SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of event reported): July 1, 2000.
CIRTRAN CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number: 33-13674-LA
NEVADA 68-0121636
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4125 South 6000 West
West Valley City, Utah 84128
(Address of principal executive (Zip Code)
offices)
Registrant's Telephone Number: (801) 963-5112
VERMILLION VENTURES, INC.
5882 South 900 East, Suite 202, Salt Lake City, Utah 84121
(Former name, former address and former fiscal year,
if changed since last report)
Item 7. Financial Statements and Exhibits
Financial Statements and Pro Forma Financial Information
Included with this amendment to the Report on Form 8-K for
CirTran Corporation, originally filed with the Securities and
Exchange Commission on July 17, 2000, are the following financial
statements of Circuit Technology Corporation and pro forma
financial information giving effect to the acquisition of assets
of Circuit Technology Corporation.
Unaudited Consolidated Financial Statements - June 30, 2000 and 1999
Balance Sheet - June 30, 2000
Statements of Operations - Six Months Ended June 30, 2000 and 1999
Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999
Notes To Unaudited Consolidated Financial Statements
Audited Consolidated Financial Statements - December 31, 1999 and 1998
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1999 and 1998
Statements Of Operations - Years Ended December 31, 1999 and 1998
Statements Of Cash Flows - Years Ended December 31, 1999 and 1998
Notes To Consolidated Financial Statements
Unaudited Combined Pro Forma Financial Statements
Balance Sheet - June 30, 2000
Statement of Operations - Six Months Ended June 30, 2000
Statements of Operations - Year Ended December 31, 1999
Notes To Unaudited Combined Pro Forma Financial Statements
CIRCUIT TECHNOLOGY CORPORATION
AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
C O N T E N T S
Page
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET 3
STATEMENTS OF OPERATIONS 4
STATEMENTS OF CASH FLOWS 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Circuit Technology Corporation and Subsidiary
UNAUDITED CONSOLIDATED BALANCE SHEET
June 30, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 200
Trade accounts receivable, net of allowance for doubtful
accounts of $309,973 972,687
Inventories 3,245,911
Other 93,621
Total current assets 4,312,419
PROPERTY AND EQUIPMENT, NET 2,370,576
OTHER ASSETS, NET 159,927
$ 6,842,922
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Line of credit $ 2,820,429
Current maturities of long-term obligations 475,385
Current maturities of capital lease obligations 100,920
Checks written in excess of cash in bank 68,812
Accounts payable 2,440,277
Accrued liabilities 976,343
Notes payable to stockholders 1,035,966
Total current liabilities 7,918,132
LONG-TERM OBLIGATIONS, less current maturities 532,066
CAPITAL LEASE OBLIGATIONS, less current maturities 80,762
COMMITMENTS -
STOCKHOLDERS' EQUITY
Common stock, no par value; Authorized 50,000 shares;
issued and outstanding; 11,579 shares 5,846,671
Receivable from stockholders (56,000)
Accumulated deficit (7,478,709)
Total stockholders' deficit (1,688,038)
$ 6,842,922
The accompanying notes are an integral part of this statement.
3
Circuit Technology Corporation and Subsidiary
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months ended June 30,
2000 1999
Net sales $ 2,680,038 $7,158,203
Cost of sales 2,511,279 6,987,246
Gross profit 168,759 170,957
Selling, general and administrative expenses 1,439,057 2,472,429
Loss from operations (1,270,298) (2,301,472)
Other income (expense)
Interest expense (308,317) (299,780)
Other income 67,660 153,865
(240,657) (145,915)
NET LOSS $ (1,510,955) $(2,447,387)
The accompanying notes are an integral part of these statements.
4
Circuit Technology Corporation and Subsidiary
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended June 30,
2000 1999
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (1,510,955) $(2,447,387)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 336,999 380,556
Allowance for bad debts (50,520) 30,000
Allowance for inventory obsolescence 78,000 50,000
Changes in assets and liabilities
Trade accounts receivable 51,184 67,766
Inventories (267,528) (214,217)
Other assets - (200,712)
Accounts payable 74,090 938,928
Accrued liabilities 377,557 59,284
Total adjustments 599,782 1,111,605
Net cash used in
operating activities (911,173) (1,335,782)
Cash flows from investing activities
Purchase of property and equipment (7,553) (385,554)
Acquisition costs (5,693) -
Net cash used in
investing activities (13,246) (385,554)
(Continued)
5
Circuit Technology Corporation and Subsidiary
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the Six Months ended June 30,
2000 1999
Cash flows from financing activities
Increase in receivable from stockholders 30,000 -
Increase (decrease) in checks written in excess
of cash in bank (8,844) 161,097
Net change in line of credit 27,820 626,979
Borrowings from stockholders - 250,000
Proceeds from notes payable - 463,282
Principal payments on notes payable (194,902) (20,854)
Principal payments on capital leases (1,555) (10,710)
Purchase of outstanding stock (80,000) -
Issuance of common stock 1,151,600 630,000
Net cash provided by
financing activities 924,119 2,099,794
Net increase (decrease) in cash and cash equivalents (300) 378,458
Cash and cash equivalents at beginning of period 500 2,239
Cash and cash equivalents at end of period $ 200 $ 380,697
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 308,317 $ 299,780
Supplemental schedule of noncash investing and
financing activities
Capital lease obligation incurred for equipment $ - $ 26,954
6
Circuit Technology Corporation and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Circuit
Technology Corporation and Subsidiary (the Company) have been
prepared in accordance with accounting principles generally
accepted in the United States for interim financial
statements. Accordingly, these financial statements do not
include all of the information and footnote disclosures
required by accounting principles generally accepted in the
United States for complete financial statements. These
financial statements and footnote disclosures should be read
in conjunction with the Company's audited December 31, 1999
consolidated financial statements and notes thereto. In the
opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary
to fairly present the Company's consolidated financial
position as of June 30, 2000 and its consolidated results of
operations and cash flows for the six months ended June 30,
2000 and 1999. The results of operations for the six months
ended June 30, 2000, may not be indicative of the results
that may be expected for the year ending December 31, 2000.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles,
which contemplate continuation of the Company as a going
concern. However, the Company has sustained substantial
losses from operations in 1999 and 1998, and such losses have
continued in 2000. The Company also has deficit equity of
$1,688,038 at June 30, 2000. In addition, the Company has
used, rather than provided, cash in its operations. The
Company is no longer in compliance with certain of its line
of credit and loan covenants. This condition of noncompliance
has resulted in the entire amount of the obligations becoming
due and payable.
Since February of 1999, the Company has operated without
additional balances available on its line of credit. Most
vendors stopped shipping components used by the Company to
manufacture products and as a result, the Company is
converting most 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 balance sheet 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.
7
Circuit Technology Corporation and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE B - REALIZATION OF ASSETS - CONTINUED
Management believes that a significant portion of the losses
in 1999 are attributable to expenses related to opening and
subsequently closing of their 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.
The Company's plans include working with vendors to convert
approximately 80 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, are willing to exchange the debt for common
stock. 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
returns to profitability. The Company raised approximately
$2,170,000 of additional capital from investors during 1999.
The Company's president also lent the Company approximately
$1,000,000 during 1999 and during the period ended June 30,
2000, the Company issued 235 shares of its common stock to
investors for $1,151,600 in cash. The Company is continuing
to seek infusions of capital from investors and is also
attempting to replace their 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 return to profitability.
NOTE C - INVENTORIES
Inventories consist of the following at June 30, 2000:
Raw materials $1,705,202
Work-in process 985,925
Finished goods 966,687
3,657,814
Less reserve for obsolescence 411,903
$3,245,911
8
Circuit Technology Corporation and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE D - MERGER AGREEMENT
Effective July 1, 2000, all of the assets and liabilities of
the Company were acquired by CTI Systems, Inc. (CTISI), a
wholly owned subsidiary of Vermillion Ventures, Inc. (VVI).
The Company received 10,000,000 shares of VVI common stock in
the transaction of which 800,000 shares were paid by the
Company to Cogent Capital Corp. for services performed in
facilitating the transaction. CTISI subsequently changed its
name to CirTran Corporation.
The merger will be accounted for as a reverse acquisition of
CirTran Corporation by the Company. Although CirTran
Corporation will be the surviving legal entity, for
accounting purposes the Company will be treated as the
continuing entity.
NOTE E - LITIGATION
The Company 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 range of potential
loss is estimated at between $0 and $2,500,000. The range is
widespread 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 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.
9
CIRCUIT TECHNOLOGY CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1999 AND 1998
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS 3
STATEMENTS OF OPERATIONS 4
STATEMENT OF STOCKHOLDERS' EQUITY 5
STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Circuit Technology Corporation
and Subsidiary
We have audited the accompanying consolidated balance sheets of
Circuit Technology Corporation and Subsidiary as of December 31,
1999 and 1998, 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. 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Circuit Technology Corporation and
Subsidiary, as of December 31, 1999 and 1998, 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.
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 financial statements, the
Company has a deficit in stockholders' equity, 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 financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Grant Thornton LLP
Salt Lake City, Utah
September 7, 2000
1
CONSOLIDATED FINANCIAL STATEMENTS
Circuit Technology Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1999 1998
CURRENT ASSETS (Notes F and G)
Cash and cash equivalents $ 500 $ 2,239
Trade accounts receivable, net of allowance for doubtful
accounts of $360,493 in 1999 and $74,750 in 1998 (Note G) 973,351 1,773,427
Inventories (Notes C and F) 3,056,383 3,292,055
Other 93,621 151,987
Total current assets 4,123,855 5,219,708
PROPERTY AND EQUIPMENT, NET (Notes D, F, G and H) 2,603,022 3,018,189
OTHER ASSETS, NET (Note E) 251,234 544,433
$ 6,978,111 $ 8,782,330
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Line of credit (Note F) $ 2,792,609 $ 3,987,189
Current maturities of long-term obligations (Note G) 475,385 871,485
Current maturities of capital lease obligations (Note H) 100,920 296,464
Checks written in excess of cash in bank 77,656 202,415
Accounts payable 2,366,187 2,655,469
Accrued liabilities (Note J) 598,786 252,100
Notes payable to stockholders (Note I) 1,035,966 -
Total current liabilities 7,447,509 8,265,122
LONG-TERM OBLIGATIONS, less current maturities (Note G) 726,968 15,415
CAPITAL LEASE OBLIGATIONS, less current maturities (Note H) 82,317 86,806
COMMITMENTS (Notes F, H and K) - -
STOCKHOLDERS' EQUITY (Notes B, I and L)
Common stock, no par value; Authorized 50,000 shares;
issued and outstanding; 11,404 in 1999 and
9,694 in 1998 4,775,071 2,838,836
Receivable from stockholders (Note I) (86,000) (225,000)
Accumulated deficit (5,967,754) (2,198,849)
Total stockholders' (deficit) equity (1,278,683) 414,987
$6,978,111 $ 8,782,330
The accompanying notes are an integral part of these statements.
3
Circuit Technology Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1999 1998
Net sales $ 9,860,489 $15,448,642
Cost of sales 10,427,294 14,389,204
Gross (loss) profit (566,805) 1,059,438
Selling, general and administrative expenses 2,594,430 3,240,074
Loss from operations (3,161,235) (2,180,636)
Other income (expense)
Interest expense (764,486) (513,382)
Other income 156,816 144,671
(607,670) (368,711)
NET LOSS $ (3,768,905) $(2,549,347)
The accompanying notes are an integral part of these statements.
4
Circuit Technology Corporation and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Years ended December 31, 1999 and 1998
Retained
Common Stock Receivable Earnings
Number from (accumulated
of shares Amount stockholders deficit) Total
Balances at January 1, 1998 8,992 $ 1,986,725 $ - $ 350,498 $ 2,337,223
Issuance of common
stock 977 1,166,741 - - 1,166,741
Repurchase and
retirement of common stock (275) (314,630) - - (314,630)
Net loss - - - (2,549,347) (2,549,347)
Receivable from
stockholders - - (225,000) - (225,000)
Balances at December
31, 1998 9,694 2,838,836 (225,000) (2,198,849) 414,987
Issuance of common stock 1,881 2,171,235 - - 2,171,235
Repurchase and
retirement of
common stock (171) (235,000) 225,000 - (10,000)
Net loss - - - (3,768,905) (3,768,905)
Receivable from
stockholders - - (86,000) - (86,000)
Balances at December
31, 1999 11,404 $ 4,775,071 $ (86,000) $ (5,967,754) $(1,278,683)
The accompanying notes are an integral part of this statement.
5
Circuit Technology Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities
Net loss $ (3,768,905) $(2,549,347)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,080,193 784,511
Loss on disposal of property and equipment 85,209 -
Provision for losses on trade receivables 285,743 70,070
Reserve for inventory obsolescence 329,561 121,254
Changes in assets and liabilities
Trade accounts receivable 514,333 (41,186)
Inventories (93,889) (666,249)
Other assets 129,492 62,762
Accounts payable (289,282) 630,720
Accrued liabilities 346,686 1,968
Total adjustments 2,388,046 963,850
Net cash used in
operating activities (1,380,859) (1,585,497)
Cash flows from investing activities
Purchase of property and equipment (453,351) (853,115)
Acquisition costs (47,857) (51,835)
Net cash used in
investing activities (501,208) (904,950)
(Continued)
6
Circuit Technology Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1999 1998
Cash flows from financing activities
Increase in receivable from stockholders - (225,000)
Increase (decrease) in checks written in excess
of cash in bank (124,759) 90,312
Payments to stockholders - (2,290,873)
Borrowings from stockholders 1,035,966 2,137,682
Net change in line of credit (1,194,580) 2,187,189
Principal payments on long-term obligations (291,266) (209,800)
Proceeds from long-term obligations 606,719 209,295
Payments on capital lease obligations (226,987) (207,766)
Purchase and retirement of outstanding stock (10,000) (314,630)
Issuance of common stock 2,085,235 1,166,741
Payment of finance costs - (51,247)
Net cash provided by
financing activities 1,880,328 2,491,903
Net increase (decrease) in cash and cash equivalents (1,739) 1,456
Cash and cash equivalents at beginning of year 2,239 783
Cash and cash equivalents at end of year $ 500 $ 2,239
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 764,486 $ 521,273
Noncash investing and financing activities
Capital lease obligation incurred for
equipment (Note H) 26,954 94,335
Common stock retired as payment of receivables
from stockholders 225,000 -
Receivable from stockholders for purchase of stock 86,000 -
7
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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.
2. Principles of consolidation
The consolidated financial statements include the accounts of
Circuit Technology Corporation (CTC) and its wholly-owned
subsidiary, Racore Network, Inc. (RNI). 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
Inventories consist primarily of boards, components and
cables and are valued at the lower of average cost or market.
Costs include materials, labor and overhead.
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.
8
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 cash flow and profitability projections.
Amortization expense totaled $269,930 and $221,512 for 1999
and 1998, 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
The Company has elected to be taxed as a U.S. small business
corporation exempt from income taxes under Sub-Chapter S of
the Internal Revenue Code. Accordingly, the Company's
stockholders are responsible for federal and state income
taxes on the Company's earnings and receive the benefit for
tax deductions from losses to the extent of their basis of
their stock in the Company.
10. Use of estimates
In preparing the Company's financial statements, 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).
9
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
11. Concentrations of risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of trade
accounts receivable. The Company sells substantially to
recurring customers wherein the customer's ability to pay has
previously been evaluated. The Company generally does not
require collateral. Allowances are maintained for potential
credit losses, and such losses have been within management's
expectations. At December 31, 1999 and 1998, this allowance
was $360,493 and $74,750, respectively.
At December 31, 1999, accounts receivable from one customer
located in San Diego, California, represented approximately
25 percent of total trade accounts receivable. Sales to this
customer accounted for 10 percent of 1999 revenues.
12. Fair value of financial instruments
The carrying value of the Company's cash and cash equivalents
and trade receivables, 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.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles,
which contemplate continuation of the Company as a going
concern. However, the Company has sustained substantial
losses from operations in 1999 and 1998, and such losses have
continued in 2000. The Company also has deficit equity of
$1,278,683 at December 31, 1999. In addition, the Company
has used, rather than provided, cash in its operations. As
discussed in Notes F and G, the Company is no longer in
compliance with certain of its line of credit and loan
covenants. This condition of noncompliance has resulted in
the entire amount of the obligations becoming due and
payable.
Since February of 1999, the Company has operated without
additional balances available on its line of credit. Most
vendors stopped shipping components used by the Company to
manufacture products and as a result, the Company is
converting most of its turnkey customers to customers that
provide consigned components to the Company for production.
10
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE B - REALIZATION OF ASSETS - CONTINUED
In view of the matters described in the preceding paragraphs,
recoverability of a major portion of the recorded asset
amounts shown in the accompanying 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.
Management believes that a significant portion of the losses
in 1999 are attributable to expenses related to opening and
subsequently closing of their 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.
The Company's plans include working with vendors to convert
approximately 80 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, subsequent to year-end, Abacus Ventures, Inc.
purchased the Company's line of credit (Note F) from the
lending institution and based on certain criteria are willing
to exchange the debt for common stock. 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
returns to profitability. The Company has raised
approximately $2,170,000 of additional capital from investors
during 1999. The Company's president also lent the Company
approximately $1,000,000 during 1999. The Company is
continuing to seek infusions of capital from investors and is
also attempting to replace their 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 return to
profitability.
NOTE C - INVENTORIES
Inventories consist of the following:
1999 1998
Raw materials $ 1,677,554 $ 1,964,918
Work-in process 1,015,925 567,997
Finished goods 852,807 880,394
3,546,286 3,413,309
Less reserve for obsolescence 489,903 121,254
$ 3,056,383 $ 3,292,055
11
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of
the following at December 31:
Estimated
service
1999 1998 lives
Production equipment $3,138,908 $2,838,475 5-10
Leasehold improvements 954,170 1,027,436 7-10
Office equipment 620,969 463,467 5-10
Other 118,029 118,029 3-7
4,832,076 4,447,407
Accumulated depreciation and
amortization (2,229,054) (1,429,218)
$2,603,022 $3,018,189
NOTE E - OTHER ASSETS
Other assets consist of the following at December 31:
1999 1998
Intellectual property $582,540 $582,540
Financing and acquisition costs 150,939 103,082
Other 9,197 80,323
742,676 765,945
Accumulated amortization (491,442) (221,512)
Other assets, net $251,234 $544,433
NOTE F - LINE OF CREDIT
In April 1998, the Company established a line of credit
agreement with a lending institution providing for borrowings
up to $4,500,000 with an interest rate of 3.5 percent over
the lending institution's prime rate (12 percent at December
31, 1998). The line expired in April 1999. The line was
collateralized by all tangible personal property of the
Company, including inventories and equipment. Interest was
due monthly and any outstanding balance was due on demand.
Certain stockholders of the Company guaranteed the borrowings
on the line of credit. As of December 31, 1999, the Company
had outstanding borrowings on this line of credit of
$2,792,609.
12
NOTE F - LINE OF CREDIT - CONTINUED
The Company had convenants related to this line which
required compliance with certain levels of cash flow, working
capital, earnings from operations and current and debt to
equity ratios. At various times during 1999 and as of
December 31, 1999, the Company was not in compliance with
these convenants. The lending institution extended the line
of credit through February 18, 2000 subject to certain
conditions, which included substantial reductions in the line
of credit (if possible). Subsequent to year-end, the line of
credit was purchased by a company that is willing, based on
certain criteria, to exchange the debt for common stock.
NOTE G - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
1999 1998
Note payable to a financial
institution, due in monthly
installments of $20,000, including
interest at 4% over prime (12.5% at
December 31, 1999), with a maturity
date of July 2001, collateralized by
equipment $301,504 $282,273
Note payable to a finance corporation,
due in monthly installments of $3,114,
including interest at 9%, with a
maturity date of May 2001,
collateralized by equipment and trade
accounts receivable 25,828 43,754
Note payable to a finance corporation,
due in monthly installments of $3,114,
including interest at 9%, with a
maturity date of March 2000,
collateralized by equipment and trade
accounts receivable 35,761 75,109
Note payable to a finance corporation,
due in monthly installments of $4,152,
including interest at 9%, with a
maturity date of July 2000,
collateralized by equipment and trade
accounts receivable 63,176 87,469
13
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
1999 1998
Note payable to a finance corporation,
due in monthly installments of $3,280,
including interest at prime (11.5% at
December 31, 1999) plus 3%, with a
maturity date of January 2002,
collateralized by equipment 82,083 106,083
Note payable to an individual, due in
monthly installments of $5,000,
including interest at a rate of 9.5%,
with a maturity date of May 2000,
collateralized by all assets of the
Company 104,212 104,212
Note payable to a financial
institution, due in monthly
installments of $9,462, including
interest at 8.61%, with a maturity
date of April 2004, collateralized by
equipment 446,352 -
Note payable to a company, due in
monthly installments of $39,188,
including interest at 9.75%, due in
2000, collateralized by equipment 143,437 -
Note payable to a company, payable in
full, February 1999, no interest
charged (imputed at 10%),
collateralized by equipment - paid in
full during 1999 - 88,000
Note payable to a company, due in
monthly installments of $5,000, no
interest charged (imputed at 10%),
callable at any time, collateralized
by equipment - paid in full during
1999 - 100,000
1,202,353 886,900
Less current maturities 475,385 871,485
$ 726,968 $ 15,415
14
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
The Company's long-term obligations mature as follows:
Year ending December 31,
2000 $ 475,385
2001 398,920
2002 149,305
2003 110,011
2004 68,732
Thereafter -
$ 1,202,353
Certain of the Company's long-term obligations contain
various convenants and restrictions, the most restrictive of
which require the Company to maintain certain net worth and
current ratios. In addition, the agreements provide for the
acceleration of principal payments in the event of a
convenant violation or a material adverse change in the
operations of the Company. As of December 31, 1999, the
Company was not in compliance with certain of these covenants
(Note B). Balances due on these obligations have been
classified as current obligations.
NOTE H - LEASES
The Company conducts a substantial portion of its operations
utilizing leased facilities and equipment consisting of sales
office, warehouses, manufacturing plants, and transportation
and computer equipment. Some of the operating leases provide
that the Company pay taxes, maintenance, insurance and other
occupancy expenses applicable to leased premises. Generally,
the leases provide for renewal for various periods at
stipulated rates.
15
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE H - LEASES - CONTINUED
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, 1999:
Capital Operating
Year ending December 31, leases leases
2000 $ 118,565 $ 325,722
2001 74,611 320,526
2002 8,520 324,713
2003 4,388 329,037
2004 4,388 226,298
Thereafter - 958,440
Future minimum lease payments 210,472 $ 2,484,736
Amounts representing interest (27,235)
Present value of net minimum lease
payments 183,237
Less current maturities (100,920)
$ 82,317
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 $743,552 and $280,623
for 1999 and 1998, 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 L).
Property and equipment includes $1,034,551 and $860,653 of
equipment under capital leases at December 31, 1999 and 1998,
respectively. Accumulated amortization amounted to $266,472
and $336,032 at December 31, 1999 and 1998, respectively, for
equipment under capital leases.
16
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE I - RELATED PARTY TRANSACTIONS
Lease
As discussed in Note H, the Company entered into a lease for
manufacturing and office space with a company owned by
certain stockholders of the Company. 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 1999 the Company had amounts due to
stockholders. The balance due to stockholders at December
31, 1999 and 1998 was $1,035,966 and $0, respectively.
Notes receivable
During 1999, the Company advanced certain stockholders
$86,000 in exchange for notes receivable. The receivables
are due on demand and bear no interest (imputed at ten
percent).
The receivables are presented in the financial statements as
a reduction of equity.
NOTE J - ACCRUED LIABILITIES
Accrued liabilities include approximately $359,000 of
delinquent payroll taxes.
NOTE K - LITIGATION
The Company 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 range of potential
loss is estimated at between $0 and $2,500,000. The range is
widespread 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 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.
17
Circuit Technology Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE L - SUBSEQUENT EVENTS
Issuance of stock
Subsequent to December 31, 1999, the Company issued 235
shares of its common stock to investors for $1,151,600 in
cash.
Merger agreement
Effective July 1, 2000, all of the assets and liabilities of
the Company were acquired by CTI Systems, Inc. (CTISI), a
wholly owned subsidiary of CirTran Corporation (formerly
Vermillion Ventures, Inc.) (CirTran). The Company received
10,000,000 shares of CirTran common stock in the transaction
of which 800,000 shares were paid by the Company to an entity
for services performed in facilitating the transaction.
The merger has been accounted for as a reverse acquisition of
CirTran by the Company. Although CirTran is the surviving
legal entity, for accounting purposes the Company will be
treated as the continuing entity.
18
UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
COMBINED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements
are based on the June 30, 2000 historical consolidated financial
statements of CirTran Corporation and Subsidiary (formerly
Vermillion Ventures, Inc.) and the June 30, 2000 historical
consolidated financial statements of Circuit Technology
Corporation and Subsidiary. The unaudited pro forma combined
balance sheet assumes that the merger was completed at June 30,
2000 with Circuit Technology Corporation treated as the acquiring
entity for financial statement purposes. The pro forma combined
statements of operations for the six months ended June 30, 2000
and the year ended December 31, 1999 assume that the merger was
completed at the beginning of each period.
The unaudited pro forma condensed combined financial statements
have been prepared by management of CirTran and Circuit
Technology based on the financial statements included elsewhere
herein. The pro forma adjustments include assumptions and
preliminary estimates as discussed in the accompanying notes, and
are subject to change. These pro forma statements may not be
indicative of the results that actually would have occurred if
the merger had been in effect on the dates indicated, and may not
be indicative of financial results that may be obtained in the
future.
These pro forma financial statements should be read in
conjunction with the historical financial information on both
CirTran and Circuit Technology.
According to the agreement between CirTran and Circuit, CirTran
issued 10,000,000 shares of common stock to the former holders of
equity interests in Circuit. Circuit then issued 800,000 of
these shares to an entity involved in introducing CirTran and
Circuit. As a result of this transaction, the former
stockholders of Circuit will own approximately 91 percent of the
combined company while the former stockholders of CirTran will
own approximately 1 percent.
The merger will be accounted for as a reverse acquisition of
CirTran by Circuit. Although CirTran will be the surviving legal
entity, for financial reporting purposes, the entity whose
shareholders hold in excess of 50 percent of the combined
company, Circuit will be treated as the continuing accounting
entity. The reverse acquisition will be treated as a capital
stock transaction in which Circuit will be deemed to have issued
the shares of common stock held by CirTran stockholders for the
net assets of Circuit. No goodwill will be recorded.
CirTran Corporation and Subsidiary
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
June 30, 2000
ASSETS
Circuit
Technology
Corporation Pro Forma
CirTran and Pro Forma Combined
Corporation Subsidiary Adjustments Balance
CURRENT ASSETS
Cash and cash equivalents $ - $ 200 - $ 200
Trade accounts receivable,
net of allowance for doubtful
accounts of $309,973 - 972,687 - 972,687
Inventories - 3,245,911 - 3,245,911
Other - 93,621 - 93,621
Total current assets - 4,312,420 - 4,312,420
PROPERTY AND EQUIPMENT, NET - 2,370,576 - 2,370,576
OTHER ASSETS, NET - 159,927 - 159,927
$ - $ 6,842,922 - $ 6,842,922
(Continued)
2
CirTran Corporation and Subsidiary
UNAUDITED COMBINED PRO FORMA BALANCE SHEET - CONTINUED
June 30, 2000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Circuit
Technology
Corporation Pro Forma
CirTran and Pro Forma Combined
Corporation Subsidiary Adjustments Balance
CURRENT LIABILITIES
Line of credit $ - $2,820,429 $ - $2,820,429
Current maturities of long-
term obligations - 475,385 - 475,385
Current maturities of
capital lease obligations - 100,920 - 100,920
Checks written in excess of
cash in bank - 68,813 - 68,813
Accounts payable 2,713 2,440,277 - 2,442,990
Accrued liabilities - 976,343 - 976,343
Notes payable to stockholders - 1,035,966 - 1,035,966
Total current liabilities 2,713 7,918,132 - 7,920,845
LONG-TERM OBLIGATIONS,
less current maturities - 532,066 - 532,066
CAPITAL LEASE OBLIGATIONS,
less current maturities - 80,762 - 80,762
COMMITMENTS - - - -
STOCKHOLDERS' DEFICIT
Common stock, no par value;
Authorized 500,000,000
shares; issued and outstanding;
10,143,567 shares pro forma 144 5,846,671 10,000 1 10,144
(5,846,671)2
Additional paid-in capital 29,072 - 5,846,671 2 5,836,527
(29,072)3
(10,000)1
Receivable from stockholders - (56,000) - (56,000)
Accumulated deficit (31,929) (7,478,709) 31,929 3 (7,478,709)
Total stockholders' deficit (2,713) (1,688,038) 2,857 3 (1,688,038)
$ - $ 6,842,922 $ - $6,842,922
The accompanying notes are an integral part of this statement.
3
CirTran Corporation and Subsidiary
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
Six months ended June 30, 2000
Circuit
Technology
Corporation Pro Forma
CirTran and Pro Forma Combined
Corporation Subsidiary Adjustments Balance
Net sales $ - $ 2,680,038 $ - $ 2,680,038
Cost of sales - 2,511,279 - 2,511,279
Gross profit - 168,759 - 168,759
Selling, general and
administrative expenses 7,080 1,439,057 - 1,446,137
Loss from operations (7,080) (1,270,298) - (1,277,378)
Other income (expense)
Interest expense - (308,317) - (308,317)
Other income - 67,660 - 67,660
- (240,656) - (240,656)
NET LOSS $ (7,080) $ (1,510,955) $ - $ (1,518,035)
The accompanying notes are an integral part of this statement.
4
CirTran Corporation and Subsidiary
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
Year ended December 31, 1999
Circuit
Technology
Corporation Pro Forma
CirTran and Pro Forma Combined
Corporation Subsidiary Adjustments Balance
Net sales $ - $ 9,860,489 $ - $ 9,860,489
Cost of sales - 10,427,294 - 10,427,294
Gross profit - (566,805) - (566,805)
Selling, general and
administrative expenses 2,649 2,594,430 - 2,597,079
Loss from operations (2,649) (3,161,235) - (3,163,884)
Other income (expense)
Interest expense - (764,486) - (764,486)
Other income - 156,816 - 156,816
- (607,670) - (607,670)
NET LOSS $ (2,649) $ (3,768,905) $ - $ (3,771,554)
The accompanying notes are an integral part of this statement.
5
CirTran Corporation and Subsidiary
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE A - STOCKHOLDERS' DEFICIT
Stockholders' deficit was determined as if the
consolidated financial statements are a continuation of
Circuit. Thus, the accumulated deficit and equity
accounts in the consolidated financial statements
immediately after the merger will be the accounts of
Circuit at that date. The accumulated deficit and other
equity accountings of CirTran at the date of the merger
will be eliminated.
CirTran issued 10,000,000 shares of common stock to the
former shareholders in Circuit. Circuit then issued
800,000 of these shares to an entity involved in
introducing CirTran and Circuit. The combined company
will have an authorized capital of 500,000,000 shares of
common stock, par value $0.001 per share.
NOTE B - REVERSE MERGER PRO FORMA ADJUSTMENTS
The reverse merger was affected through adjustment as
follows:
1 Issuance of 10,000,000 shares of $0.001 par value
CirTran common stock in exchange for the net assets
of Circuit.
2 Reclassification of Circuit stock to additional paid-
in capital of CirTran.
3 Removal of CirTran additional paid-in capital and
accumulated deficit.
6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
CIRTRAN CORPORATION
DATED: October 4, 2000 By: /s/ Iehab J. Hawatmeh, President