UNITED STATES
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 Quarter Ended December 31, 2001 Commission File Number 0-30913
Circuit Source International, Inc.
(Name of Small Business Registrant)
Nevada 86-0985427
(State of Incorporation) (I.R.S. Employer Identification Number.)
1930 East Third Street, Suite 15, Tempe, Arizona 85281
(Address of Principal Executive Offices Including Zip Code)
(480) 967 7090
(Issuers Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. YES [X] NO [ ]
Number of shares outstanding of each of the issuer's classes of common equity,
as of December 31, 2001 5,009,000
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet at December 31, 2001 1
Statement of Operations for six months and three months ended
December 31, 2001 and December 31, 2000 2
Consolidated Statements of Stockholders' Equity
for the six months ended December 31, 2001 and 2000 3
Statement of Cash Flows for the six months and three months
ended December 31, 2001 and December 31, 2000 4
Notes to Financial Statements 5
Item 2 - Management's Discussion and Analysis 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Default Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001
(UNAUDITED)
December 31,
2001
------------
ASSETS
Current Assets:
Cash and cash equivalents $ 61,668
Accounts receivable trade, net of allowance for
doubtful accounts 685,182
Other receivables 16,878
Inventory 184,033
Other 1,931
-----------
Total Current Assets 949,692
Property and equipment 943,844
Accumulated depreciation (193,929)
-----------
Net Property and Equipment 749,915
Deferred tax asset 209,345
Goodwill, net of amortization of $25,251 1,995,300
Refundable deposits 6,850
Other 31,059
-----------
TOTAL ASSETS $ 3,942,161
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 207,731
Accrued expenses 133,312
Notes payable - current and current portion 3,356,139
-----------
Total Current Liabilities 3,697,182
Notes payable - long term 136,409
-----------
TOTAL LIABILITIES 3,833,591
STOCKHOLDERS' EQUITY
Common Stock 501
Additional Paid in Capital 111,999
Retained Earnings (3,930)
-----------
TOTAL STOCKHOLDERS' EQUITY 108,570
-----------
TOTAL LIABILITIES AND STOCKHODLERS' EQUITY $ 3,942,161
===========
The accompanying notes are an integral part of these financial statements.
1
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
For the six months ended For the three months ended
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
Income $ 1,541,489 $ 962,150 $ 1,130,874 $ 480,075
Cost of sales:
Materials 255,392 243,457 156,776 122,986
Labor and related costs 357,052 206,508 261,753 104,404
Direct manufacturing expenses 231,749 72,142 187,801 36,758
Depreciation 39,000 24,410 32,300 12,205
----------- ----------- ----------- -----------
Total Cost of Sales 883,193 546,517 638,630 276,353
----------- ----------- ----------- -----------
Gross Profit 658,296 415,633 492,244 203,722
Operating expenses:
Salaries and related costs 256,814 137,670 229,835 68,685
Occupancy costs 38,679 35,804 24,570 18,353
General and administrative costs 366,372 262,162 268,397 115,081
Depreciation 20,987 754 20,764 377
Amortization (organization costs) 25,251 25,251
Interest expense 74,420 14,334 64,532 4,210
----------- ----------- ----------- -----------
Total Operating Expenses 782,523 450,721 633,349 206,706
----------- ----------- ----------- -----------
Operating Income (Loss) (124,227) (35,088) (141,105) (2,984)
Interest Income 95 1,923 93 718
Miscellaneous Income 13,101 (2,788) 13,101 (2,210)
----------- ----------- ----------- -----------
Income (loss) before income taxes (111,031) (35,953) (102,660) (4,476)
Benefit (provision) for income
taxes 42,800 13,800 39,600 1,700
----------- ----------- ----------- -----------
Net Income (Loss) $ (68,231) $ (22,153) $ (63,066) $ (2,776)
=========== =========== =========== ===========
(Loss) earnings per common share
Basic $ (0.01) $ 0.00 $ (0.01) $ 0.00
=========== =========== =========== ===========
Diluted $ (0.01) $ 0.00 $ (0.01) $ 0.00
=========== =========== =========== ===========
Average shares of common stock outstanding
Basic 4,926,803 4,610,000 4,953,901 4,610,000
=========== =========== =========== ===========
Diluted 4,926,803 4,610,000 4,953,901 4,610,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
2
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
Common Stock Additional Retained
------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
Beginning balance - Circuit Source, Inc.
July 1, 2000 4,610,000 $ 461 $ 3,039 $ 137,494 $ 140,994
Net Income (loss) for the six months
ended December 31, 2000 (20,923) (20,923)
---------- -------- -------- --------- ---------
Ending Balance - December 31, 2000 4,610,000 $ 461 $ 3,039 $ 116,571 $ 120,071
========== ======== ======== ========= =========
Beginning Balance - Circuit Source
International, Inc. July 1, 2001 4,900,000 $ 490 $ 3,010 $ 64,301 $ 67,801
Sale of common stock 109,000 11 108,989 109,000
Net Income (loss) for the six months ended
December 31, 2001 (68,231) (68,231)
---------- -------- -------- --------- ---------
Ending Balance - December 31, 2001 5,009,000 $ 501 $111,999 $ (3,930) $ 108,570
========== ======== ======== ========= =========
The accompanying notes are an integral part of these financial statements.
3
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
For the six months For the three months
ended ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net Income (Loss) $ (68,231) $ (22,153) $ (63,066) $ (2,776)
Adjustments to reconcile Net Income to Net
Cash Provided by Operating Activities
Depreciation and amortization 85,238 25,164 78,315 12,582
Deferred tax asset 42,800 13,800 39,600 1,700
Change in assets and liabilities:
Aaccounts receivable (451,769) 53,885 (393,124) 43,937
Other receivables (12,893) 48,446 (4,824) 2,562
Prepaid expenses (1,931) (1,931)
Inventory (152,914) (11,956) (161,333) (5,978)
Accounts payable 82,967 (38,612) 107,257 (19,778)
Accrued liabilities 131,742 (7,472) 129,738 (4,274)
--------- --------- --------- ---------
Net Cash Provided By Operating Activities (336,991) 61,102 (269,368) 27,975
Cash Flows from Investing Activities
Purchase of subsidiary (500,000) (500,000)
Purchase of property and equipment (20,862) (1,255) (7,767) (651)
Disposition of property and equipment 42,888
--------- --------- --------- ---------
Net Cash Used By Investing Activities (477,974) (1,255) (507,767) (651)
Cash Flow from Financing Activities
Proceeds from sale of common stock 109,000
Proceeds of loans 985,111 96,076 973,717 34,000
Principal payments on loans (197,189) (62,925) (127,104) (32,065)
Officer loans (43,985) (17,619)
--------- --------- --------- ---------
Net Cash Used By Financing Activities 852,937 33,151 828,994 1,935
--------- --------- --------- ---------
Increase In Cash 37,972 92,998 51,859 29,259
Beginning of period 23,696 5,509 9,809 69,248
--------- --------- --------- ---------
Ending Balance $ 61,668 $ 98,507 $ 61,668 $ 98,507
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
STATEMENT OF INFORMATION FURNISHED
The accompanying financial statements have been prepared in accordance with Form
10-QSB instructions and in the opinion of management contain all adjustments
(consisting of only normal and recurring accruals) necessary to present fairly
the financial position as of December 31, 2001. These results have been
determined on the basis of generally accepted accounting principles.
NOTE 1. THE COMPANY
On February 27, 2001, SixthCAI, Inc., a public shell corporation, in a capital
transaction accompanied by a stock recapitalization acquired the stock of
Circuit Source, Inc. SixthCAI, Inc. was incorporated on February 2, 2000 and had
only limited operations until its Plan of Reorganization with Circuit Source,
Inc. In conjunction with the plan, SixthCAI, Inc. cancelled 4,750,000 shares
then outstanding and issued 4,610,000 shares to the stockholders of Circuit
Source, Inc. for all of the issued and outstanding stock of that company. As
part of this reverse acquisition, SixthCAI, Inc. changed its name to Circuit
Source International, Inc. (the Company") and owns the wholly owned subsidiary,
Circuit Source, Inc.
Circuit Source, Inc. was incorporated in the state of Arizona in 1988. The
Company's year end is June 30.
On a pro forma basis, had the merger occurred on July 1, 2000, the results of
operations would have been to increase the loss by $300 for the three months
ended September30, 2001.
On October 31, 2001 the Company entered into a Stock Purchase Agreement (the
"Agreement") to acquire all of the outstanding stock of Avanti Circuits, Inc. an
Arizona corporation. Avanti Circuits, Inc. is in the same line of business as
the Company. The purchase price was $2,500,000, payable $500,000 at closing with
the balance of $2,000,000 due on January 31, 2002 at ten percent (10%) per
annum. Subsequently the due date of the note was extended to March 31, 2002. In
conjunction with the Agreement the Company entered into five-year employment
agreements with the former owner and two employees. This acquisition will be
accounted for as a purchase by the Company.
NOTE 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Circuit Source, Inc. manufactures and sells single, double sided and
multilayered printed circuit boards from prototype to volume productions
quantities. Some of these boards may have up to twelve layers and they vary in
the sophistication of layout of design. The Company is located in Arizona and
all production is done in Arizona.
The financial statements include the accounts of the Company and its wholly
owned subsidiaries, Circuit Source, Inc, and Avanti Circuits, Inc.
5
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
NOTE 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of deposits in checking and savings accounts.
REVENUE RECOGNITION
The Company recognizes revenue when the product is complete, conforms to the
buyer's specifications and is shipped to the customer. The company provides a
reserve for doubtful accounts. The reserve is currently $5,000, which the
Company believes is adequate to cover any potential uncollectible receivables.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated or amortized using
straight line or accelerated methods over the estimated useful lives of the
assets.
Manufacturing equipment 5-7 years
Office equipment 5-7 years
Leasehold improvements 5-7 years
Vehicles 3-7 years
Maintenance and repairs are charged against operations as incurred. Significant
improvements and upgrades are capitalized and depreciated over their estimated
useful life.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, which requires the use of an
asset and liability method of accounting. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
NOTE 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
The excess of the cost over the net assets acquired (goodwill) is being
amortized on a straight-line basis over 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS 121"). SFAS 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the book value of the
asset may not be recoverable. The Company evaluates on each balance sheet date
whether events or circumstances have occurred that indicate a possible
impairment. In accordance with SFAS 121, the Company uses an estimate of the
future undiscounted net cash flows of the related asset or asset group over the
remaining life in measuring whether the assets are recoverable.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement establishes accounting and reporting standards for
goodwill and intangibles for years commencing after December 15, 2001. Whether
already acquired or subsequently acquired after the effective date, companies
are required to identify intangibles with finite lives and those with indefinite
lives. Those intangibles with finite lives are to be amortized over the
estimates useful lives of the assets while those with indefinite lives are not
to be amortized. Goodwill is not be amortized. Each intangible or goodwill asset
should be analyzed at least annually for impairment where the carrying value is
in excess of the fair value of the intangibles and in excess of the implied fair
value in the case of goodwill assets. The asset's carrying value is to be
reduced by a charge to income if the fair value is lower than the carrying
value. The Company has not determined the effect of this new standard; however,
at June 30, 2001 the Company has no amortizing intangibles. The impact of
implementation SFAS No. 142 for periods after June 30, 2002 are expected to
reduce amortization expense by approximately $101,000 per year.
7
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30,
2001
------------
Manufacturing equipment $ 638,268
Office equipment 181,625
Leasehold improvements 85,057
Vehicles 38,894
---------
943,844
Less: accumulated depreciation (193,929)
---------
$ 749,915
=========
Depreciation and amortization expense for the six months ended December 31, 2001
and 2000 were $85,238 and $25,164) and for the three months ended September 30,
2001 and 2000 were $78,315 and $12,582, respectively.
NOTE 4. NOTES PAYABLE
Notes payable and long-term debt consist of the following:
September 30,
2001
-------------
Lines of credit - banks, unsecured, interest at prime plus
6.75% and 13.5% due 2005, maximum lines are $100,000 $99,510
Line of credit - bank, unsecured, interest at prime plus 7.0%,
monthly payments of 2% of outstanding principal balance,
guaranteed by shareholder 81,162
Note payable - interest at 15%, monthly payments $1,250, due
December 31, 2001, secured by accounts receivable and
guarantee of shareholder 100,000
Note payable - bank, 9% secured by the assets of Avanti
Circuits, Inc., repaid subsequent to quarter end,
replaced with new financing 570,333
Note payable - individual, due March 31, 2002, interest
at 10%, secured by stock of Avanti Circuits, Inc. 2,000,000
Note payable - bank, 12% unsecured due within one year 514,542
Note payable - individual, 36% unsecured due in 180 days 130,000
---------
Total 3,495,547
Less current portion 3,356,883
---------
Long-term portion $ 138,664
=========
8
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
NOTE 5. INCOME TAXES
Components on income taxes benefit reflected in the consolidated statements of
operations are as follows:
2001 2000
-------- --------
Current Income Taxes:
Federal $ 35,100 $ 11,400
State 7,700 2,400
-------- --------
$ 42,800 $ 13,800
======== ========
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting (loss) earnings compared to the (benefit)
provision for income tax in the consolidated statements of operations:
Income tax (benefit) expense at the statutory rate $ 37.700 $ 12,200
(Decrease) Increase resulting from:
State income taxes, net of federal income tax 5,100 1,600
-------- --------
$ 42,800 $ 13,800
======== ========
Tax effects are based on a 7.0% state and 34.0% federal income tax rates for a
net combined rate of 38.6% for 2001 before credit for rate differences.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Net operating loss carryforwards for
federal income tax purposes of $603,000 expire in 2021. Net operating loss
carryforwards for state income tax purposes expire in 2006.
NOTE 6. RELATED PARTY TRANSACTIONS
The major stockholder of the Company has guaranteed the notes payable of the
Company and also guaranteed the lease obligations. The Company has agreed to
indemnify the major stockholder/officer for any related costs.
9
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
NOTE 7. LEASE COMMITMENTS
The Company leases its manufacturing and office facilities under an operating
lease that requires monthly rental payments of $5,137 with annual increases
through December 31, 2005.
The Company maintains equipment under long-tern operating leases. Future minimum
rental payments required under operating leases that have an initial or
remaining noncancelable lease term in excess of one year are:
For the twelve months ended
December 31, 2002 $103,776
December 31, 2003 103,776
December 31, 2004 103,776
December 31, 2005 50,848
--------
$362,176
========
The rental expense is charged to operations as paid over the lease term. Total
lease expense for the six months ended December 31, 2001 and 2000 was $76,771
and $64,720 and for the three months ended December 31, 2001 and 2000 was
$39,362and $32,362, respectively.
NOTE 8. CONCENTRATION OF MARKET RISK
No Customer provides more than ten percent (10%) of the gross revenue.
NOTE 9. STOCKHOLDERS' EQUITY
The Company has 100,000,000 shares of $0.0001 par value stock authorized and
4,900,000 and 4,610,000 shares outstanding at December 31, 2001 and 2000 after
giving effect to the transaction with SixthCAI, Inc. and the reorganization of
the Company.
The Company sold 109,000 shares of $0.0001 par value common stock during the
quarter ending December 31, 2001 at a price of $1.00 per share.
NOTE 10. EARNINGS (LOSS) PER SHARE
The income per share is based on the number of shares outstanding as if all
shares were outstanding at the beginning of the period. The weighted average
number of shares outstanding for both basic and diluted earnings per share was
4,926,803 and 4,610,000 shares for the six months ended December 31, 2001 and
2000 and 4,953,901 and 4,610,000 for the three months ended December 31, 2001
and 2000, respectively.
Basic loss per share is calculated by dividing the net loss by the weighted
average common shares outstanding during the period. The basic and diluted loss
per share has been adjusted to give effect to the stock split as a result of the
reorganization.
10
CIRCUIT SOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
NOTE 11. CORPORATE ACQUISITION
On October 31, 2001 the Company entered into a Stock Purchase Agreement (the
"Agreement") to acquire all of the outstanding stock of Avanti Circuits, Inc. an
Arizona corporation. Avanti Circuits, Inc. is in the same line of business as
the Company. The purchase price was $2,500,000, payable $500,000 at closing with
the balance of $2,000,000 due on January 31, 2002 at ten percent (10%) per
annum. In conjunction with the Agreement the Company entered into five year
employment agreements with the former owner and two employees. This acquisition
will be accounted for as a purchase by the Company.
This acquisition was accounted for as a purchase and accordingly, the results of
operations of the acquired business is included in the accompanying financial
statements from the date of acquisition. Goodwill has been recognized for the
amount of the excess of the purchase price paid over the fair market value of
the net assets acquired and is being amortized on a straight-line basis over 20
years. The pro forma results of operations for the six months ended December 31,
2001, as if Avanti Circuits, Inc. had been combined as of the beginning of the
year follow. Th eproforma results include estimates and assumptions which
management believes are reasonable. However, pro forma results do not include
any anticipated cost savings or other effects of the planned integration with
other operations of the Company and are not necessarily indicative of the
results which would have occurred if the business combination had been in effect
on the dates indicated, or which may result in the future.
Pro Forma
For the six months ended
December 31,
----------------------------
2001 2000
---------- ----------
Net Sales $2,339,130 $1,807,509
Net Income (Loss) $ (131,812) $ (44,375)
Income per common share
Basic $ (0.03) $ (0.01)
Diluted $ (0.03) $ (0.01)
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-QSB contains certain statements that are not related to
historical results, including, without limitations, statements regarding the
company's business strategy and objectives and future financial position, are
forward looking statements within the meaning of section 27A of the securities
act and section 21E of the Exchange Act and involve risks and uncertainties.
Although the company believes that the assumptions on which these forward
looking statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate and actual results could differ materially
from those discussed in the forward looking statements. Factors that could cause
or contribute to such differences include but are not limited to, those set
forth in the preceding paragraph, as well as those discussed elsewhere in this
report. All forward-looking statements contained in this report are qualified in
their entirety by this cautionary statement.
Circuit Source, Inc. was incorporated in the state of Arizona in 1988. The
Company's year end is June 30.
On February 27, 2001, SixthCAI, Inc., a public shell corporation, in a
capital transaction accompanied by a stock recapitalization acquired the stock
of Circuit Source, Inc. SixthCAI, Inc. was incorporated on February 2, 2000 and
had only limited operations until its Plan of Reorganization with Circuit
Source, Inc. In conjunction with the plan, SixthCAI, Inc. cancelled 4,750,000
shares then outstanding and issued 4,610,000 shares to the stockholders of
Circuit Source, Inc. for all of the issued and outstanding stock of that
company. As part of this reverse acquisition, SixthCAI, Inc. changed its name to
Circuit Source International, Inc. (the Company") and owns the wholly owned
subsidiary, Circuit Source, Inc. The reorganization has been restated to the
July 1, 1999.
OVERVIEW
Circuit Source, Inc. manufactures and sells single and double sided printed
circuit boards from prototype to volume productions quantities. These boards may
have up to twelve layers and vary in the sophistication and layout of design.
The Company is located in Arizona and all production is done in Arizona.
The financial statements include the accounts of the Company and its wholly
owned Subsidiaries, Circuit Source, Inc. and Avanti Circuits, Inc.
RESULTS OF OPERATIONS
The company had a gross profit for the six months ended December 31, 2001
of $658,296 and $415,633 at December 31, 2000.
The company's net income (loss) increased from $(22,153) for the six months
ended December 31, 2000 to $(68,231) for the same six month period ending in
2001.
The company's earnings (loss) per share, on a fully diluted basis was
$(0.01) for the six months ending December 31, 2001 and for the six months
ending December 31, 2000 is $(0.01).
The Company expects to face many operating and industry challenges and will
be doing business in a highly competitive industry.
12
Capital reserves at September 30, 2001 were positive and the company has
adequate working capital to continue its operations at its present level. The
Company plans to increase working capital through the sale of stock as well as
strategic mergers or acquisitions in the industry, as set forth in ITEM 5, to
increase revenue and cash flow.
LIQUIDITY AND CAPITAL RESOURCES
The Company has three lines of credit with interest rates ranging from
prime plus six and three quarters to 15%. Two of the loans for an aggregate of
$178,458 are unsecured and $100,000 is secured by the pledge of the receivables
of the Company. The current portion of the lines of credit is $139,884.
The Company leases its manufacturing and office facilities under an
operating lease that requires monthly rental payments of $5,137 with annual
increases through December 31, 2005.
The Company maintains equipment under long-tern operating leases. The
rental expense is charged to operations as paid over the lease term. Total lease
expense for the six months ended September 30, 2001 and 2000 was $76,771 and
$64,720, respectively.
SEASONALITY
The Company's operations are not affected by seasonal fluctuation. However,
cash flows may at times be affected by fluctuations in the timing of cash
receipts from large contracts.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Additional Financing. The Company will require additional financing to
achieve growth in operations. The company is in the process of raising
additional capital through the private placement of common stock to accredited
investors. The purpose of the raise is to reduce lease and credit lines,
purchase new equipment and working capital. The company has also completed an
acquisition as specifically set forth in ITEM 5.
Technological Change. The Company has been able to keep pace with
technological changes through an on going educational process in the industry.
Competition. The Company faces competition from many sources, most of which
are larger and have significantly more resources than the Company.
13
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation and to its knowledge, no
action, suit or proceedings against it has been threatened by any person or
entity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On October 31, 2001 the registrant entered into a Stock Purchase
Agreement purchasing all the issued and outstanding shares in Avanti Circuits,
Inc. from its sole shareholder. The consideration was $500,000 in cash and a
Promissory Note for $2,000,000 with 10% interest payable on or before January
31, 2002. The shares of stock will be held in escrow and not released until the
balance is fully paid. A Security Agreement securing all the assets of Avanti
Circuits secures the Promissory Note. Said agreement is subordinate to the
security interest a preexisting lender has against the assets of Avanti. The
majority shareholder of the registrant, James Keaton, has also guaranteed the
Promissory Note. The closing of the transaction occurred on October 31, 2001
with an effective date of October 1, 2001. The majority shareholder of the
registrant assumed the position of president of Avanti and the existing
directors of Avanti resigned subsequent to the appointment of James Keaton and
Ron Conquest to Avanti's board of directors. An additional condition of the
transaction was the placement of a $2,000,000 life insurance policy on the life
of the registrant's majority shareholder while the promissory note is in effect.
Avanti as a condition of this transaction also executed three employment
contracts. All pertinent documents are attached as exhibits.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (* denotes previously filed exhibit incorporated by reference)
2 Stock Purchase Agreement between Circuit Source International
Inc., the acquiring corporation, Avanti Circuits, Inc., the
acquired corporation and William C Malone the sole shareholder of
Avanti Circuits, Inc. *
3.1 Articles of Incorporation with Amendments filed with the Form 10SB
on June 28, 2000 and incorporated by reference. *
3.2 By Laws filed with the Form 10SB on June 28, 2000 and incorporated
by reference. *
3.3 Computation per share earnings filed with Form 10-KSB on October
1, 2001 and incorporated by reference and in current financial
statements. *
10 Merger and Plan of Reorganization filed in an 8-K on March 14,
2001 and incorporated by reference. *
10.1 A Security Agreement dated October 1, 2001 between the registrant,
(debtor) Avanti Circuits, Inc. (corporation) and William Malone
(secured party) with an effective date of October 31, 2001
securing all the assets of Avanti. *
10.2 A Promissory Note dated October 1, 2001 for $2,000,000 plus 10%
interest payable to the shareholder of Avanti by the registrant
due on January 31, 2002. *
10.3 A Security Agreement, dated October 1, 2001 by and between the
registrant as the Pledgor and William Malone as Pledgee pledging
the Avanti stock as security for payment of the note. *
10.4 Guaranty by majority shareholder of the registrant regarding the
acquisition of Avanti Circuits. *
(b) Reports on Form 8-K
Reports filed December 31, 2001 on a Form 8-K during this
reporting period reporting Items 2 and 7 on the acquisition of
Avanti Circuits, Inc.
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SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CIRCUIT SOURCE INTERNATIONAL, INC.
November 19, 2001 By: /s/ James Keaton
-------------------------------------
James Keaton, Director and President
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