (20,195) (25,841)
Proceeds from (purchase) of equity investments 81,360 (467,367)
Other investing activities (133,209) -
----------- -----------
Net cash used in investing activities (44,852) (365,460)
----------- -----------
Cash flows from financing activities:
Proceeds from (repayments of) bank notes (227,163) (176,959)
Proceeds from (repayments of) related
party obligations 268,679 658,327
Proceeds (repayments) of long-term debt (75,635) (10,557)
Proceeds from sale of common stock - 500,000
Issuance costs from sale of common stock - (26,690)
----------- -----------
Net cash provided by (used in) financing activities (34,119) 944,121
----------- -----------
See notes to unaudited consolidated financial statements.
3
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Continued)
For the Three Months Ended
March 31,
---------
2004 2003
---- ----
(Restated)
Effect of exchange rate changes on cash 53,383 38,460
----------- ----------
Net increase (decrease) in cash and cash equivalents (13,850) (199,913)
Cash and cash equivalents, beginning of the period 237,125 378,721
----------- ----------
Cash and cash equivalents, end of the period $ 223,275 $ 178,808
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 80,425 $ 51,972
=========== ==========
Income taxes paid $ - $ -
=========== ==========
See notes to unaudited consolidated financial statements.
4
CIRMAKER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB and item 310 of Regulation SB. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for annual financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The accounts of
the Company and all of its subsidiaries are included in the consolidated
financial statements. All significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated operating results for
the three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended December 31,
2003.
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION
CIRMAKER TECHNOLOGY CORPORATION
Cirmaker Technology Corporation, a Nevada corporation (the "Company"), formerly
called Wrestle-Plex Sports Entertainment Group, Ltd. was incorporated on June 1,
2000. The Company, while operating under the name of Wrestle-Plex, was a Company
in the development stage, and operated to provide sports entertainment,
specifically in the area of professional wrestling. In 2002, the Company
discontinued its operations and devoted all of its efforts towards effecting a
business combination with an operating entity.
On December 3, 2002, the Company entered into a stock purchase agreement which
was later amended (as so amended, the "Purchase Agreement"), with Cirmaker
Industry Co., Ltd. ("Cirmaker Taiwan"). Pursuant to the Purchase Agreement, on
March 21, 2003 (the "Acquisition Date") the Company acquired approximately 75%
of the issued and outstanding capital stock of Cirmaker Taiwan. As the other
stockholders of Cirmaker Taiwan continue to exchange their Cirmaker Taiwan
shares for shares of the Company, pursuant to the Purchase Agreement, the
Company may eventually own Cirmaker Taiwan as a wholly-owned subsidiary.
CIRMAKER TAIWAN
Cirmaker Taiwan was incorporated under the Company Law of Taiwan, Republic of
China ("ROC") on June 18, 1984.
Cirmaker Taiwan is in the business of manufacturing a wide variety of electronic
parts and components for sales primarily in the Asian markets. Its products
include digital TV receivers (set top boxes), computer heat dispersion systems,
electronic terminals, computer chips and various other electronic parts and
accessories.
ACQUISITION OF CIRMAKER TAIWAN
Pursuant to the Purchase Agreement, Cirmaker Taiwan's stockholders, exchanged
16,100,000 shares of Cirmaker Taiwan capital stock (approximately 75% of the
outstanding Cirmaker Taiwan capital stock), for 8,050,000 shares of the
Company's common stock, in 2 for 1 stock exchange, on the Acquisition Date. At
December 31, 2003, there were 5,284,000 remaining shares of Cirmaker Taiwan that
have not yet been exchanged with the Company. Cirmaker Taiwan will continue to
negotiate with its minority interest stockholders to exchange their Cirmaker
Taiwan shares for shares of the Company, pursuant to the Purchase Agreement.
5
CIRMAKER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION (Continued)
ACQUISITION OF CIRMAKER TAIWAN (Continued)
The Purchase Agreement has not yet been approved by the Taiwan Ministry of
Economic Affairs ("Taiwan Ministry"). The Company is currently working on
obtaining this approval from the Taiwanese government.
Due to the fact that the Purchase Agreement has not yet been approved by the
Taiwan Ministry, the Company entered into separate Trust Agreements with 10
individuals, all related parties to Cirmaker Taiwan. In each trust, a certain
number of shares of Cirmaker Taiwan's stock are currently being held in each of
their names, as nominees of and trustee for the Company. Approximately 90% of
these shares held in trusts are being held by a major shareholder who is also
the President of the Company ("major stockholder") and members of his family.
Since the former stockholders of Cirmaker Taiwan and their related or affiliated
parties now effectively control a majority of the issued and outstanding shares
of the common stock of the Company, subsequent to the merger, and have appointed
the current board of directors, this acquisition was accounted for as a
recapitalization of Cirmaker Taiwan, whereby Cirmaker Taiwan is deemed to be the
accounting acquirer and has adopted the capital structure of the Company. The
Company has changed its fiscal year end to December 31, to match that of
Cirmaker Taiwan as the accounting acquirer. Due to the recapitalization of
Cirmaker Taiwan, all reference to the shares of Cirmaker Taiwan's common stock,
have been restated to reflect the equivalent number of total shares of the
Company's outstanding common stock on a post-acquisition basis.
The Company did not have any assets or liabilities on the Acquisition Date. All
financial information included in this Form 10-QSB report, prior to the
Acquisition Date is the financial information of Cirmaker Taiwan, as if Cirmaker
Taiwan had been the registrant. The financial information since the Acquisition
Date, is that of the Company and its subsidiaries, on a consolidated basis.
After the Acquisition Date, Cirmaker Taiwan created three wholly-owned
subsidiaries. These subsidiaries are called Masterwealth Limited
("Masterwealth"), a British Virgin Islands corporation, Cirmaker Technology
Corp. ("Technology"), a British Virgin Islands corporation, and Evergreat
Technology Corp. ("Evergreat"), a Mauritius corporation. In addition,
Masterwealth and Evergreat each have a wholly owned subsidiary corporation
(collectively "Cirmaker PRC") organized in the People's Republic of China
("PRC"). Cirmaker PRC is expected to commence its full operations in the second
quarter of 2004. Cirmaker PRC is expected to manufacture and distribute its
products, particularly set top boxes, in the PRC. The Company expects to make
future significant capital investments and expand its business operations in the
PRC. The Company is currently seeking to obtain approval from the Taiwan
Ministry on the formation of, and the Company's investment in Masterwealth
Limited, and its PRC subsidiary.
6
CIRMAKER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION (Continued)
CONTROL BY PRINCIPAL STOCKHOLDERS
The directors, executive officers of the Company and their related or affiliated
parties own, beneficially and in the aggregate, a significant percentage of the
voting power of the outstanding common shares of the Company. Accordingly, if
the directors, executive officers and related or affiliated parties, voted their
shares uniformly, they could have the ability to control the approval of most
corporate actions, including increasing the authorized capital stock and
issuance of additional stock of the Company and the dissolution, merger or sale
of substantially all of the Company's assets.
RESTRICTIONS ON TRANSFER OF ASSETS OUT OF TAIWAN AND CHINA
Dividend payments by Cirmaker Taiwan and Cirmaker PRC are limited by certain
statutory regulations in Taiwan and China. In Taiwan, restrictions will be
imposed due to non-approval of the above-mentioned business acquisition by the
Taiwan Ministry. In China, no dividends may be paid without first receiving
prior approval from the Foreign Currency Exchange Management Bureau. Dividend
payments are restricted to 85% of profits, after tax in China. Repayments of
loans or advances from Cirmaker PRC, unless certain conditions are met, will be
restricted by the Chinese government.
BUSINESS RISKS
The Company has obtained various patents for its products. Intellectual property
protection measures may not be sufficient to prevent misappropriation of the
technology, or competitors may independently develop technologies that are
substantially equivalent or superior to the Company's technology. Legal systems
of many foreign countries, including the PRC, do not protect intellectual
property rights to the same extent as the legal system of the United States. If
the Company cannot adequately protect the proprietary information and
technology, the business financial condition and results of operations could be
materially or adversely affected.
Other factors that could effect the Company's future operating results and cause
future results to vary materially from expectations include, but are not limited
to, lower than anticipated business derived from its customers, an inability to
attract new customers and grow on its own, an inability to control expenses,
technology changes in the industry, changes in regulatory requirements, a
decline in the financial stability of the Company's customers and general
uncertain economic conditions overseas, especially in China. Negative
developments in these or other risk factors could have a material adverse effect
on the Company's future financial position, results of operations, cash flows
and its ability to continue its operations.
2. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
On March 3, 2004 an agreement was signed with IDN Telecom, Inc. ("IDN") whereby
the Company agreed to sell to IDN or affiliates its investment in IDN and
Vecast, Inc. at cost. The Agreement did not refer to any impact on the IDN set
top box production agreement. The Company has recovered approximately $73,600 of
its initial investment as of March 31, 2004. It is unknown whether the Company
will be able to recover from IDN its total investment.
In February 2004, the Company signed an agreement with Shaanxi New Century
Electronics Co. Ltd. for the production of set top boxes. The total investment
to be funded in 2004 will be approximately $500,000, for a 66% stock interest in
the company.
7
CIRMAKER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. COMMITMENTS AND CONTINGENCIES (Continued)
COMMITMENTS (Continued)
The Company's investment in Cirmaker Technology (Donguan) Limited, a wholly
owned subsidiary in 2004 will be approximately $400,000 in a manufacturing
facility in the PRC, owned by the Company. This manufacturing facility will
produce electrical cooling fans and set top boxes.
CONTINGENCIES
The Purchase Agreement between the Company and Cirmaker Taiwan has not yet been
approved by the Taiwan Ministry (refer to note 1). The Company is currently
working on obtaining this approval. Management believes that the consequences of
non-approval are not material to the Company's financial statements.
3. RESTATEMENT OF FINANCIAL STATEMENTS
The Company's first and second quarter 2003 10-QSB's did not reflect the
approximate 25% minority interest in Cirmaker Taiwan. The March 31, 2003
financial statements have been restated to reflect this minority interest. The
minority interest reported on the Consolidated Balance Sheet was $1,729,976 at
March 31, 2003. The minority interest reported on the Consolidated Statement of
Operations was $37,236 for the three months ended March 31, 2003.
8
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements and information relating to
us that are based on the beliefs of our management as well as assumptions made
by, and information currently available to, our management. When used in this
report, the words "anticipate", "believe", "estimate", "expect", "intend",
"plan" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect
management's current view concerning future events and are subject to certain
risks, uncertainties and assumptions, including among many others: the risk
factors described below under "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors that May Affect
Future Operating Results", our potential inability to raise additional capital,
our potential inability to compete with other companies that may be more
experienced and better capitalized than us, changes in domestic and foreign
laws, regulations and taxes, changes in economic conditions, uncertainties
related to the legal systems in our target markets, including, China's legal
system and economic, political and social events in China and other target
markets, foreign relations between Taiwan, China and our other potential target
markets, a general economic downturn, a downturn in the securities markets,
Securities and Exchange Commission and National Association of Securities
Dealers, Inc. regulations which may affect trading in the securities of "penny
stocks," and other risks and uncertainties. Should any of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this report as
anticipated, estimated or expected.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND AND OVERVIEW
Our corporate name is Cirmaker Technology Corporation. We were incorporated
in the State of Nevada under the name Wrestle-Plex Sports Entertainment Group,
Ltd. on June 1, 2000. During the period from our inception until December 2002
we operated as a development stage sports entertainment provider, specifically
in the area of professional wrestling.
On December 3, 2002, we entered into a stock purchase agreement, which was
subsequently amended, with Cirmaker Industry Co. Ltd. (Cirmaker Taiwan), a
corporation organized under the Company Law of the Republic of China (Taiwan) in
1984. Pursuant to the stock purchase agreement, we have acquired approximately
75% of the issued and outstanding capital shares of Cirmaker Taiwan. As the
other stockholders of Cirmaker Taiwan continue to exchange their Cirmaker Taiwan
shares for shares of our common stock pursuant to the stock purchase agreement,
we may acquire the remaining shares and thereby make Cirmaker Taiwan a
wholly-owned subsidiary. The acquisition of our initial interest in Cirmaker
Taiwan was consummated in March, 2003. The business operations of Cirmaker
Taiwan have now become our primary focus.
Initially, Cirmaker Taiwan manufactured terminals and connectors. Over the
past twenty years, Cirmaker Taiwan has gained substantial experience in the
production of electronic parts from developing, designing, and tooling. Cirmaker
Taiwan's R&D ability, quality control system and high-end electronics
manufacturing facilities have completed the enterprise resource planning system
and Cirmaker Taiwan's manufacturing processes are ISO 9001 and 9002 certified.
9
Historically, Cirmaker Taiwan has been in the business of manufacturing a
wide variety of electronic parts and components. Our current products include
electronic terminals, electronic blocks and accessories, electronic panel
control and locking components, power distribution blocks and accessories,
electronic timer and relay sockets, optical fiber connectors and adapters, car
audio components, DVD players, electronics, cooling fins and systems for laptop
and personal computers, electrical tools and similar devices. More recently,
Cirmaker Taiwan has focused its efforts on two primary product lines, digital TV
receivers (including cable, satellite and terrestrial receivers) and heat
dispersion systems for personal and laptop computers. Cirmaker Taiwan also
intends to begin manufacturing back light modules for LCD TV and PC monitors.
Our reverse acquisition of Cirmaker Taiwan was subject to the approval of
the Taiwan Ministry of Economic Affairs. We did not obtain approval from this
Taiwanese governmental agency at the time of the reverse acquisition. We are
currently seeking this approval from the Taiwanese government.
Our equity interest in Cirmaker Taiwan is currently held by several
affiliates in trust for us. Currently, the trustees are applying with the Taiwan
ministry and are taking other necessary actions in order to transfer the title
to these shares from the trust to us.
ASSETS
At March 31, 2004, we had cash of $223,275 as compared to $178,808 as of
March 31, 2003. We had $653,240 in restricted cash which is cash held in reserve
to meet debt covenants.
At March 31, 2004, trade receivables totaled $7,036,934 as compared with
$6,968,378 as of March 31, 2003. Receivables have increased as a percentage of
annualized sales as compared to the first quarter of 2003 due to the extension
of the average payment period in the computer industry.
Inventory was $1,839,762 at March 31, 2004 compared to $1,995,732 at March
31, 2003. The decline in inventory is due to an inventory clearance sale.
Fixed assets, net of accumulated depreciation, was $6,144,207 as of March
31, 2004 compared to $5,999,503 as of March 31, 2003. We invested approximately
$20,195 in the last three months in fixed assets, including office equipment,
manufacturing equipment, buildings and plants.
We also held equity investments at March 31, 2004 of $677,076 compared to
$561,528 as of March 31, 2003.
LIABILITIES AND STOCKHOLDERS' EQUITY
As of March 31, 2004, we had bank notes of $4,777,309 as compared to
$3,263,995 as of March 31, 2003.
We had accounts payable of $3,413,915 as compared to $3,544,289 as of March
31, 2004 and 2003, respectively.
As of March 31, 2004, long-term debt less current maturities was $1,436,639
as compared to $1,587,397 as of March 31, 2003.
10
As of March 31, 2004, stockholder's equity was $4,280,360 as compared to
$5,744,445 as of March 31, 2003. The decrease in stockholders' equity results
from operating losses in 2003. As of March 31, 2004, our minority interest in
Cirmaker Taiwan of approximately 25% was $1,777,376 compared to $1,729,976 as of
March 31, 2003.
RESULTS OF OPERATIONS AND CASH FLOWS
We generated $3,921,263 and $3,738,202 in sales revenue during the three
month period ended March 31, 2004 and 2003, respectively.
Operating expenses were $809,124 and $314,478 during the three month period
ended March 31, 2004 and 2003, respectively. The increase in expenses is due to
increases in the number of employees/salespersons, increased advertisement and
business trips for the marketing of our set-top boxes ("STB"). In March, we
attended a trade show in Beijing and held a conference on our STB in Beijing.
As of March 31, 2004, we had $223,275 in cash and cash equivalents. During
the three months ended March 31, 2004 $11,738 in cash was provided from
operating activities. During the same period we also used $44,852 in investing
activities and our financing activities used $34,119.
LIQUIDITY
We had $223,275 in cash and cash equivalents as of March 31, 2004. As of
such date we also had total assets of $18,090,213.
We believe that our cash balances and revenues generated from our
operations will be sufficient to fund our operations for the next twelve months
at levels consistent with our operations in 2003. We will require additional
capital, however, in order to expand our operations and fully implement our
business plan.
Operations to date have been primarily financed by revenues from
operations, bank loans, stockholder debt and equity transactions. Our future
operations are dependent upon the identification and successful completion of
permanent equity financing, the continued support of shareholders and profitable
operations. Currently, we have not received a firm commitment on any such
financing and management can provide no assurance that such a commitment will be
obtained. Management is actively seeking such financing.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
CRITICAL ACCOUNTING POLICIES
Preparation of our financial statements requires management to make
judgments, assumptions, and estimates regarding uncertainties that affect the
reported amounts of assets, liabilities, stockholders' equity, revenues and
expenses. Note 2 of the Company's Consolidated Financial Statements for the year
11
ended December 31, 2003 that were filed with our 10-KSB describes our
significant accounting policies used in the preparation of our unaudited
Consolidated Financial Statements. The most significant areas involving
management judgments and estimates are described below. Actual results in these
areas could differ materially from management's estimates under different
assumptions or conditions.
Revenue Recognition
- -------------------
We recognize revenue from the sale of our products in accordance with the
U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements. In SAB No. 101, the SEC expressed
its view that revenue was realizable and earned when the following four criteria
were met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred and title has passed according to the sale terms, (3) the seller's
price to the buyer is fixed or determinable; and (4) collectibility is
reasonably assured.
Shipping and handling costs incurred by us are included in cost of goods
sold and those costs, that are billed to customers, are included in net sales.
Significant Estimates
- ---------------------
Several areas require significant management estimates relating to
uncertainties for which it is reasonably possible that there will be a material
change in the near term. The more significant areas requiring the use of
management estimates related to valuation of trade receivables and inventory
reserves, contingent liabilities, fair value of long term investments,
impairment of long-lived assets, fair value of services for stock based
compensation and the useful lives for amortization and depreciation.
Trade Receivables
- -----------------
Trade receivables are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition and credit history, and current economic
conditions. Trade receivables are written off when deemed uncollectible upon
evaluation of such account by management.
Inventories
- -----------
Inventories are stated at the lower of cost or market. The majority of
inventory values are based upon weighted average costs. Management regularly
reviews inventory for obsolescence to determine whether a write-down is
necessary. Various factors are considered in making this determination,
including recent sales history and predicted trends, industry market conditions
and general economic conditions.
Equity Investments
- ------------------
All equity investments are recorded at cost and are written down to their
estimated recoverable amount if there is evidence of a decline in value that is
other than temporary.
12
Management evaluates related information in addition to quoted market
prices, if any, in determining the fair value of these investments and whether
an other than temporary decline in fair value exists. Factors indicative of an
other than temporary decline include recurring operating losses, credit defaults
and subsequent rounds of financings at an amount below the cost basis of the
investment. The list is not all inclusive and management periodically weighs all
quantitative and qualitative factors in determining if any impairment loss
exists.
The majority of equity investments are primarily based on a contractual
relationship between us and the investee. Therefore, it is not practicable to
estimate the fair value of the equity instruments, because there are no
transactions that in substance, are involving the equity investment alone.
Fair Value Of Financial Instruments
- -----------------------------------
Our financial instruments, trade receivables, bank notes, trade payables
and accrued liabilities approximate their carrying amounts due to the short-term
nature of these instruments. Fair values of cash equivalents represent quoted
market prices, if available. If no quoted market prices are available, fair
values are estimated based on other factors. The fair value of amounts due to
related parties is not determinable since it is not negotiated at arms length.
The carrying value of our long-term debt approximates fair value.
INFLATION
We believe that inflation has not had a material impact on our results of
operations for the three-month period ended March 31, 2004.
SEASONALITY
We may experience variations in revenues and operating costs due to
seasonality, however, we do not believe that these variations will be material.
OUTLOOK
Management plans to continue to enhance our position as a provider of
electronic components and systems to a variety of industries. We will also begin
to fulfill our existing and projected customer orders for advanced digital
television receivers, primarily in major cities located in China. In addition,
we will continue with the development and sale of our electrical cooling systems
for laptop and personal computers.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition, results of operations or product market share could be materially
adversely affected. In such case, the trading price of our common stock could
decline and you could lose all or part of your investment.
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We need substantial additional capital in order to fully implement our business
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plan.
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Our current business plan contemplates capital expenditures beyond our
current capital resources. For example, we plan on expanding our manufacturing
facility in Dongguan, China. Our expansion plans include the acquisition of
equipment and the renovation of the facility. We estimate the cost of this
expansion to be approximately $400,000. We have also identified a potential
acquisition target in mainland China. The target company owns a facility that
could be used for the assembly of our set top boxes in China. We anticipate that
the cost of this acquisition will be approximately $500,000. We paid a $40,000
deposit toward the purchase price for the target. The acquisition is subject to
regulatory approvals which have not yet been obtained. We do not currently have
enough capital to make these and other anticipated capital expenditures.
Management expects that these expenditures will be met through a combination of
increased revenues from product sales and the sale of our common stock in
private or public offerings. However, we have not received a firm commitment on
any such financing and management can provide no assurance that such a
commitment will be obtained.
Our success depends in large part on whether or not our products will be
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accepted by consumers in our target markets.
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Our business strategy is currently focused on two products, digital TV
receivers and computer heat dispersion systems. We have been developing the
components and systems that enable analog televisions to access the digital
television broadcasting network which is developing in China and our ultimate
success depends in large part upon the full development of a national digital
television broadcasting network in China. There are many obstacles to the
creation of a national digital television broadcasting network in China'
including consumer acceptance, compliance with governmental regulations and the
need to obtain governmental approvals. If third party efforts to establish a
digital television broadcasting network in China fail, our digital to analog set
top boxes will not be in demand and our results of operations and prospects
would be materially adversely affected.
With regard to our computer heat dispersion system product line, we have
spent considerable resources developing high-end nano-technology which applies a
special material that transfers heat from computer systems more quickly and
efficiently. Future sales of our computer heat dispersion systems using this
technology, when fully developed, will depend in large part on whether this new
technology is accepted by consumers and manufacturers as a replacement for the
current heat transfer material. If the market does not accept this new
technology our results of operations and prospects would be materially adversely
affected.
Rapid technological changes and short product life cycles in our industry could
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harm our business.
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The technology underlying our products and other products in our industry,
in general, is subject to rapid change, including the potential introduction of
new types of products and technologies, which may have a material adverse impact
upon our business. We will need to maintain an ongoing research and development
program, and our potential future success, of which there can be no assurances,
will depend in part on our ability to respond quickly to technological advances
by developing and introducing new products, successfully incorporating such
advances in existing products, and obtaining licenses, patents, or other
proprietary technologies to be used in connection with new or existing products.
There can be no assurance that our research and development will be successful
or that we will be able to foresee and respond to such advances in technological
developments and to successfully develop additional products. Additionally,
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there can be no assurances that the development of technologies and products by
competitors will not render our products or technologies non-competitive or
obsolete.
There are several risks relating to the infringement of our proprietary
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technology.
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We have obtained patents for our computer CPU cooling systems in Taiwan,
Japan, China, South Korea and the U.S.A. We cannot guarantee that these and
other intellectual property protection measures will be sufficient to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to ours or otherwise obtain access to our know-how or that others will not be
issued patents which may prevent the sale of our products or require licensing
and the payment of significant fees or royalties by us for the pursuit of our
business. In addition, the legal systems of many foreign countries, including
China, do not protect intellectual property rights to the same extent as the
legal system of the United States. If we are unable to adequately protect our
proprietary information and technology, our business, financial condition and
results of operations could be materially adversely affected.
Furthermore, litigation may be necessary to enforce and protect our
intellectual property rights. Any intellectual property litigation could be
costly and could cause diversion of management's attention from the operation of
our business. Adverse determinations in any litigation could result in the loss
of our proprietary rights, subject us to significant liabilities or require us
to seek licenses from third parties that may not be available on commercially
reasonable terms, if at all. We could also be subject to court orders preventing
us from manufacturing or selling our products, which could adversely affect our
business.
We face potentially fierce competition.
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There are many companies with substantially more resources than we have,
that manufacture and distribute digital TV receivers and computer heat
dispersion systems. Most of our potential competitors have substantially greater
capital, marketing and development capabilities and human resources than we have
and will likely represent significant competition for us. The foregoing
conditions create a rigorous competitive climate for us and increase the risk
that our products will be unable to compete successfully with other potential
marketers of these products. Our competitors may succeed in developing products
that are more effective or less costly than any that may be developed by us and
may also prove to be more successful than us in technology, marketing and sales.
Our largest target sales market is in China and there are several significant
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risks relating to conducting operations in China.
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Our largest target consumer market is in China. We also expect to make
investments in China in the future. Therefore, our business, financial condition
and results of operations are to a significant degree subject to economic,
political and social events in China.
Governmental policies in China could impact our business.
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Since 1978, China's government has been and is expected to continue
reforming its economic and political systems. These reforms have resulted in and
are expected to continue to result in significant economic and social
development in China. Many of the reforms are unprecedented or experimental and
may be subject to change or readjustment due to a number of political, economic
15
and social factors. We believe that the basic principles underlying the
political and economic reforms will continue to be implemented and provide the
framework for China's political and economic system. New reforms or the
readjustment of previously implemented reforms could have a significant negative
effect on our operations. Changes in China's political, economic and social
conditions and governmental policies which could have a substantial impact on
our business include:
* new laws and regulations or new interpretations of those laws and
regulations;
* the introduction of measures to control inflation or stimulate growth;
* changes in the rate or method of taxation;
* the imposition of additional restrictions on currency conversion and
remittances abroad; and
* any actions which limit our ability to develop, manufacture or sell
our products in China, or to finance and operate our business in
China.
Economic policies in China could negatively impact our business.
The economy of China differs from the economies of most countries belonging
to the Organization for Economic Cooperation and Development in various
respects, such as structure, government involvement, level of development,
growth rate, capital reinvestment, allocation of resources, self-sufficiency,
rate of inflation and balance of payments position. In the past, the economy of
China has been primarily a planned economy subject to one and five-year state
plans adopted by central government authorities and largely implemented by
provincial and local authorities. These plans set production and development
targets.
Since 1978, increasing emphasis had been placed on decentralization and the
utilization of market forces in the development of China's economy. Economic
reform measures adopted by China's government may be inconsistent or
ineffectual, and we may not in all cases be able to capitalize on any reforms.
Further, these measures may be adjusted or modified in ways that could result in
economic liberalization measures that are inconsistent from time to time, from
industry to industry or across different regions of the country. China's economy
has experienced significant growth in the past decade. This growth, however, has
been accompanied by imbalances in China's economy and has resulted in
significant fluctuations in general price levels, including periods of
inflation. China's government has implemented policies from time to time to
increase or restrain the rate of economic growth, control periods of inflation
or otherwise regulate economic expansion. While we may be able to benefit from
the effects of some of these policies, these policies and other measures taken
by China's government to regulate the economy could also have a significant
negative impact on economic conditions in China with a resulting negative impact
on our business.
China's entry into the WTO creates uncertainty.
China formally became the 143rd member of the World Trade Organization
(WTO), the multilateral trade body, on December 11, 2001. Entry into the WTO
will require China to further reduce tariffs and eliminate other trade
restrictions. While China's entry into the WTO and the related relaxation of
trade restrictions may lead to increased foreign investment, it may also lead to
increased competition in China's markets from international companies. The
impact of China's entry into the WTO on China's economy and our business is
uncertain.
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Uncertainty relating to China's legal system could negatively affect us.
China has a civil law legal system. Decided court cases do not have binding
legal effect on future decisions. Since 1979, many new laws and regulations
covering general economic matters have been promulgated in China. Despite this
activity to develop the legal system, China's system of laws is not yet
complete. Even where adequate law exists in China, enforcement of contracts
based on existing law may be uncertain and sporadic and it may be difficult to
obtain swift and equitable enforcement, or to obtain enforcement of a judgment
by a court of another jurisdiction. The relative inexperience of China's
judiciary in many cases creates additional uncertainty as to the outcome of any
litigation. Further, interpretation of statutes and regulations may be subject
to government policies reflecting domestic political changes.
The deterioration of relations between Taiwan and China could negatively affect
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our business.
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The main target market for our products is mainland China and other
locations in the Asia-Pacific region. For decades, potential conflict in the
Taiwan Strait has remained a serious threat to the stability of the Asia-Pacific
region. Even today, when trade, business, and unofficial contacts between China
and Taiwan are rapidly expanding, China has not renounced the use of force
against Taiwan. If relations between China and Taiwan deteriorate or if any
material conflicts between the two nations arise, our ability to continue to do
business in China may diminish and our projected sales to China may
significantly decrease or be eliminated altogether. Accordingly, such
deterioration in relations could have a material adverse effect on our business.
You will likely suffer significant dilution. We do not intend to pay any
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dividends for the foreseeable future.
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We will likely need to issue additional shares of our capital stock in the
future in order to raise capital to satisfy our current obligations and to
otherwise carry out our business plan. Upon the issuance of these shares you
will experience dilution in the net tangible book value of your common stock. We
have never paid dividends and do not intend to pay any dividends in the
foreseeable future.
Our stock is a penny stock and there are significant risks related to buying and
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owning penny stocks.
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Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional
sales practice requirements on broker-dealers that sell non-Nasdaq listed
securities except in transactions exempted by the rule, including transactions
meeting the requirements of Rule 506 of Regulation D under the Securities Act
and transactions in which the purchaser is an institutional accredited investor
(as defined) or an established customer (as defined) of the broker or dealer.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, this rule may
adversely affect the ability of broker-dealers to sell our securities and may
adversely affect your ability to sell any of the securities you own.
The Securities and Exchange Commission regulations define a "penny stock"
to be any non-Nasdaq equity security that has a market price (as defined in the
regulations) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to some exceptions. For any transaction by a
17
broker-dealer involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks. Our market liquidity could be severely adversely affected by these
rules on penny stocks.
Our stock is very volatile and subject to significant fluctuations.
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Our stock price could be subject to wide fluctuations in the future in
response to many events or factors, including those discussed in the preceding
risk factors relating to our operations, as well as:
* actual or anticipated fluctuations in operating results;
* changes in expectations as to future financial performance or changes
in financial estimates or buy/sell recommendations of securities
analysts;
* changes in governmental regulations or policies in China;
* our, or a competitor's, announcement of new products or technological
innovations; and
* the operating and stock price performance of other comparable
companies.
General market conditions and domestic or international macroeconomic
factors unrelated to our performance may also affect our stock price. For these
reasons, investors should not rely on recent trends to predict future stock
prices or financial results. In addition, following periods of volatility in a
company's securities, securities class action litigation against a company is
sometimes instituted. This type of litigation could result in substantial costs
and the diversion of management time and resources.
ITEM 3. CONTROLS AND PROCEDURES.
Within 90 days of the filing of this Form 10-QSB, an evaluation was carried
out under the supervision and with the participation of our management,
including Bill Liao, our Chairman, Chief Executive Officer and President and
Grace Chang, our Chief Financial Officer and General Manager, of the
effectiveness of our disclosure controls and procedures. Disclosure controls and
procedures are procedures that are designed with the objective of ensuring that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, such as this Form 10-QSB, is recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms. Based on that evaluation, management
concluded that as of March 31, 2004, and as of the date that the evaluation of
the effectiveness of our disclosure controls and procedures was completed, our
disclosure controls and procedures were effective to satisfy the objectives for
which they are intended.
There were no changes in our internal control over financial reporting
identified in connection with the evaluation performed that occurred during the
fiscal quarter covered by this report that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Stock Option Agreement, dated December 29, 2003, between the Company
and Bill Liao.
10.2 Stock Option Agreement, dated December 29, 2003, between the Company
and Hong Juin (Grace) Chang.
10.3 Stock Option Agreement, dated December 23, 2003, between the Company
and William Chen.
10.4 Stock Option Agreement, dated December 29, 2003, between the Company
and Shiu-Li Ku
10.5 Stock Option Agreement, dated December 29, 2003, between the Company
and Shih-Tang Liao.
31.1 Certification of Principal Executive Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal Financial
Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CIRMAKER TECHNOLOGY CORPORATION
Date: May 19, 2004 By: /s/ Bill Liao
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Bill Liao
President
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EXHIBIT INDEX
Exhibit
No. Description
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10.1 Stock Option Agreement, dated December 29, 2003, between the Company
and Bill Liao.
10.2 Stock Option Agreement, dated December 29, 2003, between the Company
and Hong Juin (Grace) Chang.
10.3 Stock Option Agreement, dated December 23, 2003, between the Company
and William Chen.
10.4 Stock Option Agreement, dated December 29, 2003, between the Company
and Shiu-Li Ku
10.5 Stock Option Agreement, dated December 29, 2003, between the Company
and Shih-Tang Liao.
31.1 Certification of Principal Executive Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal Financial
Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.