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 September 30, 1998
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 September 30, 1998
Common stock, $.10 par value 410,182
Page
number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1998 (Unaudited) and
December 31, 1997 2
Consolidated Condensed Statements of
Operations - Three and nine months ended
September 30, 1998 and 1997 (Unaudited) 4
Consolidated Condensed Statements of Cash
Flows - Nine months ended September 30, 1998
and 1997 (Unaudited) 5
Notes to Consolidated Condensed Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. OTHER INFORMATION:
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 130,884 $ 119,851
Securities available-for-sale 492,430 89,607
Accounts receivable, less allowance for
doubtful accounts of $6,520 214,758 112,320
Inventories:
Raw materials and supplies 143,406 176,439
Work in process 270,852 289,690
Finished goods 517,274 416,996
Total inventories 931,532 883,125
Prepaid expenses and other 58,254 58,346
Total current assets 1,827,858 1,263,249
PROPERTY, PLANT AND EQUIPMENT:
Land 130,869 130,869
Building and improvements 503,000 497,004
Furniture and fixtures 305,072 300,628
Machinery and equipment 604,456 599,864
Total 1,543,397 1,528,365
Less accumulated depreciation 1,041,458 996,810
Property, plant and equipment - net 501,939 531,555
OTHER ASSETS - NET 9,447 51,794
TOTAL $2,339,244 $1,846,598
(continued)
2
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 37,175 $ 53,382
Accrued salaries and benefits 42,876 63,086
Accrued professional fees 19,721 29,302
Customer deposits 30,105 26,180
Other accrued expenses and liabilities 27,386 7,315
Long-term debt - current portion 11,080 16,481
Total current liabilities 168,343 195,746
LONG-TERM DEBT - LESS CURRENT PORTION 9,881 105,656
Total liabilities 178,224 301,402
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 59,768 59,768
Additional paid-in capital 1,247,240 1,247,240
Retained earnings 1,035,652 238,188
2,342,660 1,545,196
Less, common stock in treasury - at cost,
187,500 shares (181,640)
Total stockholders' equity 2,161,020 1,545,196
TOTAL $2,339,244 $1,846,598
See accompanying notes to consolidated condensed financial statements.
3
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
NET SALES $421,598 $557,549 $1,263,473 $1,574,688
COST OF GOODS SOLD 191,158 267,040 561,893 751,228
Gross profit 230,440 290,509 701,580 823,460
OPERATING EXPENSES:
Selling, general and
administrative 209,982 252,787 735,319 725,130
Research and development 61,837 52,501 175,176 157,714
Total operating expenses 271,819 305,288 910,495 882,844
LOSS FROM OPERATIONS (41,379) (14,779) (208,915) (59,384)
OTHER INCOME (EXPENSE):
Proceeds from officer's life
insurance in excess of cash
surrender value 1,000,681
Interest and other income 14,785 1,147 24,854 4,923
Interest expense (3,151) (19,156) (9,677)
Total other income (expense) 14,785 (2,004) 1,006,379 (4,754)
(LOSS) INCOME BEFORE INCOME TAX (26,594) (16,783) 797,464 (64,138)
INCOME TAX EXPENSE 3,050
NET (LOSS) INCOME $ (26,594) $(16,783) $ 797,464 $ (67,188)
(LOSS) INCOME PER COMMON SHARE
Basic $(06.) $(.03) $1.62 $(.11)
Diluted $1.60
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
Basic 410,182 597,682 493,515 597,682
Diluted 497,238
See accompanying notes to consolidated condensed financial statements.
4
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1998 1997
OPERATING ACTIVITIES:
NET INCOME (LOSS) $797,464 $(67,188)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 45,909 58,306
Proceeds from officer's life insurance in
excess of cash surrender value (1,000,681)
Changes in assets and liabilities:
Accounts receivable (102,438) (47,810)
Inventories (48,407) 38,734
Prepaid expenses and other assets 8,808 4,642
Accounts payable, accrued expenses and
customer deposits (22,002) (44,638)
NET CASH USED IN OPERATING ACTIVITIES (321,347) (57,954)
INVESTING ACTIVITIES:
Proceeds from officer's life insurance 1,033,051
Purchase of securities (1,463,156) (118,833)
Proceeds from sale or maturity of securities 1,060,333 227,438
Capital expenditures (15,032) (15,068)
NET CASH PROVIDED BY INVESTING ACTIVITIES 615,196 93,537
FINANCING ACTIVITIES:
Principal payments on long-term debt (101,176) (15,804)
Purchase of treasury shares (181,640)
NET CASH USED IN FINANCING ACTIVITIES (282,816) (15,804)
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,033 19,779
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 119,851 48,048
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $130,884 $ 67,827
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $19,156 $ 9,677
Cash paid for income taxes $ 3,050
See accompanying notes to consolidated condensed financial statements.
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 September 30,
1998 and the Consolidated Condensed Statements of Operations for the three
and nine months ended September 30, 1998 and 1997 and the Consolidated
Condensed Statements of Cash Flows for the nine months ended September 30,
1998 and 1997 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, 1997.
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. The following is a reconciliation of the numerators and denominators of
basic and diluted income per share for the nine month period ended
September 30, 1998. For the three months ended September 30, 1998 and the
three and nine months ended September 30, 1997, the effects of 15,312 total
shares related to options to purchase common stock were not used for
computing diluted earnings per share because the results would be
antidulitive.
Nine months ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amounts
Basic $ 797,464 493,515 $ 1.62
Effect of Dilutive Securities 3,723
Diluted $ 797,464 497,238 $ 1.60
3. The Company adopted SFAS No. 130, Reporting Comprehensive Income, on
January 1, 1998. Comprehensive (loss) income for the three and nine months
ended September 30, 1998 was $(26,594) and $797,464, respectively.
Comprehensive loss for the three and nine months ended September 30, 1997
was the same as net loss for these periods.
6
4. Ronald R. Jones, who was the President and a Director and Chief
Executive Officer of the Company, died on January 1, 1998. At a special
meeting of the Board of Directors of the Company on January 2, 1998, Gary
D. Clarkson was appointed President and Chief Executive Officer. Mr.
Clarkson had been the Secretary/Treasurer and a Director of the Company,
and was co-founder of the Company with Ronald Jones in 1974.
On February 6, 1998, the Company received approximately $1,033,000 as
proceeds of an insurance policy payable upon the death of Ronald Jones.
Pursuant to an agreement between the Company and Ronald R. Jones, the
Company repurchased all of Ronald R. Jones' 187,500 shares from the estate
of Ronald R. Jones for $181,640 on May 5, 1998.
5. Until March 31, 1998, Circuit Research Labs, Inc. was listed on the
NASDAQ Small Cap market. NASDAQ has raised its requirements for continued
listing. It now requires among other criteria, a public float of 500,000
shares, and the Company's public float is approximately 295,000 shares.
"Public float" is defined as shares that are not held directly or
indirectly by any officer or director of the issuer and by any other person
who is the beneficial owner of more than 10% of the total shares
outstanding. NASDAQ also requires a minimum market value of the public
float to be $1,000,000. The bid price on March 31, 1998 for the Company's
common stock was $2.00. The highest bid price in 1997 was $2.19. The market
value of the Company's public float at March 31, 1998 was approximately
$590,000. In addition, the Company did not meet other new monetary tests.
While the Company's common shares are no longer listed on the NASDAQ Small
Cap market, as of April 1, 1998, the shares have been listed on the OTC
Bulletin Board.
6. On May 31, 1998, Gary M. Hamker resigned as a member of the Company's
Board of Directors.
7. On July 16, 1998, the Company paid Royce T. Jones $98,000 as a
settlement of any and all claims that Royce T. Jones or the Estate of
Ronald R. Jones, may have had against the Company. Such amount is included
in selling, general and administrative expenses. On July 21, 1998, Royce T.
Jones resigned as a member of the Company's Board of Directors.
7
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 net working capital of approximately $1,660,000 and
the ratio of current assets to current liabilities was 10.86 to 1 at
September 30, 1998. At December 31, 1997, the Company had net working
capital of approximately $1,068,000 and a current ratio of 6.45 to 1.
In February 1998, the Company received $1,033,000 as proceeds of an
insurance policy payable upon the death of Ronald R. Jones. In March 1998,
the Company paid off the balance, plus accrued interest and early payment
premium, on the mortgage note collateralized by the Company's operating
facility. Pursuant to an agreement between the Company and Ronald R. Jones,
the Company repurchased all of Ronald R. Jones' 187,500 shares from the
estate of Ronald R. Jones for $181,640 on May 5, 1998. In July 1998, the
Company paid Royce T. Jones $98,000 as a settlement of any and all claims
that Royce T. Jones or the Estate of Ronald R. Jones, may have had against
the Company.
Securities increased from $90,000 at December 31, 1997 to $492,000 at
September 30, 1998. The increase was the result of the investment of the
proceeds of the insurance policy mentioned above. The estimated fair value
of the Company's securities at June 30, 1998 was $492,000.
Accounts receivable of $215,000 at September 30, 1998 compared to
$112,000 at December 31, 1997. Accounts receivable as a percentage of
sales for the three months ended September 30, 1998 was 51% as compared to
30% for the three months ended December 31, 1997. One large credit sale in
September accounted for the difference.
Total inventories were $932,000 at September 30, 1998 compared to
total inventories of $883,000 at December 31, 1997. The increase is the
result of lower than expected sales for the first nine months of 1998.
Net cash used in operating activities increased from $58,000 for the
nine months ended September 30, 1997 to $321,000 for the nine months ended
September 30, 1998, primarily as the result of the increase in the loss
from operations from $59,000 to $209,000 for the comparable periods, as
well as the increase in receivables and inventories discussed above.
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 Company does not have any
available credit facilities. The Company presently does not have any
commitments for capital expenditures.
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 third quarter of 1998 totaled $422,000 compared to
the third quarter sales in 1997 of $558,000. The Company continues to
experience slower demand across its product lines, in both domestic and
international markets.
Cost of goods sold was 45% of net sales for the third quarter ended
September 30, 1998 compared to 48% for the same period in 1997. The cost of
goods sold for the nine-month period ended September 30, 1998 was 44%
compared to 48% for the same period of 1997.
Selling, general and administrative expenses were $210,000 in the
third quarter of 1998 compared to selling, general and administrative
expenses of $253,000 for the third quarter of 1997. Selling, general and
administrative expenses were $735,000 in the nine months ended September
30, 1998 compared to selling, general and administrative expenses of
$725,000 for the nine months ended September 30, 1997. There was an overall
decrease in selling, general and administrative expenses in 1998 except for
the payment of $98,000 as a settlement of any and all claims that Royce T.
Jones or the Estate of Ronald R. Jones may have had against the Company.
Research and development expense in the second quarter of 1998
totaled $62,000, compared to the 1997 third quarter total of $53,000.
Proceeds from the gain on officer's life insurance in excess of cash
surrender value of $1,001,000 was the result of the proceeds of an
insurance policy payable upon the death of Ronald R. Jones.
Interest and other income of $14,800 for the third quarter of 1998
compared to $1,100 for the third quarter of 1997. The increase was the
result of more funds invested as a result of the insurance proceeds.
In March 1998, the Company paid off the balance, plus accrued
interest and early payment premium, on the mortgage note collateralized by
the Company's operating facility, and therefore the Company incurred no
interest expense during the third quarter of 1998. Interest expense of
$3,200 for the third quarter of 1997 consists of the interest cost on this
mortgage.
For the three and nine months ended September 30, 1998, there is no
income tax provision primarily because the proceeds from officer's life
insurance is not expected to be included in taxable income, and any
remaining income tax benefit has been offset by an increase in the
valuation allowance, as utilization of such benefit is not reasonably
assured.
Net loss for the third quarter of 1998 was $27,000 compared to a net
loss of $17,000 for the third quarter of 1997.
9
Year 2000 Readiness Disclosure
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems
will recognize the year 2000 as "00." This could cause many computer
applications to fail completely or to create erroneous results unless
corrective measures are taken. This is referred to as the "Y2K" problem.
In February 1998, the Company's board of directors passed a plan (the "Year
2000 Plan") that the Company developed to achieve Year 2000 readiness. The
Year 2000 Plan is intended to remediate the Year 2000 issue in all
categories of systems in use by CRL so that CRL may continue its operations
without interruptions or with minimal disruptions. The Year 2000 Plan,
which also allocated financial resources to assure Y2K compliance, is
outlined below.
State of Readiness
Computer hardware - CRL uses Personal Computers ("PC") linked together in a
network. These PCs are upgraded periodically to increase efficiency and to
stay current with new technology. Any hardware that is not currently Y2K
compliant will be upgraded by year-end 1998. It is not anticipated that
there will be any substantial additional expenses incurred in these
upgrades.
Accounting software - CRL is under contract with a software company for
CRL's accounting software. It is anticipated that this software will be Y2K
compliant by year-end 1998. Since CRL is under contract with this software
company, this compliance is handled as a normal upgrade of software, and
CRL should not experience any additional expenses or delays in operations.
Internal developmental and operational software - CRL is currently
evaluating all internal software used in development of products and in
internal Company operations. It is anticipated that no substantial cost
will be incurred in bringing all internal developmental and operational
software to compliance. These programs are off- the-shelf products, which
will either be upgraded or replaced by an alternative product that is
compliant.
Suppliers - CRL has a significant inventory of raw materials. It is
estimated that the Company could continue to manufacture products for 3
months with current supplies of raw materials. This quantity of raw
materials is expected to be the same at year-end 1999. If a supplier were
unable to deliver after this three-month period due to Y2K non-compliance,
CRL would look for an alternative supplier, or redesign the product to use
an alternative, available part. CRL feels that either one of these
alternatives could be realized without significant additional expense or
loss of revenue. CRL is currently requesting Y2K compliance documentation
from its major suppliers.
Shipping and freight companies - CRL uses several methods and companies
to ship products to customers. The Company feels that due to the abundance
of alternatives available there should not be a problem distributing
products. CRL has no method of assuring compliance from public
transportation and shipping, Postal Service, FAA etc., which could
adversely affect the Company's ability to deliver products.
CRL's products - Three of CRL's products contain embedded chips, which need
to be Y2K compliant. The Company has identified all products that were
shipped with non-Y2K compliant chips and is notifying these customers that
a free software upgrade is available to make these chips
10
Y2K compliant. The number of products shipped with non-Y2K compliant chips
is small and the cost to supply the Y2K compliant software is insignificant
to the Company. All products that are currently in inventory and that are
currently being manufactured contain embedded chips, which are Y2K
compliant
CRL's dealers - CRL is currently requesting Y2K compliance documentation
from major dealers who purchase the Company's products on credit to insure
that there will be no delay of payment of invoices.
Cost
The Board of Directors of CRL has allocated $10,000 for the Company's
estimated cost of Y2K compliance. The estimated cost of new hardware,
software and manpower to become Y2K compliant was used to determine this
estimated cost.
Risk
CRL believes that its internal operations will be Y2K compliant, and there
will be no material interruption in operations. However, due to the general
uncertainty inherent in the Y2K problem, resulting from the uncertainty of
the Y2K readiness of third-party supplies and customers, the Company is
unable to determine at this time whether the consequences of Y2K failures
will have a material impact on the Company's result of operations,
liquidity or financial condition. CRL believes that, with the
implementation of the Y2K plan initiated by the board of directors, that
the possibility of significant interruptions in normal operations should be
reduced.
Contingency Plans
Internal Y2K compliance will be completed prior to June 30, 1999. Any
unexpected problems associated with internal compliance will be remedied
with alternative available hardware or software. Contingency plans with
external companies will be accomplished by having alternative supplies and
shippers. This should minimize the potential risk of interruptions to
operations.
Forward Looking Information
This 10QSB 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, stability of the regulatory
environment, the Company's ability to become Y2K compliant, and other risk
detailed from time to time in the Company's filings. Any of these
assumptions could prove inaccurate, and therefore there can be no assurance
that the forward-looking information will prove to be accurate.
11
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
Part II. OTHER INFORMATION
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.
On May 5, 1998, pursuant to an agreement between the Company and Ronald
R. Jones, the Company repurchased all of Ronald R. Jones' 187,500
shares from the estate of Ronald R. Jones for the price of $181,640.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herein: none
(b) Reports on Form 8-K: none
12
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: November 13, 1998
BY /s/Gary D. Clarkson
Gary D. Clarkson
President (Authorized Officer for
signature)
13