1
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, 1999
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, 1999
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
September 30, 1999 (Unaudited) and
December 31, 1998 2
Consolidated Condensed Statements of
Operations - Nine months and three months
ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Condensed Statements of Cash
Flows - Nine months ended September 30, 1999
and 1998 (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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 291,773 $ 128,691
Securities available-for-sale 771,461 486,961
Accounts receivable, less allowance for
doubtful accounts of $9,715 at September
30, 1999 and $6,520 at December 31, 1998 60,417 87,942
Inventories:
Raw materials and supplies 34,046 28,844
Work in process 15,892 25,090
Finished goods 70,179 330,433
Total inventories, net of obsolescence reserve
of $682,751 at September 30, 1999 and
$696,751 at December 31, 1998 120,117 384,367
Prepaid expenses and other 12,818 9,566
Total current assets 1,256,586 1,097,527
PROPERTY, PLANT AND EQUIPMENT:
Land 130,869 130,869
Building and improvements 503,000 503,000
Furniture and fixtures 312,679 305,072
Machinery and equipment 525,115 555,878
Total 1,471,663 1,494,819
Less accumulated depreciation 1,051,703 1,061,082
Property, plant and equipment - net 419,960 433,737
OTHER ASSETS - NET 1,310
TOTAL $1,676,546 $1,532,574
(continued)
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 46,631 $ 44,748
Accrued salaries and benefits 29,628 36,703
Accrued professional fees 4,426 27,986
Customer deposits 5,611 17,355
Other accrued expenses and liabilities 6,899 12,215
Long-term debt - current portion 21,000
Total current liabilities 93,195 160,007
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 1,637,475 1,247,240
(Deficit) retained earnings (113,892) 247,199
1,583,351 1,554,207
Less, common stock in treasury - at cost,
187,500 shares (181,640)
Total stockholders' equity 1,583,351 1,372,567
TOTAL $1,676,546 $1,532,574
See accompanying notes to consolidated condensed financial statements.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
NET SALES $196,000 $421,598 $844,976 $1,263,473
COST OF GOODS SOLD 107,514 191,158 561,833 561,893
Gross profit 88,486 230,440 283,143 701,580
OPERATING EXPENSES:
Selling, general and
administrative 188,012 209,982 544,136 735,319
Research and development 42,542 61,837 128,120 175,176
Total operating expenses 230,554 271,819 672,256 910,495
LOSS FROM OPERATIONS (142,068) (41,379) (389,113) (208,915)
OTHER INCOME (EXPENSE):
Proceeds from officer's life
insurance in excess of cash
surrender value 1,000,681
Interest and other income 7,795 14,785 28,022 24,854
Interest expense (19,156)
Total other income 7,795 14,785 28,022 1,006,379
(LOSS)INCOME BEFORE INCOME TAXES(134,273) (26,594) (361,091) 797,464
NET (LOSS)INCOME $(134,273)$(26,594) $(361,091) $797,464
(LOSS)INCOME PER COMMON SHARE -
Basic $(.33) $(.06) $(.88) $1.62
Diluted $(.33) $(.06) $(.88) $1.60
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
Basic 412,221 410,182 410,869 493,515
Diluted 412,222 410,182 410,869 497,238
See accompanying notes to consolidated condensed financial statements.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1999 1998
OPERATING ACTIVITIES:
NET (LOSS) INCOME $(361,091) $797,464
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization 23,391 45,909
Proceeds from officer's life insurance in
excess of cash surrender value (1,000,681)
Changes in assets and liabilities:
Accounts receivable 27,525 (102,438)
Inventories 264,250 (48,407)
Prepaid expenses and other assets (1,942) 8,808
Accounts payable, accrued expenses and
customer deposits (45,812) (22,002)
NET CASH USED IN OPERATING ACTIVITIES (93,679) (321,347)
INVESTING ACTIVITIES:
Proceeds from officer's life insurance 1,033,051
Purchase of securities (870,198) (1,463,156)
Proceeds from sale or maturity of securities 585,698 1,060,333
Proceeds on sale of assets 5,394
Capital expenditures (15,008) (15,032)
NET CASH(USED IN)PROVIDED BY INVESTING
ACTIVITIES (294,114) 615,196
FINANCING ACTIVITIES:
Principal payments on long-term debt (21,000) (101,176)
Sale of treasury shares 571,875
Purchase of treasury shares (181,640)
NET CASH PROVIDED BY (USED IN)FINANCING
ACTIVITIES 550,875 (282,816)
NET INCREASE IN CASH AND CASH EQUIVALENTS 163,082 11,033
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 128,691 119,851
CASH AND CASH EQUIVALENTS AT END OF PERIOD $291,773 $130,884
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $19,156
See accompanying notes to consolidated condensed financial statements.
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, 1999 and the Consolidated
Condensed Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 and the Consolidated Condensed
Statements of Cash Flows for the nine months ended September 30,
1999 and 1998 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, 1998.
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. In calculating the loss per share for the nine months ended
September 30, 1999, the effects of 500,000 total shares related to
options to purchase common stock were not used for computing the
diluted loss per share because the results would be antidulitive.
Options to purchase 14,062 shares expired unexercised in May 1999.
3. At the Annual Meeting of Shareholders of the Company held on
May 11, 1999, the shareholders passed a proposal to dissolve the
Company. The dissolution may be revoked by the Board of Directors
at any time up to 120 days after its effective date without
stockholder action relating to such revocation.
On June 28, 1999, the Company and Mr. Gary Clarkson (Chairman of
the Board, President and CEO of the Company at that time) entered
into an agreement to sell to Mr. Charles Jayson Brentlinger the
controlling interest in CRL. The transaction closed on September
30, 1999.
Of the Company's 597,682 shares of issued common stock, 288,870
are held by the public, and 308,812 or 51.67% are held by Mr.
Brentlinger. All previously issued options to purchase shares of
the Company's common stock have expired.
Mr. Brentlinger purchased 187,500 shares of the Company's
authorized, but unissued common stock at $3.05 per share, for a
total of $571,875. Within one year of closing, Mr. Brentlinger has
agreed to purchase an additional 171,250 shares of the Company's
common stock at $2.50 per share cash for a total of $428,125. Mr.
Brentlinger also has a 5 year option to purchase an additional
500,000 shares of the Company's common stock for $2.50 per share
cash for a total of $1,250,000.
At the closing, Mr. Brentlinger purchased all of Mr. Clarkson's
stock, 121,312 shares, at $3.05 per share, with $250,000 paid at
closing and the balance to be paid as determined between the
parties.
Mr. Clarkson has resigned as President and Chief Executive Officer
of the Company and has been replaced by Mr. Brentlinger. Mr.
Clarkson will remain with the Company as an Advanced Product
Engineer, under a 3 year employment contract, and will remain as
Chairman of the Board.
Production of the Company 's current product lines has been
resumed.
4. On October 6, 1999, the Board of Directors, pursuant to its
authority under Arizona Law, voted not to dissolve the Company,
but to continue in business, as set forth above. Mr. Brentlinger
was appointed to the Board of Directors of the Company, to serve a
term to expire at the next meeting of shareholders duly called to
elect a Board of Directors.
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
$1,163,000 and the ratio of current assets to current liabilities
was 13.48 to 1 at September 30, 1999. At December 31, 1998, the
Company had net working capital of approximately $938,000 and a
current ratio of 6.86 to 1. The $225,000 increase was primarily
the result of $572,000 received upon the sale of the Company's
treasury stock, offset by the net loss of $361,000.
Securities increased $284,000 from $487,000 at December 31,
1998 to $771,000 at September 30, 1999. The increase reflects the
investment of a portion of the proceeds from the sale of the
Company's treasury stock.
Accounts receivable were $60,000 at September 30, 1999
compared to $88,000 at December 31, 1998. The decrease of $27,000
was the result of lower sales in the third quarter of 1999
compared to the fourth quarter of 1998.
Total inventories were $120,000 at September 30, 1999
compared to total inventories of $384,000 at December 31, 1998.
The decrease is the result of the Company selling finished goods
from current inventory and resuming production using current
supplies of raw materials.
Current liabilities decreased $67,000 to $93,000 at
September 30, 1999 from $160,000 at December 31, 1998. The
decrease was the result of a $48,000 decrease in accrued expenses
and $21,000 payment of the current portion of the Company's long-
term debt.
The Company believes its future liquidity needs will be met
by a combination of cash generated from operating activities, and
the reduction of investments. The Company does not have any
available credit facilities. The Company presently does not have
any commitments for capital expenditures.
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 three months ended September 30, 1999
totaled $196,000 compared to $422,000 for the three months ended
September 30, 1998. For the nine months ended September 30, 1999
net sales were $845,000 compared to $1,263,000 for the nine months
ended September 30, 1998. The Company continues to experience
slower demand across its product lines, in both domestic and
international markets. Discounts were increased to move inventory.
Cost of goods sold were 55% of net sales for the three
months ended September 30, 1999 compared to 45% for the same
period in 1998. For the nine months ended September 30, 1999 cost
of goods sold were 66% compared to 44% for the nine months ended
September 30, 1998. The increase in cost of goods sold was a
result of the decrease in net sales, increase in discounts, and
increase in production salaries as the result of severance
expenses relating to the potential dissolution of the Company.
Selling, general and administrative expenses were $544,000
for the nine months ended September 30, 1999 compared to $735,000
for the same period of 1998. The decrease in selling, general and
administrative expenses in 1999 was the result of a decrease in
personnel and cutbacks in both domestic and international sales
and marketing.
Research and development expense for the nine months ended
September 30, 1999 totaled $128,000, compared to the same period
in 1998 of $175,000. The decrease is the result of a decrease in
the staff in engineering.
Interest and other income totaled $28,000 for the nine
months ended September 30, 1999 compared to $25,000 for the nine
months ended September 30, 1998.
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 nine months
ended September 30, 1999. Interest expense of $19,000 for the same
period in 1998 consists of the interest cost on this mortgage.
The loss for the nine months ended September 30, 1999 was
$361,000 compared to net income of $797,000 for the nine months
ended September 30, 1998. The significant change was due to the
proceeds from officer's life insurance in excess of cash surrender
value of approximately $1,000,000 recognized by the Company during
the nine months ended September 30, 1998.
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 or 1900".
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
November 30, 1999. 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 1999. Since CRL is
under contract with this software company, this compliance is
handled as a normal upgrade of software.
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
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 November 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 suppliers and shippers. This should minimize
the potential risk of interruptions to operations.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herein: none
(b) Reports on Form 8-K - 8-K filed on January 25, 1999
8-K filed on March 8, 1999
8-K filed on June 29, 1999
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 14, 1999
BY /s/Charles Jayson Brentlinger
Charles Jayson Brentlinger
President (Authorized Officer
for signature)