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, 1997 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, 1997 Common stock, $.10 par value 597,682 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES INDEX Page number Part I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Balance Sheets June 30, 1997 (Unaudited) and December 31, 1996 2 Consolidated Condensed Statements of Operations - Three and six months ended June 30, 1997 and 1996 (Unaudited) 4 Consolidated Condensed Statements of Cash Flows - Six months ended June 30,1997 and 1996 (Unaudited) 5 Notes to Consolidated Condensed Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 Page 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS June 30, December 31, 1997 1996 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 92,021 $ 48,048 Securities available-for-sale 59,477 167,961 Accounts receivable, less allowance for doubtful accounts of $12,520 (1997) and $16,520 (1996) 186,950 189,616 Inventories: Raw materials and supplies 278,980 335,072 Work in process 361,524 314,291 Finished goods 304,714 306,559 Total inventories 945,218 955,922 Prepaid expenses and other 67,688 69,628 Total current assets 1,351,354 1,431,175 PROPERTY, PLANT AND EQUIPMENT: Land 130,869 130,869 Building and improvements 497,004 497,004 Furniture and fixtures 399,148 397,546 Machinery and equipment 623,762 616,081 Total 1,650,783 1,641,500 Less accumulated depreciation 1,097,341 1,062,936 Property, plant and equipment - net 553,442 578,564 OTHER ASSETS - NET 154,488 159,851 TOTAL $2,059,284 $2,169,590 (continued) Page 2 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS June 30, December 31, 1997 1996 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 86,885 $ 64,650 Accrued salaries and benefits 48,821 65,699 Accrued professional fees 5,614 21,976 Customer deposits 5,305 40,432 Other accrued expenses and liabilities 28,521 31,826 Long-term debt - current portion 20,830 15,228 Total current liabilities 195,976 239,811 LONG-TERM DEBT - LESS CURRENT PORTION 106,221 122,287 STOCKHOLDERS' EQUITY: Preferred stock, $100 par value - authorized 500,000 shares, none issued Common stock, $.10 par value - authorized 20,000,000 shares, 597,682 shares issued and outstanding 59,768 59,768 Additional paid-in capital 1,247,240 1,247,240 Retained earnings 450,079 500,484 Total stockholders' equity 1,757,087 1,807,492 TOTAL $2,059,284 $2,169,590 See accompanying notes to consolidated condensed financial statements. Page 3 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months ended June 30, June 30, 1997 1996 1997 1996 NET SALES $506,287 $599,761 $1,017,139 $1,238,292 COST OF GOODS SOLD 277,351 245,301 484,188 505,585 Gross profit 228,936 354,460 532,951 732,707 OPERATING EXPENSES: Selling, general and administrative 224,607 261,282 472,343 523,966 Research and development 54,513 60,369 105,213 152,668 Total operating expenses 279,120 321,651 577,556 676,634 (LOSS) INCOME FROM OPERATIONS (50,184) 32,809 (44,605) 56,073 OTHER INCOME (EXPENSE): Interest and other income 2,189 3,461 3,776 8,466 Interest expense (3,223) (5,250) ( 6,526) (12,287) Total other (expense) income (1,034) (1,789) (2,750) (3,821) (LOSS) INCOME BEFORE INCOME TAXES (51,218) 31,020 (47,355) 52,252 INCOME TAX EXPENSE 0 50 3,050 50 NET (LOSS) INCOME $ (51,218) $ 30,970 $(50,405) $ 52,202 (LOSS) INCOME PER COMMON SHARE $(.09) $ .05 $(.08) $.09 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 597,682 597,682 597,682 597,682 See accompanying notes to consolidated condensed financial statements. Page 4 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1997 1996 OPERATING ACTIVITIES: NET (LOSS) INCOME $ (50,405) $ 52,202 ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation and amortization 39,768 42,508 Changes in assets and liabilities: Accounts receivable 2,666 22,114 Inventories 10,704 (123,575) Prepaid expenses and other assets 1,940 ( 3,588) Accounts payable, accrued expenses and customer deposits (49,437) (25,265) NET CASH USED IN OPERATING ACTIVITIES (44,764) (35,604) INVESTING ACTIVITIES: Purchase of securities (59,477)(75,000) Proceeds from sale or maturity of securities 167,961 174,070 Capital expenditures (9,283) Payments received on stockholders' notes 1,081 NET CASH PROVIDED BY INVESTING ACTIVITIES 99,201 100,151 FINANCING ACTIVITIES: Principal payments on long-term debt (10,464) (14,789) NET INCREASE IN CASH AND CASH EQUIVALENTS 43,973 49,758 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 48,048 25,974 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 92,021$75,732 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 6,526 $12,288 Cash paid for income taxes $ 3,050 Test equipment transferred from Inventories to Engineering Equipment $ 45,290 See accompanying notes to consolidated condensed financial statements. Page 5 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, 1997 and the Consolidated Condensed Statements of Operations for the three and six months ended June 30, 1997 and 1996 and the Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 1997 and 1996 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, 1996. 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. Certain reclassifications were made to the 1996 financial statements to conform with the 1997 presentation. 2. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", effective for both interim and annual periods ending after December 15, 1997. This standard specifies the computation, presentation and disclosure of earnings per share for entities with publicly held common stock or potential common stock. The Company will provide the required disclosures in its year-end report. The effect on the Company's earnings per share disclosure is not material for the periods presented. The FASB also issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 130 is effective for fiscal years Page 6 beginning after December 15, 1997. The standard changes the reporting of certain items currently reported in the equity section of the balance sheet. The Company is currently evaluating what impact this standard will have on the Company's financial statements. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This standard requires that public companies report certain information about operating segments in their financial statements. It also establishes related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating what impact this standard will have on its financial statements. Page 7 Item. 2 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The Company had net working capital of $1,155,000 and the ratio of current assets to current liabilities was 6.9 to 1 at June 30, 1997. At December 31, 1996, the Company had net working capital of $1,191,000 and a current ratio of 6.0 to 1. Accounts receivable of $187,000 at June 30, 1997 was comparable to the December 31, 1996 balance of $190,000. Total inventories of $945,000 at June 30, 1997 compared to total inventories of $956,000 at December 31, 1996. The Company's credit agreement expired on July 1, 1996, and since it had not been used, the Company did not pursue its renewal. The Company believes its future liquidity needs will be met by a combination of cash generated from operating activities, the reduction of investments, and existing cash balances. The estimated fair value of the Company's securities approximated cost at June 30, 1997. Page 8 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net sales for the second quarter of 1997 totaled $506,000 and were 16% lower than the second quarter sales in 1996 of $600,000. The decrease was due to slower sales across CRL's product lines, in both domestic and international markets. In the second quarter of 1996, the Company had a large single international order that also contributed to the difference. Cost of goods sold was 55% of net sales for the second quarter ended June 30, 1997 compared to 41% for the same period in 1996. The increase was the result of a temporary increase in production costs on CRL's main product line. The cost of goods sold for CRL's main product line year-to-date 1997 was 38% compared to 1996 year-to-date cost of goods sold of 35%. Selling, general and administrative expenses were $225,000 in the second quarter of 1997 compared to selling, general and administrative expenses of $261,000 for the second quarter of 1996. The decrease was due to lower marketing expenses both in the domestic and international market place, primarily as the result of less media advertising and lower trade shows cost. Research and development expense in the second quarter of 1997 totaled $55,000, compared to the 1996 second quarter total of $60,000. The decrease was the result of shifting personnel from engineering to production in order to fill a vacancy in production. Interest and other income of $2,200 for the second quarter of 1997 compared to $3,500 for the second quarter of 1996. The lower interest income was the result of the Company having less funds invested in securities. Interest expense consists of the interest cost on the long-term mortgage collateralized by the Company's headquarters facility. Net loss for the second quarter of 1997 was $51,000 compared to net income of $31,000 for the second quarter of 1996. Year-to-date net sales were approximately $221,000 lower in 1997 as compared to the same period in 1996. The decrease was due to slower sales across CRL's product lines, in both domestic and international markets. The Company also had a large single international order in 1996 that contributed to the difference. Cost of goods sold was 47% of net sales for the six months ended June 30, 1997 compared to 41% for the same period in 1996. The Page 9 increase was the result of a temporary increase in production costs on CRL's main product line. The cost of goods sold for CRL's main product line year-to-date 1997 was 38% compared to 1996 year-to-date cost of goods sold of 35%. The decrease in gross profit was offset by an $100,000 decrease in operating expenses for the six months ended June 30, 1997 compared to the same period in 1996. The result of the decrease in sales, increase in percentage of cost of goods sold, and the decrease in operating expenses was a $45,000 loss from operations for the first six months of 1997, compared to a $56,000 profit for the same period of 1996. Increased marketing efforts and an increased acceptance of CRL's new products is expected to increase the levels of sales in future quarters. The document includes "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Page 10 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits included herein - None. (b) Reports on Form 8-K - None. Page 11 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 12, 1997 BY /s/Gary D. Clarkson Gary D. Clarkson Treasurer (Authorized Officer for (signature) Page 12