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 Quarter Ended June 30, 2000 Commission File Number 0-11353 CIRCUIT RESEARCH LABS, INC. (Exact name of registrant as specified in its charter) Arizona 86-0344671 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2522 West Geneva Drive, Tempe, Arizona 85282 (Address of Principal executive office) (Zip Code) Registrant's telephone number, including area code (602) 438-0888 172743 20 5 (CUSIP Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Outstanding at Class June 30, 2000 Common stock, $.10 par value 996,429 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES INDEX Page number Part I. FINANCIAL INFORMATION: Item 1. Financial Statements (Unaudited) Consolidated Condensed Balance Sheets June 30, 2000 and December 31, 1999 2 Consolidated Condensed Statements of Operations - Six months ended June 30, 2000 and 1999 4 Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 2000 and 1999 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. OTHER INFORMATION: Item 2. Changes in use of securities and use of proceeds 10 Item 5. Other Information 10 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, 2000 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 172,105 $ 62,597 Securities available-for-sale 0 383,905 Accounts receivable, less allowance for doubtful accounts of $5,000 at June 30,2000 and $9,715 at December 31, 1999 873,321 47,662 Inventories: Raw materials and supplies 1,794,558 137,247 Work in process 603,701 118,233 Finished goods 1,395,208 305,725 Total inventories, net of obsolescence reserve of $651,000 at June 30, 2000 and $380,000 at December 31, 1999 3,793,467 561,205 Prepaid expenses and other 652,097 40,219 Total current assets 5,490,990 1,095,588 PROPERTY, PLANT AND EQUIPMENT: Land 130,869 130,869 Building and improvements 874,696 503,000 Furniture and fixtures 913,115 Machinery and equipment 1,132,504 518,272 Total 3,051,184 1,437,308 Less accumulated depreciation 1,044,459 996,420 Property, plant and equipment - net 2,006,725 440,888 GOODWILL - (Net of amortization of $107,154) 8,922,859 0 OTHER ASSETS 174,500 298,215 TOTAL $16,595,074 $1,834,691 (continued) CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, 2000 1999 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 883,454 $ 70,732 Accrued salaries and benefits 156,796 34,684 Accrued professional fees 21,798 30,933 Customer deposits 38,069 3,623 Due to shareholders 292,500 0 Other accrued expenses and liabilities 15,698 10,507 Long-term debt - current portion 4,449,040 0 Total current liabilities 5,857,355 150,479 Long-Term Debt Less Current Portion 4,409,347 0 STOCKHOLDERS' EQUITY: Preferred stock, $100 par value - authorized 500,000 shares, none issued Common stock, $.10 par value - authorized 20,000,000 shares, 996,429 and 597,682 shares issued 99,642 59,768 Additional paid-in capital 6,903,841 1,637,474 Accumulated dedficit (675,111) (13,030) Total stockholders' equity 6,328,372 1,684,212 TOTAL $16,595,074 $1,834,691 See accompanying notes to consolidated condensed financial statements. CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 NET SALES $1,039,679 $274,683 $1,247,747 $648,976 COST OF GOODS SOLD 556,075 210,652 647,062 454,319 Gross profit 483,604 64,031 600,685 194,657 OPERATING EXPENSES: Selling, general and administrative 663,809 70,714 906,338 356,124 Research and development 213,092 56,231 310,703 85,579 Total operating expenses 876,901 126,945 1,217,041 441,703 LOSS FROM OPERATIONS (393,297) (62,914) (616,356) (247,046) OTHER INCOME (EXPENSE): Interest and other income 736 6,619 16,947 20,227 Interest expense (62,672) (62,672) Total other income (expense) (61,936) 6,619 (45,725) 20,227 (LOSS) BEFORE INCOME TAXES (455,233) (56,295) (662,081) (226,819) INCOME TAX (BENEFIT) PROVISION NET (LOSS) INCOME $(455,233) $(56,295) $(662,081) $(226,819) (LOSS) Basic $(.58) $(.14) $(.96) $(.55) Diluted $(.58) $(.14) $(.96) $(.55) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic 783,663 410,182 691,771 410,182 Diluted 783,663 410,182 691,771 410,182 See accompanying notes to consolidated condensed financial statements. CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2000 1999 OPERATING ACTIVITIES: NET (LOSS) $(662,081) $(226,819) ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 162,320 15,535 Loss on sale of assets 5,394 Changes in assets and liabilities: Accounts receivable 261,006 64,005 Inventories (292,488) 289,600 Prepaid expenses and other assets (192,115) 4,116 Accounts payable and accrued expenses 364,606 (85,231) NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (358,752) 66,600 INVESTING ACTIVITIES: Purchase of net assets of Orban, Inc. (1,775,852) Purchase of securities (243,003) Proceeds from sale or maturity of securities 383,905 295,928 Capital expenditures (16,921) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,408,868) 52,925 FINANCING ACTIVITIES: Proceeds from debt issuance 403,387 Shareholder advances 292,500 Principal payments on long-term debt (21,000) Deposit on purchase of Company's common stock 300,000 Proceeds from sale of common stock 1,181,241 NET CASH PROVIDED BY FINANCING ACTIVITIES 1,877,128 279,000 NET INCREASE IN CASH AND CASH EQUIVALENTS 109,508 398,525 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 62,597 128,691 CASH AND CASH EQUIVALENTS AT END OF PERIOD $172,105 $527,216 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $6,005 $19,156 SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES: Purchase of net assets of Orban, Inc.: Fair value of assets acquired, including goodwill $15,504,797 Debt issued to seller (8,500,000) Fair values of warrants issued to seller (4,125,000) Debt issued to stockholder (205,000) Liabilities assumed (600,730) Costs paid in 1999 (298,215) Cash and costs paid $ 1,775,852 Unrealized appreciation of securities available-for-sale $ 9,074 See accompanying notes to consolidated condensed financial statements. CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) Common Stock Paid-In Accumulated Total Shares Amount Capital Deficit BALANCE, January 1, 1999 597,682 $ 59,768 $1,637,474 $ (13,030) $2,281,894 Net loss (662,081) (662,081) Issuance of common shares 398,747 39,874 1,141,367 1,579,988 Issuance of warrants 4,125,000 4,125,000 BALANCE, June 30, 2000 996,429 $ 99,642 $ 6,903,841 $(675,111) 7,324,801 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The Consolidated Condensed Financial Statements included herein have been prepared by Circuit Research Labs, Inc. ("CRL") include the accounts of CRL and all of its subsidiaries, CRL Systems, Inc. ("CRL Systems"), and CRL International, Inc. ("CRLI"), collectively, "the Company"). The Consolidated Condensed Balance Sheet as of December 31, 1999 and June 30, 2000 and the Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2000 and 1999 and the Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2000 and 1999 have been prepared without audit. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these Consolidated Condensed Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. In the opinion of management, the Consolidated Condensed Financial Statements for the unaudited interim periods presented herein include all adjustments, consisting only of normal recurring adjustments, necessary to present a fair statement of the results of operations for such interim periods. Net operating results for any interim period may not be comparable to the same interim period in previous years, nor necessarily indicative of the results that may be expected for the full year. 2. Earnings per Share In calculating earnings per share for the three and six months ended June 30, 2000, the effects of 591,250 shares relating to options to purchase common stock and 793,747 shares relating to warrants were not used for computing diluted earnings per share because the results would be antidilutive 3. Business Combination On May 31, 2000, CRL Systems acquired the net assets of Orban, Inc., a wholly-owned subsidiary of Harman International Industries, Inc. Including the $500,000 previously paid to Orban, the total cash purchase price was $10.5 million, $2 million of which was paid in cash, the balance a combination of short term and long-term seller financing. In order to raise the cash necessary for the purchase, the Company sold approximately $1,000,000 in common stock through a private placement, the Company's majority shareholder, Charles Jayson Brentlinger, advanced $150,000 to the Company, and the Company's Tempe, Arizona office building was mortgaged for $335,000. The seller financing consists of a $3.5 million short term and a $5 million long-term note to Orban, Inc. The Asset Sale Agreement between CRL Systems and Orban, Inc. ("the Asset Sale Agreement") contains a provision to allow Orban to rescind the transaction if, as of November 30, 2000, CRL Systems has not paid in full the $3.5 million short term note. If Orban exercises its option to rescind the agreement, it is to return $9,250,000 of the cash purchase price to CRL Systems, with the difference due to Orban as liquidating damages. In addition to the cash purchase price, CRL issued to Orban, Inc. warrants to purchase 500,000 shares of its common stock, immediately exercisable for $4.50 per share. The warrants have a 3 year term, and can be exercised either in cash or by reducing the unpaid princicpal amount of the $5 million long-term note, or in any combination thereof. The warrants have an estimated fair value of $4,125,000 which, when combined with the cash purchase price, results in a total purchase price of Orban's assets of $14,625,000. The Company is in the process of obtaining an independent valuation of the warrants. In the absence of such a valuation, the Company has valued the warrants using a Black-Scholes valuation model at $4,125,000 which, when combined with the cash purchase price, results in a total purchase price of Orban's assets of $14,625,000. As part of the acquisition, CRL Systems purchased the rights to the name "Orban" and is currently operating under the dba "Orban". The acquisition has been accounted for as a purchase and accordingly the net assets and results of operations of Orban have been included in the consolidated financial statements commencing May 31, 2000. The excess of the total acquisition costs over the fair value of the assets acquired of approximately $9.3 million is being amortized over 7 years. CRL is still gathering certain information required to complete the allocation of the Orban asset purchase price. Further adjustments may arise as a result of this analysis. The following unaudited pro-forma summary combines the consolidated results of operations of Circuit Research Labs and Orban as if the acquisition had occurred on January 1 of that period after giving effect to certain adjustments including amortization of the purchase price in excess of net assets acquired, corporate general and administrative expenses, and income taxes. This pro-forma summary is not necessarily indicative of the results of operations that would have occurred if Circuit Research Labs and Orban had been combined during such periods. Moreover, the pro-forma summary is not intended to be indicative of the results of operations to be attained in the future. Six Months Ended June 30 2000 1999 Net revenues $6,200,000 $7,400,000 Net loss (89,000) (510,000) Net loss per common share $(.13) $(1.24) 4. Debt Long term-debt at June 30, 2000 consisted of the following: Orban, Inc. Tranche A Note $4,750,000 Orban, Inc. Tranche B Note 3,500,000 Note to shareholder 205,000 Mortgage note 335,000 Unsecured promissory note 68,387 Total long-term debt $8,858,387 Less current portion (4,449,040) Total long-term debt, less current portion $4,409,347 There was no debt at June 30, 1999. In conjunction with the Asset Sale Agreement between Orban, Inc. and CRL Systems, Inc., CRL Systems and Orban entered into a Credit Agreement to establish the terms and conditions of the $8,500,0000 loan from Orban to CRL Systems. The loan is evidenced by two promissory notes, the Senior Subordinated Tranche A Note (the "Tranche A Note") and the Senior Subordinated Tranche B Note (the "Tranche B Note"). The Tranche A Note, in the amount of $5,000,000, bears interest at 8 percent per annum and requires quarterly principal payments beginning March 31, 2001, with a balloon payment of $3,000,000 due on March 31, 2003, based on current interest rates this includes a discount of $250,000. The Tranche B Note, in the amount of $3,500,000, bears interest at 8 percent per annum for the period from June 1, 2000 to July 31, 2000 and 10 percent per annum from August 1, 2000 up to its September 30, 2000 maturity date. The notes are secured by, among other things, all receivables, inventory and equipment, investment property, including CRL's capital stock in CRL ystems, and intellectual property of CRL and CRL Systems, as defined in the "Guarantee and Collateral Agreement". In consideration for arranging the above financing with Orban, the Company incurred financing fees of $97,500 to a shareholder, the total of which is included Due to Shareholders at June 30, 2000. Such deferred financing fees are included in other assets and will be amortized over the term of the related notes. The Company issued $205,000 in long-term debt to a shareholder in consideration for his role in the acquisition of the assets of Orban, Inc. The note bears interest at 7.5 per cent per annum, with principal and interest due monthly beginning July 1, 2000 for four years. The original amount of the note has been included in the total acquisition costs of the Orban assets. At June 30, 2000, included in Due to Shareholders is $195,000 the Company received in non-interest bearing cash advances from Mr. Brentlinger. There is no stated term on the advances. On May 30, 2000, the Company mortgaged its office building and manufacturing facility in Tempe, Arizona for $335,000. The mortgage note bears interest at 15.25 percent per annum, payable monthly, and the full principal balance due in November 2000. On June 12, 2000 the Company entered into a promissory note for $68,387 from an employee. The note bears interest at 12 percent per annum. All principal and interest is due September 12, 2000. The note is unsecured. The following represents the principal maturities of debt over the next five years: June 30, 2001 $4,449,040 June 30, 2002 1,049,202 June 30, 2003 3,303,021 June 30, 2004 57,214 5. Stockholders' Equity Common Stock and Warrants Subscription Agreement: During the period ended June 30, 2000, the Company sold in a private placement, for $3.00 per share, 293,747 units of common stock and warrants under a subscription agreement (the "Subscription Agreement") with accredited investors. Under the agreement, each unit consists of one share the Company's common stock and one warrant (the "Class A Warrants") to purchase at an exercise price of $3.50 per share one share of the Company's common stock and one Class B Warrant (as defined). The Class A Warrant may be exercised for a sixty day period following the registration of the shares issuable upon exercise of the Class A Warrants. The holder of a Class A Warrant shall not have the right to obtain a Class B Warrant if the Class A Warrant is not timely exercised. Each Class B Warrant, if and when issued, will be a warrant to purchase at an exercise price of $4.00 per share one share of Company's common stock and one Class C Warrant. The holder of a Class B Warrant shall not have the right to obtain a Class C Warrant if the Class B Warrant is not timely exercised, as defined in the subscription agreement. Each Class C Warrant, if and when issued, will be a warrant to purchase at an exercise price of $4.50 per share one share of Company's common stock and one Class D Warrant. The holder of a Class C Warrant shall not have the right to obtain a Class D Warrant if the Class C Warrant is not timely exercised, as defined in the subscription agreement. Each Class D Warrant, if and when issued, will be a warrant to purchase at an exercise price of $5.00 per share one share of Company's common stock. Stock Options Exercised: During the three months ended June 30, 2000, Mr. Brentlinger purchased 80,000 shares of the Company's common stock for $2.50 per share under the 1999 stock purchase agreement between himself and the Company. Under such agreement, Mr. Brentlinger was obligated to purchase 171,250 shares on or before September 30, 2000 for $2.50 per share. At June 30, 2000, he remains obligated to purchase 91,250 shares on or before September 30, 2000 for a total price of $228,125. 6. Subsequent Events Stock dividend: On July 7, 2000, the Board of Directors declared a 100 percent stock dividend of one share of common stock for each share held, payable on August 15, 2000 to all shareholders of record as of the close of business on July 31, 2000. Common stock: During July and August, 2000, the Company received funds for an additional 63,332 units under the Subscription Agreement for the total consideration of $189,996 and accordingly issued 63,332 shares of its common stock. Item. 2 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction On May 31, 2000, CRL Systems acquired the net assets of Orban, Inc., a wholly-owned subsidiary of Harman International Industries, Inc. Including the $500,000 previously paid to Orban, the total cash purchase price was $10.5 million. Accordingly, the net asset s and results of operations of CRL Systems Inc d.b.a. Orban ("Orban") have been included in these financial statements commencing May 31, 2000. Results of Operations Net Revenues. Total net revenues during the three and six months ended June 30, 2000, were $1.0 million and $1.2 million, respectively, compared to $275,000 and $649,000 during the comparable periods in 1999, respectively, reflecting an increase of 279% and 92%, respectively. The increase in the net revenues was primarily attributable to Orban revenues, offset by a decrease in CRL revenues, as the Company continues to experience slower demand across its product lines, in both domestic and international markets. Gross Profit. The increased revenue levels generated gross profit of $484,000 and $601,000 for the three and six months ended June 30, 2000, which was an increase of 655% and 201% over the comparable periods in 1999, respectively. Gross profit as a percentage of net revenues increased from 23% to 47% for the three months ended June 30, 2000 as compared to the three months ended June 30, 1999. Gross profit as a percentage of net revenues increased from 30% to 48% for the six months ended June 30, 2000. The gross profit percentage improved as a result of the Company's decision not to dissolve in May 1999 and thereby returning to selling it's inventory at normal margins subsequent to such time. Selling, General and Administrative. Total selling, general, and administrative expenses ("SG&A") increased 839% and 155% for the three and six months ended June 30, 2000 as compared to the same periods during 1999, respectively. As a percentage of revenues, SG&A went from 26% to 64% for the three months ended June 30, 1999 versus 2000, respectively, and from 55% to 73% for the six months ended June 30, 1999 versus 2000, respectively. The increased SG&A dollars are due in part to the variable component of SG&A (commissions and other domestic and international sales and marketing expenses) associated with the increased revenues resulting from the acquisition of Orban. The fixed component of SG&A has also increased due to additional personnel in sales, marketing and administration, amortization of goodwill, and costs related to Orban. As a result SG&A is expected to be higher throughout 2000 compared to 1999. Research and Development. Research and development expenses increased 279% and 263% for the three and six months ended June 30, 2000 as compared to the same periods during 1999. The increase is the result of an increase in the number of engineering staff at CRL and ongoing research and development activities at Orban. Other Income (Expense). Other income (expense) was ($62,000) and ($46,000) for the three and six months ended June 30, 2000 compared to $7,000 and $20,000 for the same periods in 1999. Other income in 1999 consisted of interest on the Company's marketable securities and the cash surrender value of a life insurance policy. In 2000, the marketable securities had been sold, leaving no source for interest income after the first quarter and the Company entered into various forms of debt to finance the purchase of Orban's assets, resulting in interest expense of $63,000 for the three and six months ended June 30, 2000. CRL plans to attempt to raise additional capital during fiscal year 2000 with a private equity placement of an undetermined number of shares of CRL's common stock. CRL intends to apply any such additional capital to debt repayment with any excess funds to be used for product development, and working capital requirements above those funded from operations. The Company has not yet entered into any agreements for this planned private equity funding. See "Liquidity and Capital Resources." Liquidity and Capital Resources As discussed above, on May 31, 2000, CRL Systems acquired the net assets of Orban, Inc., a wholly-owned subsidiary of Harman International Industries, Inc. Including the $500,000 previously paid to Orban, the total cash purchase price was $10.5 million, $2 million of which was paid in cash, the balance a combination of short term and long-term seller financing. In order to raise the cash necessary for the purchase, the Company sold approximately $1,000,000 in common stock through a private placement, the Company's majority shareholder, Charles Jayson Brentlinger, advanced $150,000 to the Company, and the Company's Tempe, Arizona office building was mortgaged for $335,000. The seller financing consists of a $3.5 million short term and a $5 million long-term note to Orban, Inc. The Asset Sale Agreement between CRL Systems and Orban, Inc. ("the Asset Sale Agreement") contains a provision to allow Orban to rescind the transaction if, as of November 30, 2000, CRL Systems has not paid in full the $3.5 million short term note. If Orban exercises its option to rescind the agreement, it is to return $9,250,000 of the cash purchase price to CRL Systems, with the difference due to Orban as liquidating damages. In addition to the cash purchase price, CRL issued to Orban, Inc. warrants to purchase 500,000 shares of its common stock, immediately exercisable for $4.50 per share. The warrants have a 3 year term, and can be exercised either in cash or by reducing the unpaid princicpal amount of the $5 million long-term note, or in any combination thereof. The Company is in the process of obtaining an independent valuation of the warrants. In the absence of such a valuation, the Company has valued the warrants using a Black-Scholes valuation model at $4,125,000 which, when combined with the cash purchase price, results in a total purchase price of Orban's assets of $14,625,000. The fair value of the assets acquired is estimated to be $15,500,000 and the Company assumed approximately $600,000 in liabilities and incurred approximately $300,000 in costs. The acquisition has been accounted for as a purchase. The Company issued $205,000 in long-term debt to a shareholder in consideration for his role in the acquisition of the assets of Orban, Inc. The note bears interest at 7.5 per cent per annum, with principal and interest due monthly beginning July 1, 2000 for four years. The original amount of the note has been included in the total acquisition costs of the Orban assets. In conjunction with the Asset Sale Agreement between Orban, Inc. and CRL Systems, Inc., CRL Systems and Orban entered into a Credit Agreement to establish the terms and conditions of the $8,500,0000 loan from Orban to CRL Systems. The loan is evidenced by two promissory notes, the Senior Subordinated Tranche A Note (the "Tranche A Note") and the Senior Subordinated Tranche B Note (the "Tranche B Note"). The Tranche A Note, in the amount of $5,000,000, bears interest at 8 percent per annum and requires quarterly principal payments beginning March 31, 2001, with a balloon payment of $3,000,000 due on March 31, 2003. The Tranche B Note, in the amount of $3,500,000, bears interest at 8 percent per annum for the period from June 1, 2000 to July 31, 2000 and 10 percent per annum from August 1, 2000 up to its September 30, 2000 maturity date. The notes are secured by, among other things, all receivables, inventory and equipment, investment property, including CRL's capital stock in CRL Systems, and intellectual property of CRL and CRL Systems, as defined in the "Guarantee and Collateral Agreement". In consideration for arranging the above financing with Orban, the Company incurred financing fees of $97,500 to a shareholder. As of June 30, 2000, there was outstanding $195,000 in non- interest bearing cash advances the Company received from Mr. Brentlinger. There is no stated term on the advances. On May 30, 2000, the Company mortgaged its office building and manufacturing facility in Tempe, Arizona for $335,000. The mortgage note bears interest at 15.25 percent per annum, payable monthly, and the full principal balance due in November 2000. On June 12, 2000 the Company entered into a promissory note for $68,387 from an employee. The note bears interest at 12 percent per annum. All principal and interest is due September 12, 2000. The note is unsecured. During the period ended June 30, 2000, the Company sold in a private placement, for $3.00 per share, 293,747 units of common stock and warrants under a subscription agreement (the "Subscription Agreement") with accredited investors. Under the agreement, each unit consists of one share the Company's common stock and one warrant (the "Class A Warrants") to purchase at an exercise price of $3.50 per share one share of the Company's common stock and one Class B Warrant (as defined). The Class A Warrant may be exercised for a sixty day period following the registration of the shares issuable upon exercise of the Class A Warrants. The holder of a Class A Warrant shall not have the right to obtain a Class B Warrant if the Class A Warrant is not timely exercised. Each Class B Warrant, if and when issued, will be a warrant to purchase at an exercise price of $4.00 per share one share of Company's common stock and one Class C Warrant. The holder of a Class B Warrant shall not have the right to obtain a Class C Warrant if the Class B Warrant is not timely exercised, as defined in the subscription agreement. Each Class C Warrant, if and when issued, will be a warrant to purchase at an exercise price of $4.50 per share one share of Company's common stock and one Class D Warrant. The holder of a Class C Warrant shall not have the right to obtain a Class D Warrant if the Class C Warrant is not timely exercised, as defined in the subscription agreement. Each Class D Warrant, if and when issued, will be a warrant to purchase at an exercise price of $5.00 per share one share of Company's common stock. During the three months ended June 30, 2000, Mr. Brentlinger purchased 80,000 shares of the Company's common stock for $2.50 per share under the 1999 stock purchase agreement between himself and the Company. Under such agreement, Mr. Brentlinger was obligated to purchase 171,250 shares on or before September 30, 2000 for $2.50 per share. At June 30, 2000, he remains obligated to purchase 91,250 shares on or before September 30, 2000 for a total price of $228,125. At June 30, 2000, the Company had cash of $172,000. The Company had a negative net working capital of approximately $310,000 June 30, 2000 compared to positive working capital of $938,000 at December 31, 1999. The Company will attempt to address the deficit in working capital through seeking a combination of accounts receivable and asset based financing. The Company will need additional capital during the next three months, primarily to meet its debt obligations described above. The Company will attempt to seek such capital through a private equity placement of its common stock, through asset-based lending, or a combination thereof. There is no assurance that the Company will be able to attract additional capital or that the funds, if acquired, will be sufficient to meet its debt obligations or operating capital requirements. CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES Part II. OTHER INFORMATION Item 2. Changes in use of securities and use of proceeds During the period ended June 30, 2000, the Company sold in a private placement, for $3.00 per share, 293,747 units of common stock and warrants under a subscription agreement (the "Subscription Agreement") with accredited investors. Under the agreement, each unit consists of one share the Company's common stock and one warrant (the "Class A Warrants") to purchase at an exercise price of $3.50 per share one share of the Company's common stock and one Class B Warrant (as defined). The Class A Warrant may be exercised for a sixty day period following the registration of the shares issuable upon exercise of the Class A Warrants. The holder of a Class A Warrant shall not have the right to obtain a Class B Warrant if the Class A Warrant is not timely exercised. Each Class B Warrant, if and when issued, will be a warrant to purchase at an exercise price of $4.00 per share one share of Company's common stock and one Class C Warrant. The holder of a Class B Warrant shall not have the right to obtain a Class C Warrant if the Class B Warrant is not timely exercised, as defined in the subscription agreement. Each Class C Warrant, if and when issued, will be a warrant to purchase at an exercise price of $4.50 per share one share of Company's common stock and one Class D Warrant. The holder of a Class C Warrant shall not have the right to obtain a Class D Warrant if the Class C Warrant is not timely exercised, as defined in the subscription agreement. Each Class D Warrant, if and when issued, will be a warrant to purchase at an exercise price of $5.00 per share one share of Company's common stock. Item 5. Other Information The Company's common shares are no longer listed on the NASDAQ Small Cap market, but as of April 1, 1998, the shares have been listed on the OTC Bulletin Board. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits included herein: none (b) Reports on Form 8-K - 8-K filed on June 15, 2000 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Registrant CIRCUIT RESEARCH LABS, INC. DATE: August 21, 2000 BY /s/Charles Jayson Brentlinger Charles Jayson Brentlinger President (Authorized Officer for signature)