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, 2001
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, 2001
Common stock, $.10 par value 2,296,022
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 2001 and December 31, 2000 2
Consolidated Condensed Statements of
Operations - Six months ended
June 30, 2001 and 2000 4
Consolidated Condensed Statements of Cash
Flows - Six months ended June 30, 2001
and 2000 5
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Part II. OTHER INFORMATION:
Signatures 14
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $210,752 $272,203
Accounts receivable, net 995,461 727,001
Inventories:
Raw Materials 2,165,382 2,062,311
Work in process 1,555,250 1,262,536
Finished goods 827,537 774,836
Obsolescence reserve (841,000) (841,000)
--------- ---------
Inventories, net 3,707,169 3,258,683
Other current assets 36,365 177,662
--------- ---------
Total current assets 4,949,747 4,435,549
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 1,622,838 1,809,355
--------- ---------
OTHER ASSETS:
Goodwill, net 6,262,247 6,774,984
Other 41,199 39,000
--------- ---------
6,303,446 6,813,984
--------- ---------
TOTAL $12,876,031 $13,058,888
========== ==========
2
(continued)
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2001 2000
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $773,571 $937,163
Checks issued in excess of deposits 5,239 0
Note payable 97,500 97,500
Customer deposits 49,828 275,502
Accrued salaries and benefits 250,140 283,226
Due to Officers 40,087 25,000
Other accrued expenses and liabilities 232,956 282,912
Long-term debt - current portion 4,183,412 385,780
--------- ---------
Total current liabilities 5,632,733 2,287,083
--------- ---------
Long-Term Debt 5,006,973 8,738,466
--------- ---------
Total Liabilities 10,639,706 11,025,549
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value - authorized
500,000 shares, none issued
Common stock, $.10 par value - (authorized
20,000,000 shares, 2,296,022 issued as of
June 30, 2001 and 2,269,522 as of
December 31, 2000) 229,602 226,952
Additional paid-in capital 4,108,015 4,077,538
Accumulated deficit (2,101,292) (2,271,151)
--------- ---------
Total stockholders' equity 2,236,325 2,033,339
--------- ---------
TOTAL $12,876,031 $13,058,888
========== ==========
See accompanying notes to consolidated condensed financial statements.
3
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $4,022,563 $1,039,679 $7,930,139 $1,247,747
COST OF GOODS SOLD 1,813,363 556,075 3,839,837 647,062
--------- --------- --------- ---------
Gross profit 2,209,200 483,604 4,090,302 600,685
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and
administrative 1,362,571 663,809 2,596,956 906,338
Research and development 367,675 213,092 783,580 310,703
--------- --------- --------- ---------
Total operating expenses 1,730,246 876,901 3,380,536 1,217,041
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 478,954 (393,297) 709,766 (616,356)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Sundry income 3,625 736 10,450 16,947
Interest, net (270,548) (62,672) (550,357) (62,672)
--------- --------- --------- ---------
(266,923) (61,936) (539,907) (45,725)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 212,031 (455,233) 169,859 (662,081)
PROVISION FOR INCOME TAXES 0 0 0 0
--------- --------- --------- ---------
NET INCOME (LOSS) $212,031 ($455,233) 169,859 ($662,081)
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted $0.09 ($0.58) $0.07 ($0.96)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic and diluted 2,296,022 783,663 2,284,309 691,771
See accompanying notes to consolidated condensed financial statements.
4
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net Income (Loss) $169,859 ($662,081)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization 738,949 162,320
Provision for uncollectable accounts 20,160
Changes in assets and liabilities:
Accounts receivable (288,620) 261,006
Inventories (386,996) (292,488)
Prepaid expenses and other assets 117,444 (192,115)
Cash overdraft 5,239
Accounts payable and accrued expenses (472,308) 364,606
------- -------
Net cash used in operating activities (96,273) (358,752)
------- -------
INVESTING ACTIVITIES:
Purchase of net assets of Orban, Inc. (1,775,852)
Purchase of assets of Avocet Instruments, Inc. (7,339)
Proceeds from sale or maturity of securities 383,905
Capital expenditures (15,866) (16,921)
------- ---------
Net cash used in investing activities (23,205) (1,408,868)
------- ---------
FINANCING ACTIVITIES:
Proceeds from debt issuance 403,387
Proceeds from shareholder advances 36,741 292,500
Principal payments on long-term debt (11,841)
Proceeds from sale of common stock 33,127 1,181,241
------- ---------
Net cash provided by financing activities 58,027 1,877,128
------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (61,451) 109,508
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 272,203 62,597
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $210,752 $172,105
======= =========
See accompanying notes to consolidated condensed financial statements.
5
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2001 2000
---- ----
Supplementary Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $521,024 $6,005
======== ========
Non-cash investing and financing activities:
Acquisitions:
Fair value of assets acquired
including goodwill $85,319 $15,504,797
Debt issued to seller (77,980) (8,500,000)
Fair values of warrants issued to seller 4,125,000
Debt issued to stockholder 205,000
Liabilities assumed 600,730
Cost paid in 1999 0 298,215
----- ---------
Cash and cost paid $7,339 $1,775,852
===== =========
Unrealized appreciation of securities available-for-sale $0 $9,074
== =====
6
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. The Consolidated Condensed Financial Statements included
herein have been prepared by Circuit Research Labs, Inc. ("CRL" or
the "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission. The Consolidated Condensed
Balance Sheet as of June 30, 2001 and the Consolidated Condensed
Statements of Operations for the three and six months ended June
30, 2001 and 2000 and the Consolidated Condensed Statements of
Cash Flows for the six months ended June 30, 2001 and 2000 have
been prepared without audit.
Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America 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 10-KSB/A for
the year ended December 31, 2000.
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. Significant Accounting Policies are as follows:
a. In calculating earnings per share for the three and six
months ended June 30, 2001, the effects of 1,000,000 shares
relating to options to purchase common stock and 1,708,158 shares
relating to warrants were not used for computing diluted earnings
per share because the result would be anti-dilutive. In the three
and six months ended June 30, 2000 the options to purchase
1,182,500 shares of common were not used in computing diluted
earnings because the result would be anti-dilutive. Financial
Accounting Standards No. 128 establishes standards for computing
and presenting earnings per share. It also requires the dual
presentation of basic and diluted earnings per share on the face
of the income statement. Earnings per share is calculated as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Numerator
Net income (loss) $212,031 ($455,233) $169,859 ($662,081)
======= ======= ======= =======
Denominator
Weighted average shares 2,296,022 783,663 2,284,309 691,771
========= ======= ========= =======
Basic and diluted earnings
(loss) per share $0.09 ($0.58) $0.07 ($0.96)
==== ==== ==== ====
7
b. The Company's effective income tax rate varies from the
federal statutory tax rate for three and six months ended June
30, 2001 due to the utilization of net operating loss
carryforwards. For the three and six months ended June 30, 2000,
there was no tax provision due to the establishment of a reserve
on the deferred income tax assets of the Company.
c. New accounting pronouncements
In July 2001, the Financial Accounting Standards Board
("FASB") issued FASB Statements Nos. 141 and 142 ("FAS 141" and
"FAS 142"), "Business Combinations" and "Goodwill and Other
Intangibles Assets". FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. FAS 142
changes the accounting for goodwill from an amortization method to
an impairment-only approach. Under FAS 142, goodwill will be
tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142
are effective for all business combinations initiated after June
30, 2001.
Upon adoption of FAS 142, amortization of goodwill
recorded for business combinations consummated prior to July 1,
2001 will cease, and intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under FAS 141
will be reclassified to goodwill. Companies are required to adopt
FAS 142 for fiscal years beginning after December 15, 2001.
The Company will adopt FAS 142 on January 1, 2002. In connection
with the adoption of FAS 142, the Company will be required to
perform a transitional goodwill impairment assessment. The
Company has not yet determined the impact, if any, these standards
will have on its results of operations and financial position.
3. Long term-debt at June 30, 2001 consisted of the following:
Orban, Inc. Tranche A Note $5,000,000
Orban, Inc. Tranche B Note 3,500,000
Note to shareholder 192,454
Mortgage note 356,306
Employee note 63,645
Avocet 77,980
---------
9,190,385
Less current portion 4,183,412
---------
$5,006,973
=========
8
In 1999, CRL Systems and Orban entered into a Credit Agreement to
establish the terms and conditions of the $8,500,0000 loan from
Orban, Inc. (Orban) to CRL Systems. The agreement was used in
conjunction with the Asset Sale Agreement between Orban and CRL
Systems, Inc. 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, originally bore
interest at 8 percent per annum and required 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, originally bore 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 collateralized 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 addition, all proceeds of
debt or equity or sales of assets are to be first applied to the
remaining balance due on the notes.
The Company has received several payment extensions on the Tranche
A and B notes. First, in exchange for $150,000 cash and an
increase in the interest rates to 12 percent per annum for both
the Tranche A and Tranche B notes, Orban extended the maturity
date of the Tranche B note to November 30, 2000. The maturity date
of the Tranche B note was subsequently extended several additional
times without fees or other significant changes to the original
terms of the note and is now due in full on April 30, 2002. Also,
the first principal payment on the Tranche A note of $250,000,
originally due March 31, 2001, has been extended to September 30,
2001 with the remaining quarterly principal payments deferred
until April 30, 2002. Interest only payments are payable monthly
for both notes. The Asset Sale Agreement between CRL Systems and
Orban 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
purchase price to CRL Systems, with the difference due to Orban as
liquidating damages. The note has been extended to April 30, 2002
with Orban retaining the option to rescind the agreement.
In consideration for arranging the purchase financing of Orban,
the Company incurred fees of $97,500 to a shareholder, the total
of which was included in the current portion of long-term debt at
December 31, 2000. The note was due on August 14, 2001 after
being extended from its prior due date of May14, 2001 and accrues
interest of 7.5 percent per annum starting at the original date of
the note of June 21, 2000, which is payable at maturity. On August
10, 2001, the note was converted to equity at the market price of
$1.05 per share.
In connection with the acquisition of the assets of Orban, 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 The note bears interest at 7.5 per cent per annum, with
principal and interest due monthly beginning August 1, 2000 for
four years. Based on a verbal agreement with the note holder the
Company has made payments in 2001 sufficient for interest and a
slight reduction in principal.
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
9
monthly, with the full principal balance due on November 30, 2000.
Prior to the December 2000 extended maturity date, the Company
refinanced the unpaid balance into two new mortgage agreements for
$300,000 and $62,000. The notes bear interest at 11.75 percent per
annum and 14.75 percent per annum, respectively. Principal and
interest payments are payable monthly for both notes commencing in
February 2001, using a 12-year amortization period and requiring a
balloon payment in February 2006.
On June 12, 2000, the Company entered into an unsecured promissory
note for $68,387 from an employee, which bears interest at 12
percent per annum. The unpaid principal and interest that was due
September 12, 2000 was extended to June 30, 2001. In order to
further extend the note, it was renegotiated converting one half
to equity at the market price of $1.05 per share with the
remaining principal and interest due in monthly installments.
On May 31, 2001, CRL acquired the assets of Avocet Instruments,
Inc., for $85,319. The acquisition has been accounted for as an
asset purchase. The excess of the total acquisition costs over the
fair value of the assets acquired was $15,184 and is being
amortized over 7 years. In conjunction with the Asset Sale
Agreement between the Company and Avocet Instruments, Inc. and
Eric B. Lane, (Sellers), the Company and the Sellers entered into
a Credit Agreement to establish terms and conditions of the
purchase price from Sellers to CRL. The loan is evidenced by an
agreement whereby the Company pays the Sellers $25,000 interest-
free, payable $5,000 on the Closing Date, and $5,000 the following
four months. Thereafter the Company will pay the balance
($57,980) payable in monthly installments of $1,200, including
interest at the rate of five percent per annum for 54 months.
4. Certain reclassifications have been made to the 2000
financial statements to conform to the classifications used in
2001.
10
Item. 2
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had negative net working capital of approximately
$683,000 and the ratio of current assets to current liabilities
was .88 to 1 at June 30, 2001. At December 31, 2000, the Company
had net working capital of approximately $2,148,000 and a current
ratio of 1.94 to 1. The decrease in working capital was a result
of the $3,500,000 Tranche B becoming current along with $1,000,000
of the Tranche A note.
Accounts receivable were $995,000 at June 30, 2001 compared
to $727,000 at December 31, 2000 for a net increase of $268,000 or
37%. The increase was the result of increased sales for the six
months ended June 30, 2001
Total inventories were $3,707,000 at June 30, 2001 compared
to total inventories of $3,259,000 at December 31, 2000. The
amount of inventory increased $448,000, or 14% due to the to an
increase in purchasing of raw materials.
For the year ending December 31, 2001, the Company's
principal working capital requirements are to pay normal recurring
operating costs. Management believes that these requirements can
be met from the operating cash flows. In addition the Company has
$4,281,000 of debt payments due by June 30, 2002. The Company's
President, Mr. Charles Jayson Brentlinger has committed to
exercise his stock options, if necessary, to satisfy the Company's
debt payment requirements, if operating cash flows are inadequate
to retire the debt. If the Company is unable raise additional
capital or find a way of relieving its current debt, there is no
assurance that the Company will be able to meet its current
obligations. Material adverse effects will occur if funding cannot
be obtained.
Results of Operations
On May 31, 2000 the Company acquired the net assets of Orban,
Inc., which where $ 5,134,000 at December 31, 1999. The net
assets of the Company at December 31 1999 where $ 1,684,000. The
revenues for Orban for the year ended December 31, 1999 as
reported in the 8K/A file November 21,2000 where $ 12.4 million
compared to revenues for the company for the same period of $1.0
million. Accordingly , due to the consolidation of Orban's
operations into the Company's beginning May 31, 2000, period to
period comparisons of results of operations may not be meaningful.
11
Net Revenues. Total net revenues during the three and six months
ended June 30, 2001 were $4.0 million and $7.9 million,
respectively, compared to $1.0 million and $1.2 million during the
comparable periods in 2000, respectively, reflecting an increase
of 386% and 536%, respectively.
The increase in the net revenues was primarily attributable to
Orban revenues. CRL continues to experience a stabilized demand across
its product lines, in both domestic and international markets.
Included in the net sales for the three and six months ended June
30, 2001 were $3.7 million and $7.3 million for the sale of Orban
products respectively, while CRL division reported $300,000 and
$600,000 for the same periods.
Gross Profit. The increased revenue levels generated gross profit
of $2.2 million and $4.0 million for the three and six months
ended June 30, 2001, which was an increase of 457% and 681% over
the comparable periods in 2000, respectively. Gross profit as a
percentage of net revenues increased from 47% to 55% for the three
months ended June 30, 2001 as compared to the three months ended
June 30, 2000. Gross profit as a percentage of net revenues
increased from 48% to 51% for the six months ended June 30, 2001
as compared to the six months ended June 30, 2000. The increase in
the gross profit percentage resulted primarily from increased
sales of higher margin products.
Selling, General and Administrative. Total selling, general, and
administrative expenses ("SG&A") increased 105% and 187% for the
three and six months ended June 30, 2001 as compared to the same
periods during 2000, respectively. As a percentage of revenues,
SG&A decreased from 64% to 34% for the three months ended June 30,
2000 compared 2001, respectively, and decreased from 73% to 33%
for the six months ended June 30, 2000 compared to 2001,
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 also increased due to additional personnel
in sales, marketing, administration and amortization of goodwill.
As a result, SG&A is expected to be higher throughout 2001
compared to 2000. The decrease in percentage to net sales is due
to increased revenue.
Research and Development. Research and development expenses
increased 72% and 152% for the three and six months ended June
30, 2001, respectively, as compared to the same periods during
2000. 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 expense, net was $267,000 and
$540,000 for the three and six months ended June 30, 2001,
respectively, compared to $62,000 and $46,000 for the same periods
in 2000. The increase primarily represents interest paid to
Harman in conjunction with the purchase cost for the Orban assets.
Operationally, the Company is reporting $842,000 and $1.4 million
in income before interest, taxes, depreciation and amortization
(EBITDA) for the three and six months ended June 30, 2001
respectively, as compared to the same periods in 2000 where EBITDA
was ($243,000) and ($454,000) respectively.
12
The document includes "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1996.
Management's anticipation of future events is based upon
assumptions regarding levels of competition, research and
development results, raw material markets, the markets in which
the Company operates, and stability of the regulatory environment.
Any of these assumptions could prove inaccurate, and therefore
there can be no assurance that the forward-looking information
will prove to be accurate.
13
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 20, 2001
BY /s/ Charles Jayson Brentlinger
--------------------------
Charles Jayson Brentlinger
President (Authorized Officer for
signature)
14