Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-69712
Prospectus Supplement No. 3, dated April 17, 2002
(To Prospectus dated November 13, 2001)
Circuit Research Labs, Inc.
2522 West Geneva Drive
Tempe, Arizona 85282
(602) 438-0888
This Prospectus Supplement No. 3 is part of the Prospectus dated
November 13, 2001, of Circuit Research Labs, Inc. (the "Prospectus"), related to
an offering of up to 4,581,233 shares of our common stock by the persons
identified as "Selling Shareholders" in the Prospectus. This Prospectus
Supplement No. 3 is distributed only in connection with the Prospectus and must
be read in conjunction therewith.
We are distributing this Prospectus Supplement No. 3 to update information
that is contained in the Prospectus. We are distributing this Prospectus
Supplement No. 3 only with the Prospectus, which provides detailed information
related to Circuit Research Labs, Inc. In particular, this Prospectus
Supplement No. 3 contains the financial and other information set forth in our
annual report on Form 10-KSB for the year ended December 31, 2001. A copy of
the Form 10-KSB, which was filed with the Securities and Exchange Commission
on April 17, 2002, is attached hereto.
If you have received this Prospectus Supplement No. 3, you should also have
received a copy of the Prospectus. You should carefully review the Prospectus
for a detailed description of an investment in Circuit Research Labs, Inc.
The date of this Prospectus Supplement No. 3 is April 17, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 0-11353
CIRCUIT RESEARCH LABS, INC.
(Exact name of small business issuer in its charter)
Arizona 86-0344671
---------------- -------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2522 West Geneva Drive
Tempe, Arizona 85282
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (602) 438-0888
- --------------------------------------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
None
---------------
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, par value $.10 per share None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's net revenues for the year ended December 31, 2001 were
$13,066,365.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average of the high and the low prices of the
registrant's Common Stock as reported by the OTC Bulletin Board on March 28,
2002, was approximately $1,753,814. Shares of voting stock held by each
executive officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be deemed
affiliates. This determination of affiliate status is not necessarily
conclusive.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,706,880 shares of Common Stock outstanding on March 29, 2002
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference to this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART I ................................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS .................................... 1
ITEM 2. DESCRIPTION OF PROPERTY .................................... 8
ITEM 3. LEGAL PROCEEDINGS .......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 9
PART II .................................................................. 10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION .. 11
ITEM 7. FINANCIAL STATEMENTS ....................................... 22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ..................... 45
PART III ................................................................. 46
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT ........................................... 46
ITEM 10. EXECUTIVE COMPENSATION ..................................... 49
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ............................................. 52
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 54
PART IV .................................................................. 57
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ........................... 57
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
We develop, manufacture and market high-quality electronic audio
processing, transmission encoding and noise reduction equipment for the
worldwide radio, television, cable, Internet and professional audio markets.
Our main product lines control the audio quality and range of radio, television,
cable and Internet audio reception and allow radio and television stations to
broadcast in mono and stereo. Our Orban division manufactures and markets audio
processing equipment, primarily using digital technology, under the Orban,
Optimod, Audicy and OptiCodec brand names. Our CRL division also manufactures
and markets audio processing equipment, primarily using analog technology, under
the CRL, Millennium, TVS and Amigo brand names. Both divisions have always been
well respected for innovative and quality broadcast equipment solutions.
We were founded in 1974 as a broadcast industry consulting company.
Building upon our understanding of the broadcast industry's needs, we expanded
into product development and manufacturing and were incorporated in Arizona in
March 1978. Since the introduction of our first product which was designed to
improve the "coverage and quality" of AM radio stations, we have been committed
to improving broadcast quality. We were a major participant in the National
Radio Systems Committee (NRSC) which developed the standards for AM radio
stations that were adopted by the Federal Communications Commission (FCC).
During 1987, we developed and produced equipment enabling AM radio stations to
meet certain NRSC standards, and we continue to be a market leader in AM
processing. We are a member of the National Association of Broadcasters (NAB).
The NAB is the world's largest broadcaster's association, offering a wide
variety of services to radio and television stations as well as organizations
that provide products and/or services to the broadcast industry.
On May 31, 2000, we acquired the assets of Orban, Inc., a wholly owned
subsidiary of Harman International Industries, Inc., including the rights to the
name "Orban." Since its founding in 1974, Orban has been an innovative producer
of audio editing and processing equipment. Today, Orban is one of the top
manufacturers of audio processing equipment in the world. Because approximately
80% of our products are analog and 80% of Orban's products are digital, our
acquisition of Orban has combined two complementary product lines. We are now
in a position to offer a full range of digital and analog audio processing
solutions at multiple price points. Additionally, we will benefit from cost
savings produced by combined research and development, marketing, sales and
administration, manufacturing efficiencies and cross-selling opportunities. Our
objective is to grow our combined companies through constant redesign of our
existing products to keep pace with technological improvements and through
expansion into the emerging markets of digital audio broadcasting (DAB), cable
television and Internet-related audio delivery.
Industry Overview
Audio Processing
The audio processing equipment that we produce is used by radio and
television stations, recording studios and Internet webcasters. Audio
processing enhances the clarity of a radio signal, boosts loudness and increases
a broadcast station's coverage area. Our equipment "repackages" audio signals
produced by microphones, recordings and other audio sources. The equipment
alters such signals to control audio loudness and tonal balance (equalization)
prior to transmission. Audio processing
1
shapes the audio sound wave when it is in electrical impulse form before it is
transmitted by a carrier wave.
Most governments throughout the world require radio and television
broadcast stations to control their signal's modulation level and occupied
bandwidth. Radio and television stations must utilize audio processing to
comply with these governmental regulations as well as to improve the quality of
their signals. According to the FCC, there were approximately 12,900 radio
stations and approximately 1,700 television stations licensed in the United
States as of June 30, 2001. The Information Resource Center of the National
Association of Broadcasters, using data compiled by the Central Intelligence
Agency, calculated the number of radio stations and television stations
worldwide, as of January 2000, to be over 44,000 and over 21,500, respectively.
Although there has been consolidation in the radio industry in the United
States, demand continues to be strong for quality audio processing equipment.
Based on replacement equipment orders, we estimate that the average useful
life of audio processing equipment is less than five years, and improvements in
audio processing equipment cause some radio and television stations to replace
equipment before the end of its useful life.
Our recently developed products, such as those related to digital audio
broadcasting (DAB), are appropriate for the audio processing needs of the
recording and performing industries. Digital audio broadcasting, which is the
digital delivery of broadcasting signals, enables FM radio signals to be near CD
quality in terms of clarity and enables AM signals to offer sound quality that
is comparable to today's analog FM signals. Digital audio broadcasting is
widely regarded as the future of radio because it makes more efficient use of
crowded airwaves, provides better sound quality and is virtually immune to
interference.
The Internet
The Internet has grown rapidly in recent years, spurred by developments
such as user-friendly Web browsers, the availability of multimedia PCs, the
adoption of more robust network architectures and the emergence of compelling
Web-based content and commerce applications. The broad acceptance of the
Internet Protocol standard has also led to the emergence of intranets and
the development of a wide range of non-PC devices that allow users to access the
Internet and intranets.
Much of the Internet's rapid evolution towards becoming a mass medium can
be attributed to the accelerated pace of technological innovation, which has
expanded the Web's capabilities and improved users' experiences. Most notably,
the Internet has evolved from a mass of static, text-oriented Web pages and
e-mail services to a much richer environment, capable of delivering graphical,
interactive and multimedia content. Prior to the development of streaming media
technologies, users could not play back audio and video clips until the content
was downloaded in its entirety. As a result, live Internet broadcasts were not
possible. The development of streaming media products from companies such as
Microsoft Corporation and RealNetworks, Inc. enables the simultaneous
transmission and playback (i.e., the Internet broadcast) of continuous "streams"
of audio and video content over the Internet and intranets. These technologies
have evolved to deliver audio and video over widely used 28.8 kbps narrow
bandwidth modems, yet can scale in quality to take advantage of higher speed
access that is expected to be provided by xDSL, cable modems and other emerging
broadband technologies. We believe there are now over 6,100 radio stations
with Internet sites. This includes over 1,775 radio stations that are offering
Webcast or streaming services. With the Internet having no geographic limits,
thereby allowing a worldwide audience to listen to existing radio stations, the
potential for generating revenues can increase. The audio quality of these
Internet radio streams still lags behind that of conventional audio. We believe
that we already have many of the solutions for the audio quality issues being
presented by these new formats and delivery systems, as outlined below.
2
Business Plan and Growth Strategy
Our growth strategy consists of the following:
Integrate Orban Operations. We continue to integrate the operations of
the former Orban with our existing operations in order to achieve economies of
scale, manufacturing and marketing efficiencies, reduced operational expenses
and cross-selling opportunities. The combined operation of Orban/CRL provides
many new products and product lines. Both Orban and CRL products have been and
will continue to be sold through dealership networks as well as international
distributors. We believe that sales of CRL products will be significantly
enhanced as these products are offered through the Orban dealership network.
Focus on Core Audio Processing Business. We will continue to focus on
growing our core audio processing business because:
* We believe that we are the dominant leader and producer of audio
processing equipment for the broadcast industry;
* Although there has been consolidation in the radio industry in the U.S.,
demand continues to be strong for quality audio processing equipment;
* Based on replacement equipment orders, we estimate that the average
useful life of audio processing equipment is less than five years, and
improvements in audio processing equipment cause some radio and
television stations to replace equipment before the end of its useful
life; and
* Our product depth, technical superiority, and strong distribution
channels have positioned us to increase our market share, especially in
burgeoning international markets where growth is being spurred by
increased radio station usage and the issuance of new radio licenses;
Develop New Products and Acquire Additional Product Lines. We are
exploring and developing new products, such as our OptiCodec line of digital
encoders and decoders which gives us our first Digital Transmission System for
use over the Internet as well as Integrated Services Digital Network (ISDN),
ATM and Frame Relay phone lines with its TCP/IP address ability. Last year we
devoted over $1.4 million to research and development, an increase of 27% over
the previous year. We will continue to devote a significant percentage of our
revenue to research and development. In addition, we intend to make strategic
acquisitions of additional product lines that are adaptable and complementary to
our existing products. For instance, on May 31, 2001, we acquired the assets of
Avocet Instruments, Inc., a supplier of quality audio receivers and coders for
the television and post-production industry. Our acquisition of the Avocet
product line expands our range of television products and provides us with
access to a new market segment within the television industry.
Increase Penetration in Emerging Markets. We believe that the emergence
of rich multimedia capabilities, such as streaming audio and video, has
significantly enhanced the effectiveness of the Web as a global mass
communications medium and has accelerated the adoption of corporate intranets as
a means to improve communications within enterprises. These enhanced multimedia
capabilities, combined with the unique interactive properties of the Internet,
are attracting a large and expanding audience and an increasing breadth and
depth of content and online commercial applications. As the Web continues to
evolve as a mass communications medium, we believe that certain types of content
3
currently delivered through traditional media, such as radio and television,
increasingly will be delivered over the Internet. We believe that we already
have many of the solutions for the audio quality issues being presented by these
new formats and delivery systems, and we intend to leverage our technologies
in the rapidly growing markets of digital audio broadcasting (DAB), cable
television and Internet-related audio delivery.
Principal Products
Our CRL division manufactures and markets audio processing equipment,
primarily using analog technology, under the CRL, Millennium, TVS and Amigo
brand names. Our Orban division also manufactures and markets audio processing
equipment, but primarily using digital technology, under the Orban, Optimod,
Audicy and OptiCodec brand names. The combined product line can be separated
into four different series or product families, FM Series, AM Series, TV Series
and other audio post-production workstations.
The FM Series of Products
Optimod-FM 8400. The Optimod-FM 8400 is our "flagship" digital audio
processor introduced in the summer of 2000. It is based on Digital Signal
Processing (DSP) technology that is five times more powerful than that of its
predecessor, the Optimod-FM 8200. It is easier to use than previous processors,
having a number of preset configurations which customize sound processing for
specific formats and target audiences. It can be used for either classical/jazz
formats or for popular music/talk formats, depending on the settings. It permits
customized control of compressor threshold, equalization, balance control,
attack rate and multiband clipping for users who do not wish to use the factory
presets. It includes a DSP-based stereo encoder and composite processor, target
zone gating Audio Gain Controller (AGC), 2 and 5 band compressor, multi-band
limiter and graphic equalizer. Two different types of stereo enhancement are
standard, and it can be operated in either stereo or mono mode. It is compatible
with industry standards.
Other Optimod Processors. Our Orban division also produces other
processors with fewer features at lower costs. The Optimod-FM 8200 Signature
Series uses digital technology and has factory presets but can be customized for
optimum sound. It also permits tailoring a signal for loudness, clarity,
brightness and "punch" as required, but at lower cost. The Optimod-FM 2200 is
based on technology in the Optimod-FM 8200 and offers the benefits of digital
processing to stations with a modest budget. Other Optimod-FM products include
the 8218, a stand-alone digital FM stereo encoder, and the 8200ST which is an
adjustable compression studio chassis.
CRL Amigo-FM. The CRL Amigo-FM Audio Processor is an integrated "one box"
processing system for small to mid-size radio stations on a tight budget. It is
a single unit with a dual band AGC, a variable pre-emphasis multi-band limiter,
and digitally synthesized stereo generator.
Other FM products. Other CRL FM products include the Millennium, a digital
audio processor, Modulation Signature, a multi-band limiter, the SG-800A Stereo
Generator, and the SCA-300B Subcarrier Generator. In addition, Orban offers the
222A, which is a stereo spatial enhancer.
4
The AM Series of Products
Optimod-AM 9200. The Optimod-AM 9200 is our top-of-the-line digital audio
processor for monophonic AM radio stations, which enables the user to maximize
the sound quality available within the limitations of the AM channel.
Optimod-HF 9200. The Optimod-HF 9200 is a complete digital audio processor
designed for the demanding requirements of short-wave broadcasting and
"all-talk" AM radio stations that are experiencing nighttime interference
problems.
Optimod-AM 9100B2. The Optimod-AM 9100B2 is a complete audio processor
with a six-band limiter and distortion-canceling clipper for stereo AM radio
stations.
CRL Amigo-AM. The Amigo AM Audio Processor is a complete stereo audio
processing system, including a dual band AGC, triband limiter, and NRSC
(National Radio Systems Committee) output filtering. It is designed for small to
mid-size radio stations on a tight budget.
Other AM Products. Our CRL division also offers the Amigo Talk, Amigo HF,
AGC-400 Automatic Gain Controller, the SEC-400 Multi-Band Compressor/Equalizer,
the PMC-450 Limiter and the AM-4 Monaural Audio Processing System.
Television Products
Optimod-TV 6200. The Optimod-TV 6200 is our top-of-the-line digital audio
processor for two-channel (left and right audio channels) digital television
transmissions (DTV). It provides two-band and five-band Optimod processing
structures and is compatible with all digital television applications, including
conventional land-based, cable or satellite distribution of mono, two-channel or
Dolby Surround encoded programs.
Optimod-TV 8282. The Optimod-TV 8282 is a digital audio processor designed
for analog television audio, whether mono, stereo or dual-language, and is
compatible with all monophonic and stereo broadcast systems.
Other Optimod-TV Products. We also offer the Optimod-TV 8182A which is an
analog audio processor for both stereo and monophonic analog television; the
Optimod-TV 8185A, a BTSC television stereo generator; the Optimod-TV 8182A
Secondary Audio Program (SAP) Generator which is primarily designed for public
second language use; the Optimod-TV 8185A PRO Generator (Professional channel
for non-public use); and the 275A Automatic Stereo Synthesizer which improves
the sound of monophonic programs when heard on stereo or surround television
systems.
CRL TVS Processors. Our CRL division offers audio processing products for
television, including the TVS-3001, a top-of-the-line stereo television
processing system designed with surround sound compatibility; the TVS-3003, a
digitally synthesized stereo TV generator; the TVS-3004, a Professional Channel
(PRO) digitally synthesized subcarrier generator; and the TVS-3005, a digitally
synthesized subcarrier generator for a secondary audio program (SAP) channel
CRL Amigo-TV. CRL Amigo-TV is a complete audio processing solution for a
variety of monophonic television applications.
5
Avocet Pro-Line 102A. The Avocet Pro-Line 102A is designed for internal
foldback and data transmission applications. Its single rack space design
enables secure mounting in mobile broadcast facilities.
Avocet TV-2. The Avocet TV-2 is a modular receiver capable of
incorporating Main SAP and/or Pro audio. Its SAP channel incorporates full dbx
decoding for the most accurate and clearest audio available. It enables the user
to receive or monitor production-quality audio for many applications, including
feeding SAP channel to distribute promotional spots to radio stations and
feeding translators and repeaters.
Avocet AV100. The Avocet AV100 television audio receiver features
high-quality audio with professional specifications and balanced SAP and Main
channel outputs. It can also be used for monitoring the Emergency Alert System,
recording programming off-air, sending news promotionals to radio stations and
rebroadcasting to translators.
Other Products
Optimod 6200S. The Optimod 6200S is our top-of-the-line digital audio
processor for Internet Webcasters.
Optimod-DAB 6200. The Optimod-DAB 6200 is the first audio processor
designed specifically for digital audio broadcasting (DAB).
Audicy. Orban manufactures and sells digital audio production and video
post-production workstations under the Audicy brand name. The workstations
feature a simple set of controls and other features designed to reduce customer
training costs.
OptiCodec. We announced the introduction of a new line of codecs in
October 2000, which are being sold under the OptiCodec brand name. The term
"codec" is derived from the words "enCOde" and "DECode" and represents a
technology utilized in the transfer of digital data. Our OptiCodec line of
products will allow our customers to send high-quality digital audio over the
Internet, computer networks and special Integrated Services Digital Network
(ISDN) telephone lines.
Other. Our other products include stereo and monophonic gain controllers,
stereo spatial enhancers, test and analysis tools, studio chassis, and other
products related to our audio processing equipment.
Marketing and Customers
We sell our products to AM and FM radio stations and television stations
around the world. According to the FCC, there were approximately 12,900 radio
stations and approximately 1,700 television stations licensed in the United
States as of June 30, 2001. The Information Resource Center of the National
Association of Broadcasters, using data compiled by the Central Intelligence
Agency, calculated the number of radio stations and television stations
worldwide, as of January 2000, to be over 44,000 and over 21,500, respectively.
Stereo broadcasting in both radio and television requires audio processing
equipment. Based on replacement equipment orders, we estimate that the average
useful life of audio processing equipment is less than five years, and
improvements in audio processing equipment cause some stations to replace
equipment before the end of its useful life.
6
Sales of our products are conducted primarily through wholesale
distributors and dealers. Most distributors of our products are also
distributors for other products used by radio and television stations. None of
our distributors solely distributes our products.
In recent years, the radio and television industry in the United States has
experienced a great deal of consolidation of ownership. As a result, several
corporations each now own a substantial number of radio and television stations.
These corporations are the largest purchasers of our audio processing and
post-production equipment. Our largest single customer accounted for
approximately 33% of our sales revenues in 2000 and approximately 19% in 2001.
We rely to a large extent on replacement orders placed by existing customers.
In 2001 our domestic customers account for approximately 49% of our sales
revenues while foreign customers account for approximately 51%. In 2000 our
domestic customers accounted for approximately 66% while our foreign customers
accounted for approximately 34%. The 17% increase in our total foreign sales as
a percentage of total net revenue is primarily due to a decrease in sales to our
single largest customer by 14%.
Competition
As a result of our acquisition of Orban, we believe that we are a dominant
leader and producer of analog and digital audio processing equipment for both
the radio and television broadcast industry. The market for audio processing
equipment is only marginally competitive, primarily because it is a mature
market that is not characterized by a large amount of growth. We compete with a
limited number of other manufacturers of audio processing equipment, which
together represent approximately 35% of the market for audio processors.
Because we are in a finite market, we may be able to estimate that we have the
remaining 65%.
Vendors
We purchase raw materials from various vendors. Currently, we can obtain
the component parts necessary for the manufacture of our products and equipment
from a variety of sources. Furthermore, no single vendor sells us more than 10%
of our total raw material purchases. Nevertheless, as technology improves,
certain component parts may become obsolete and our vendors may discontinue
their production of such parts. If this occurs, we may not be able to obtain
these necessary component parts from alternative sources. As a result, we may
be forced to design around these parts, or make one time lifetime purchases of
discontinued parts so that we are able to continue producing our products and
equipment.
Employees
As of March 29, 2002 we had approximately 75 full-time employees. Our CRL
division, located in Tempe, Arizona employs approximately 10 persons. Our Orban
division, located in San Leandro, California employs approximately 65 persons.
Our employees are not represented by a labor union. We consider our relations
with our employees to be good.
7
Recent Events
On January 18, 2002, we acquired the assets of Dialog4 System Engineering
GmbH ("Dialog4"). Dialog4, a German corporation based in Ludwigsburg, Germany,
is a worldwide leader in ISO/MPEG, audio, ISDN, satellite transmission,
networking and storage. Dialog4 has been designing and manufacturing equipment
for the codec market for over ten years. Its products, available in Europe
since 1993, include the MusicTaxi codec for encoding and decoding audio and data
over TCP/IP on the Internet, ISDN and satellite.
We purchased the assets of Dialog4 pursuant to an Asset Sale and Purchase
Agreement for $2 million, comprised of 1,250,000 shares of restricted common
stock, valued at $1.00 per share, and $750,000 cash to be paid at a later date
either by us from our working capital or by our President and Chief Executive
Officer, Charles Jayson Brentlinger. On April 8, 2002, we executed an amendment
to the Asset Sale and Purchase Agreement with Dialog4. The amended agreement
extends the term of our payments to Dialog4 over twenty months while reducing
the amount of the monthly payment installments to $37,500 plus interest on the
remaining principal balance at a rate of 10 percent per annum. The monthly
installments of principal and interest are due and payable on the twentieth day
of each month commencing April 20, 2002.
In connection with the acquisition, Berthold Burkhardtsmaier, Dialog4's
managing director, has become our Vice President of European Operations and has
been appointed to our board of directors.
ITEM 2. DESCRIPTION OF PROPERTY.
We own an approximately 10,300 square foot building on a 37,500 square foot
parcel of land in Tempe, Arizona that currently houses our executive,
administrative, sales, manufacturing and research facilities.
On May 30, 2000, we mortgaged our facility in Tempe for $335,000. The
mortgage note bore interest at 15.25 percent per annum, payable monthly. The
full principal balance of the mortgage note was originally due November 30,
2000, but the maturity date was extended to December 31, 2000. Prior to this
date, we refinanced the $335,000 mortgage and entered into two new mortgage
agreements for $300,000 and $62,000, respectively. These notes bear interest at
11.75 percent per annum and 14.75 percent per annum, respectively. Principal
and interest payments on these notes are payable monthly commencing February
2001 using a 12-year amortization period and requiring a balloon payment at
the end of the notes' five-year term.
We lease the manufacturing and office facilities occupied by our Orban
division in San Leandro, California. The current lease, which was entered into
by a predecessor of Orban, Inc. in 1989 and assumed by us when we acquired the
assets of Orban in 2000, is for 57,013 square feet, of which 20,340 square feet
is subleased to an unrelated third party (a net of 36,673 square feet being
retained by us). The lease, which expired November 30, 2001, required lease
payments of $43,000.00 per month during 2001. We received $6,915.60 per month
under the sublease during 2001. We have renewed the lease for the San Leandro
facility. The term of the new lease is for a period of 60 months commencing
on January 1, 2002. The new lease is for 33,777 square feet and requires
payments of approximately $27,011 per month during 2002. Subsequently, the
monthly payments will increase at a rate of 4% annually.
8
ITEM 3. LEGAL PROCEEDINGS.
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is quoted on the OTC Bulletin Board of the National
Association of Securities Dealers (NASD) under the symbol "CRLI."
The following table sets forth the quarterly high and low bid prices for
our common stock as reported by the NASD's OTC Bulletin Board. The prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
CALENDER QUARTER High Low
---------------- ----- -----
2000
First Quarter $8.50 $1.00
Second Quarter 7.50 2.50
Third Quarter 11.00 3.94
Fourth Quarter 9.88 4.19
2001
First Quarter 6.81 2.31
Second Quarter 3.50 1.15
Third Quarter 1.30 0.55
Fourth Quarter 1.05 0.67
As of March 29, 2002, there were 3,706,880 shares of common stock
outstanding held by approximately 292 shareholders. We have not paid any cash
dividends on our common stock for the last two fiscal years, and, pursuant
to the terms of our loan agreement with Harman, we cannot pay cash dividends
while our debt to Harman remains outstanding.
Recent Sales of Unregistered Securities
Set forth below is information concerning sales of our common stock (or
transactions deemed to be sales) during the year ended December 31, 2001 that
were not registered under the Securities Act of 1933, as amended (the "Act").
All such securities are restricted securities and the certificates bear
restrictive legends.
We incurred fees of $97,500 to Mr. Glenn Serafin in connection with Mr.
Serafin's arrangement of purchase financing for our acquisition of Orban, Inc.
The note was originally due on May 14, 2001, but was subsequently extended to
August 14, 2001. On August 11, 2001, the note was converted to equity at the
market price of $1.05 per share resulting in the issuance of 92,857 shares of
our common stock to Mr. Serafin. In connection with this transaction, we relied
on the exemption from registration under Section 4(2) of the Act. In addition,
Mr. Serafin satisfies the criteria for qualification as an "accredited investor"
under Rule 501 of Regulation D promulgated under the Act. We did not execute a
formal agreement with Mr. Serafin in connection with the conversion of the note.
10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the
accompanying notes included elsewhere in this report. This discussion contains
statements about future events, expectations, risks and uncertainties that
constitute forward-looking statements, as do discussions elsewhere in this
report. Forward-looking statements are based on management's beliefs,
assumptions and expectations of our future economic performance, taking into
account the information currently available to management. These statements are
not statements of historical fact. Forward-looking statements involve risks and
uncertainties that may cause actual results, performance or financial condition
to differ materially from the expectations of future results, performance or
financial condition we express or imply in any forward-looking statements. The
words "believe," "may," "will," "should," "anticipate," "estimate," "expect,"
"intend," "objective," "seek," "strive" or similar words, or the negative of
these words, identify forward-looking statements. Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including, but not limited to, those described below
under this Item 6, "Management's Discussion and Analysis or Plan of Operation -
Risk Factors." We qualify any forward-looking statements entirely by these
cautionary factors.
Overview
We develop, manufacture and market high-quality electronic audio
processing, transmission encoding and noise reduction equipment for the
worldwide radio, television, cable, Internet and professional audio markets.
In recent periods, we have acquired the assets of other companies within our
industry or in related industries into which we desire to expand. On May 31,
2000, we acquired the assets of Orban, Inc., a producer of audio editing and
processing equipment. On May 31, 2001, we acquired the assets of Avocet
Instruments, Inc., a supplier of quality audio receivers and coders for the
television and post-production industry. On January 18, 2002, we acquired the
assets of Dialog4 System Engineering GmbH, a worldwide leader in ISO/MPEG,
audio, ISDN, satellite transmission, networking and storage. The results of our
acquisition of Dialog4 are not reflected in the financial statements included in
this report. Such results will be reflected in fiscal periods beginning with
the quarter ended March 31, 2002.
We are still in the process of integrating the operations of our CRL and
Orban divisions, including integration of our financial accounting and
management information systems. Once this integration is complete, we expect to
benefit from cost savings produced by combined research and development,
marketing, sales and administration, manufacturing efficiencies and
cross-selling opportunities. Our recent acquisition of the Dialog4 product line
has led to the establishment of our new Orban Europe division offices in
Ludwigsburg, Germany. We now face the challenge of integrating our financial
accounting and management information systems with those of Dialog4 as well as
the challenge of overcoming obstacles produced as a result of different
corporate cultures and different accounting and reporting regulations. We will
also face new risks arising from foreign currency fluctuations.
At December 31, 1999, our assets totaled $1,835,000 while the assets of
Orban totaled $5,134,000. The revenues for Orban for the year ended December
31, 1999, as reported in our current report on Form 8-K/A filed November 21,
2000, were $12,400,000 compared to our revenues for the same period of
$1,000,000. Accordingly, due to the consolidation of our operations with those
of Orban beginning May 31, 2000, period to period comparisons of results of
operations may not be meaningful.
11
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") Nos. 141 and 142 ("SFAS
141" and "SFAS 142"), "Business Combinations" and "Goodwill and Other
Intangibles Assets." SFAS 141 replaces APB Opinion No. 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. SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under SFAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS 141 and SFAS 142 are effective
for all business combinations initiated after June 30, 2001.
Upon adoption of SFAS 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 SFAS 141 will be reclassified to goodwill. Companies are required to
adopt SFAS 142 for fiscal years beginning after December 15, 2001. We adopted
SFAS 142 on January 1, 2002. In connection with our adoption of SFAS 142, we
are required to perform a transitional goodwill impairment assessment. We have
not yet determined the impact, if any, these standards will have on our results
of operations and financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("SFAS 143)". SFAS 143 establishes accounting standards for
the recognition and measurement of an asset retirement obligation and its
associated asset cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
143 is effective in fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company plans to adopt SFAS 143 effective January 1,
2003. The Company has not determined the effect of adopting SFAS 143 on results
of operations or financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued operations.
SFAS 144 superseded Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS 144 effective January 1, 2002 and does not expect
that the adoption will have a material impact on its consolidated results of
operations and financial position.
12
Sales to Major Customers and Export Sales
We sell our products primarily through wholesale distributors and dealers.
We recognize revenue generally upon shipment of products to customers. In 2001,
we derived approximately 19% of our net sales from one customer while in 2000
approximately 33% of our net sales were derived from the same customer. Our
dependence on a small number of relatively large customers increases the
magnitude of fluctuations in operating results particularly on a period to
period, or period over period, comparison basis.
International sales in 2001 and 2000 totaled $6,702,430 and $3,148,018,
respectively. Prior to our acquisition of the assets of Dialog4 System
Engineering GmbH on January 18, 2002, we required that all export sales be paid
in U.S. currency. Accordingly, there are no foreign currency gains or losses
for the years ended December 31, 2001 or 2000.
Our export sales by region are as follows:
Region 2001 % 2000 %
--------------------------------------------------------------
Europe $2,676,880 40% $1,679,659 53%
Pacific Rim 2,217,607 33 731,994 23
Latin and South America 712,026 11 527,618 17
Canada and 908,442 13 179,339 6
Mexico
Other 187,475 3 27,408 1
---------- ---- ----------- ----
Total $6,702,430 100% $3,148,018 100%
========== ==== ========== ====
13
Results of Operations
The following table sets forth for the periods indicated certain summary
operating results:
Year Ended December 31,
---------------------------
2001 2000
----------- ----------
Revenues:
Net sales $13,066,365 $7,259,910
Other income 32,221 18,170
----------- ----------
Total revenues $13,098,586 $7,278,080
=========== ==========
Gross profit on net sales $6,476,846 $3,576,392
Gross profit margin 50% 49%
EBITDA (1) $501,035 ($597,403)
Net loss $(2,046,640) ($2,258,121)
Net loss as a percent of net sales (16%) (31%)
Loss per share - basic and diluted $(0.88) ($1.28)
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization.
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000
Net Sales. Net sales in 2001 were $13.1 million compared to $7.3 million
in 2000 reflecting an increase of 79%. The increase in net sales was primarily
attributable to revenues from our Orban division which reported net sales in
2001 and 2000 of $12.1 million and $6.5 million, respectively. Our CRL division
reported net sales of $975,000 in 2001 as compared to $763,000 in 2000,
representing an increase of 28%. This increase was the result of increased
demand from one customer overseas. We are uncertain whether this increased
demand will continue, but generally, we expect continued stable demand across
the CRL product lines in 2002.
Gross Profit. The increase in sales generated gross profit of $6.5 million
in 2001 compared to $3.6 million in 2000. The increase was attributable to our
Orban acquisition on May 31, 2000. Gross profit as a percentage of net sales
increased by 1% to 50% in 2001 from 49% 2000.
Selling, General and Administrative. Total selling, general and
administrative expenses ("SG&A") in 2001 was $4.7 million, an increase of 52%
over the $3.1 million reported in 2000. The increase in SG&A expense is due in
part to the variable component of SG&A (commissions and other domestic and
international sales and marketing expenses) associated with the increase in
revenues following our acquisition of the Orban assets. The fixed component of
SG&A has also increased due to the additional personnel in sales and marketing
and administration and cost related to operating the Orban division following
the May 31, 2000 acquisition. As a percentage of net sales, SG&A decreased
from 43% in 2000 to 36% in 2001. The decrease was due to our discontinued use
of outside advertising agencies and a cut back in temporary personnel.
Research and Development. Research and development expense was $1.4
million in 2001, an increase of 27% over $1.1 million in 2000. The increase
resulted from both an increase in the number of engineering staff and research
and development activities at Orban. As a percentage of net sales, research and
development decreased from 14% in 2000 to 11% in 2001. The decrease is
primarily due to our discontinued use of outside consultants to assist in
finishing existing projects.
14
Other Expense. Other expense for the year ended December 31, 2001 was
$1,038,000 of which $1,020,000 represents interest paid to Harman International
Industries, Inc. in connection with the seller carry-back loan that financed a
portion of our purchase price for the Orban assets. Other expense for the year
ended December 31, 2000 was $759,000, of which $638,000 represented interest and
fees paid to Harman.
Operationally, we are reporting a $501,000 profit in 2001 before interest,
taxes, depreciation and amortization (EBITDA) which represents approximately 40%
of the total net sales in 2001 as compared to 2000 in which we reported a
$597,000 loss before interest, taxes, depreciation and amortization (EBITDA)
representing (8%) of net sales. The increase in EBITDA is primarily due to our
ability to realize economies of scale.
Liquidity and Capital Resources
We had negative net working capital of approximately $6.6 million at
December 31, 2001, and the ratio of current assets to current liabilities was
.37 to 1. At December 31, 2000, we had positive net working capital of
approximately $2.1 million and a current ratio of 1.94 to 1. The decrease in
working capital resulted from the conversion to demand notes of the $3.5 million
short-term note and the $5 million long-term note payable to Harman. The notes
are payable on the demand of Harman or, if no demand is sooner made, on the
following dates and in the following principal amounts, as specified in the
Amended Credit Agreement that we entered into with Harman on October 1, 2001:
Specified Payment Date Payment Amount
---------------------- --------------
April 30, 2002 $1,250,000
June 30, 2002 250,000
September 30, 2002 250,000
December 31, 2002 250,000
March 31, 2003 3,000,000
Accounts receivable were $641,000 at December 31, 2001 compared to $727,000
at December 31, 2000 representing a net decrease of $86,000 or 13%. The
decrease is primarily due to an increased reserve of $84,000 for the allowance
of doubtful accounts.
Total inventories were $2,828,000 at December 31, 2001 compared to total
inventories of $3,259,000 at December 31, 2000. The value of inventory decreased
$431,000, or 15%, due primarily to an increased inventory reserve of $533,000.
For the year ending December 31, 2002, our principal working capital
requirements will be the payment of normal recurring operating costs.
Management believes that these requirements can be met from the operating cash
flows. In addition, approximately $8,679,000 of our total indebtedness is due
and payable by September 30, 2002, unless with respect to the $8,500,000 due
Harman, payment is demanded at an earlier date. Our President, Mr. Charles
Jayson Brentlinger, has committed to exercise his stock options, if necessary,
to satisfy a portion of the Company's debt payment requirements if operating
cash flows are inadequate to retire the debt. If Mr. Brentlinger exercised all
of his options to purchase shares of our common stock, we would realize gross
proceeds of approximately $1,250,000. We are actively pursuing opportunities to
raise additional capital through a private equity placement of our common stock,
asset based lending, or a combination of the two. We cannot offer any
assurances
15
that we will be able to attract additional capital or that additional financing,
if obtained, will be sufficient to meet our current obligations. If we cannot
meet our current obligations, our ability to continue as a going concern will be
jeopardized.
Management also believes that the required $37,500 due to Dialog4 each
month can be met from the operating cash flows generated from the Dialog4 line
of products. The required payments may slow our ability to ramp up our European
operations.
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this report in evaluating us and our business. You
should also keep these risk factors in mind when you read and consider the
forward-looking statements in this report and other reports we file with the
SEC. The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we are unaware of, or that we
currently deem less material, also may become important factors that affect us.
AS A RESULT OF OUR LARGE OUTSTANDING DEBT OBLIGATIONS, WE HAVE SIGNIFICANT
ONGOING DEBT SERVICE REQUIREMENTS WHICH MAY ADVERSELY AFFECT OUR FINANCIAL AND
OPERATING FLEXIBILITY.
On May 31, 2000, we acquired the assets of Orban, a wholly-owned subsidiary
of Harman International Industries, Inc. Including the $250,000 previously paid
to Harman as non-refundable deposits in 1999, the total stated purchase price
was $10.5 million, of which $2 million was paid in cash and the balance of which
was paid by means of a combination of short-term and long-term promissory notes
that we issued to Harman. As of September 10, 2001, our total indebtedness was
approximately $8.5 million. Effective October 1, 2001, this indebtedness was
converted to demand notes payable on the demand of Harman or, if no demand is
sooner made, on the dates and in the amounts set forth in the amended Credit
Agreement that we entered into with Harman. Our substantial leverage may have
important consequences for us, including the following:
* our ability to continue as a going concern will depend in part on whether
Harman demands payment on the $8.5 million debt, or any portion thereof;
* a significant portion of our cash flow from operations will be dedicated
to servicing our debt obligations and will not be available for other
business purposes;
* the terms and conditions of our indebtedness limit our flexibility in
planning for and reacting to changes in our business, and in making
strategic acquisitions;
* our ability to obtain additional financing in the future for working
capital, capital expenditures, and other purposes may be substantially
impaired; and
* our substantial leverage may make us more vulnerable to economic
downturns and competitive pressures.
Our ability to meet our debt service obligations and reduce our total
indebtedness to Harman depends in part on our future operating performance. Our
future operating performance will depend on our ability to expand our business
operations by growing our core audio processing business, expanding our product
offerings and penetrating new and emerging markets, which we anticipate will
require additional financing. In addition, our future operating performance
will depend on economic, competitive, regulatory and other factors affecting our
business that are beyond our control. If we are unable to expand our business
operations as planned, we may not be able to service our outstanding
indebtedness to Harman.
16
THE EXISTENCE OF AN UNQUALIFIED OPINION WITH A GOING CONCERN EMPHASIS PARAGRAPH
WHICH MAY MAKE IT MORE DIFFICULT FOR US TO OBTAIN CREDIT OR ADDITIONAL CAPITAL
AND MAY JEOPARDIZE OUR RELATIONSHIP WITH EXISTING AND NEW CUSTOMERS.
Our inability to pay the $8.5 million debt to Harman should payment be
demanded, our difficulties in meeting our financing needs and our negative
working capital position created by the demand notes have resulted in our
independent public accountants adding a going concern emphasis paragraph in
their report by including a statement that such factors raise substantial doubt
about our ability to continue as a going concern. This opinion generally makes
it more difficult to obtain trade credit, insurance or additional capital
through public or private debt or equity financings. The opinion also may make
it more difficult to maintain existing customer relationships and to initiate
new customer relationships.
WE WILL NEED ADDITIONAL DEBT OR EQUITY TO SERVICE THE DEBT PAYABLE AS A RESULT
OF OUR ACQUISITION OF ORBAN, AND WE MAY NOT BE ABLE TO OBTAIN THIS FINANCING ON
ACCEPTABLE TERMS.
Upon our acquisition of the assets of Orban, we issued a $3.5 million
short-term note and a $5 million long-term note payable to Harman. Effective
October 1, 2001, both of these notes were converted to demand notes payable on
the demand of Harman or, if no demand is sooner made, on the dates and in the
amounts set forth in the amended Credit Agreement that we entered into with
Harman. Our ability to service this debt will depend on our ability to obtain
either additional debt or equity financing, or a combination thereof. We cannot
be sure, however, that we will be able to obtain the necessary debt or equity
financing on acceptable terms. Also, additional debt financing or the sale of
additional equity securities may cause the market price of our common stock to
decline. If we are unable to obtain additional debt or equity financing on
acceptable terms, we may have to negotiate further restructuring of the debt
with Harman. If Harman is unwilling to restructure the debt, we may default on
the debt and our ability to continue as a going concern would be jeopardized.
OUR ABILITY TO OBTAIN AN OUTSIDE LINE OF CREDIT IS SUBJECT TO THE APPROVAL OF
OUR CURRENT CREDITORS AND, IF SUCH APPROVAL IS WITHHELD, OUR ABILITY TO COMPETE
EFFECTIVELY IN OUR INDUSTRY COULD BE JEOPARDIZED.
In connection with our acquisition of Orban, we entered into a Credit
Agreement with Harman. Under the terms of the Credit Agreement, we are bound by
certain covenants that prevent us from obtaining additional credit facilities
without the prior written approval of Harman. This limitation on our ability to
obtain additional outside lines of credit may curtail our ability to make
strategic acquisitions and to conduct research and development. This in turn
could jeopardize our competitive position within our industry.
FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
On January 18, 2002, we acquired the assets of Dialog4 System Engineering
GmbH. Our acquisition of this new product line has led to the establishment of
our new Orban Europe offices in Ludwigsburg, Germany. Transactions and expenses
of our Orban Europe operations will be conducted in Euros which will expose us
to market risks related to foreign currency exchange rate fluctuations that
could adversely affect our operating results. For instance, a strengthening of
the U.S. dollar against the Euro could reduce the amount of cash and income we
receive and recognize from Orban Europe. Furthermore, it is likely that for
accounting purposes we will recognize foreign currency gains or losses arising
from our operations in Europe on weighted average rates of exchange in the
period incurred and
17
translate assets and liabilities of these operations into U.S. dollars based on
year-end foreign currency exchange rates, both of which are subject to currency
fluctuations between the U.S. dollar and the Euro. As foreign exchange rates
vary, our results from operations and profitability may be adversely affected.
We expect to derive approximately 13% of our total revenues from our Orban
Europe operations. This percentage may increase in future years as we further
develop and expand our operations in Europe. We cannot predict the effects of
exchange rate fluctuations on our operating results. We do not currently intend
to engage in foreign currency exchange hedging transactions to manage our
foreign currency exposure. If and when we do engage in foreign currency
exchange hedging transactions, we cannot assure you that our strategies will
adequately protect our operating results from the effects of exchange rate
fluctuations.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE AN EVALUATION OF OUR
COMBINED OPERATIONS WITH ORBAN AND OUR PROSPECTS FOR THE FUTURE.
We commenced our combined operations with Orban on May 31, 2000.
Accordingly, we have a limited operating history on which an evaluation of our
combined operations with Orban can be based. Our prospects must be considered in
light of the risks, expenses, difficulties and uncertainties frequently
encountered by companies in the early stages of integration, such as:
* the difficulty of integrating the operations, technologies, personnel and
cultures of our companies;
* the potential disruption of the ongoing business of our companies;
* the distraction of management of our companies from ongoing business
concerns;
* potential unknown liabilities associated with the merger of our
companies; and
* the potential disruption of our employee base.
We cannot guarantee that any or all of the above risks, expenses,
difficulties and uncertainties will not occur as a result of our integration of
the Orban operations. Nor can we guarantee that our integration with Orban will
be achieved successfully or as rapidly as we would like.
OUR FUTURE SUCCESS IS DEPENDENT ON OUR SUCCESSFUL INTEGRATION OF THE ORBAN
OPERATIONS INTO OUR OWN.
We are in the process of integrating the operations of Orban with our
existing operations in order to achieve economies of scale, manufacturing and
marketing efficiencies, reduced operational expenses and cross-selling
opportunities. Although the combination of our operations with those of Orban
has produced substantial synergies, nevertheless this combination is ongoing and
continues to present significant management challenges. We cannot assure you
that this integration, and the synergies expected to result from that
integration, will be achieved to the extent initially anticipated. If
management is unable to completely and successfully integrate our operations
with those of Orban, we will not fully realize the benefits of integration noted
above, and our business, results of operations and financial condition could be
adversely affected.
WE SERVE A MARKET IN WHICH THERE ARE A LIMITED NUMBER OF CUSTOMERS AND OUR
FINANCIAL WELL-BEING IS DIRECTLY TIED TO THE FINANCIAL HEALTH OF THESE
CUSTOMERS.
In recent years, the radio and television industry in the United States has
experienced a great deal of consolidation of ownership. As a result, several
corporations each now own a substantial number of
18
radio and television stations. These corporations are the largest purchasers of
our audio processing and post-production equipment. Moreover, a significant
amount of our revenue is derived from audio processing replacement orders that
come from these customers. Our financial stability and well-being is thus
directly tied to the financial health of these customers. If these customers
experience financial difficulty, regardless of the cause, they may delay, reduce
or cancel orders for new audio processing or post-production equipment. If this
occurs, our results of operations could decline and we could experience
difficulty in servicing our debt obligations.
WE MUST ADAPT TO RAPID TECHNOLOGICAL CHANGE AND INCREASED COMPETITION IF WE ARE
GOING TO BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY.
While audio processing has been and will continue to be our core business,
we are using our existing technologies to enter the emerging markets of digital
audio broadcasting, cable television and Internet-related audio delivery. These
markets are characterized by rapid technological change and require a
significant commitment of capital and human resources. We intend to engage
continually in research and development activities so that we can improve our
current products and develop new products. However, our significant debt
obligations may limit the amount of resources, both capital and human, that we
can commit to research and development. This could jeopardize the success and
reception of our products in these emerging markets. In addition, because of the
rapid pace of change and the intense competition that characterizes these
markets, our products may become unmarketable or obsolete by a competitor's more
rapid introduction to the marketplace.
WE MAY NOT BE ABLE TO RETAIN OUR EXISTING PERSONNEL OR HIRE AND RETAIN THE
ADDITIONAL PERSONNEL THAT WE NEED TO SUSTAIN AND GROW OUR BUSINESS.
Our future success will depend on our ability to attract, retain and
motivate employees with the necessary skills and expertise required by our
business. Competition for employees who possess the technical expertise to
develop and manufacture our products is intense. A shortage in available
skilled labor could require us to increase our wages and benefits to attract
and retain enough employees. An increase in our labor costs, or our inability
to attract, retain and motivate employees, would likely harm our growth plans
and may adversely affect our business and results of operations.
WE DEPEND ON A NUMBER OF VENDORS TO SUPPLY US WITH COMPONENT PARTS THAT ARE
NECESSARY TO THE PRODUCTION OF OUR AUDIO PROCESSING AND POST-PRODUCTION
EQUIPMENT.
We rely on certain vendors to provide component parts for use in the
manufacturing of our audio processing and post-production equipment. As
technology improves, some of these parts have become obsolete and vendors have
discontinued their production of such parts. When this occurs, we must either
obtain these necessary parts from alternative sources, or design around these
parts so that we are able to continue producing our audio processing and
post-production equipment. If any of the component parts that we require become
unavailable and we are not able to design around these parts, we may not be able
to offer some of our products and our sales revenues may decline.
19
OUR PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD EXERCISES
SIGNIFICANT CONTROL OVER US.
Charles J. Brentlinger, our President, Chief Executive Officer and Chairman
of the Board, currently owns 820,318 shares of our common stock and holds
options to purchase approximately 1,365,005 additional shares. Based on a total
of 3,706,880 shares of our common stock issued and outstanding as of March 29,
2002, if Mr. Brentlinger exercises all of his options he will own of record and
beneficially approximately 43.1% of our issued and outstanding shares. This
means that Mr. Brentlinger exercises, and will continue to exercise, significant
control over the business and affairs of our company. Mr. Brentlinger's
exercise of this control may, in certain circumstances, deter or delay a merger,
tender offers, other possible takeover attempts or changes in our management
which may be favored by some or all of our minority shareholders.
WE DEPEND ON A FEW KEY MANAGEMENT PERSONS.
We are substantially dependent on the personal efforts and abilities of
Charles Jayson Brentlinger, our Chairman, President and Chief Executive Officer,
and Robert Orban, our Vice President and Chief Engineer. The loss of either of
these officers or our other key management persons could harm our business and
prospects for growth. As a result, we have obtained key man life insurance
policies on the lives of each of these officers. We also have employment
agreements with each of these officers which are more fully described elsewhere
in this report.
THE LOCATION OF OUR ORBAN DIVISION SUBJECTS US TO A NUMBER OF RISKS THAT ARE
BEYOND OUR CONTROL WHICH COULD RESULT IN PRODUCTION INTERRUPTIONS.
Our business depends on the efficient and uninterrupted production of our
audio processing equipment and other products. Our Orban division is currently
located in San Leandro, California, and we expect to maintain our operations at
this facility for the foreseeable future. While we have taken precautions
against production interruptions, interruptions could nevertheless result from
natural disasters such as earthquakes, fires or floods. In addition, the power
shortages which occur in California from time to time have resulted in planned
and unplanned power outages and increased energy costs which we may not be able
to pass on to our customers. Power outages, which last beyond our backup and
alternative power arrangements, could harm our customers and our business.
Finally, our location in the Silicon Valley corridor of California subjects us
to increased operating costs and labor shortages which could adversely affect
our production capabilities and result in reduced revenues.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND THE VALUE OF YOUR
INVESTMENT MAY DECLINE.
The volatility of the market price of our common stock may
cause wide fluctuations in the price of our common stock on the
OTC Bulletin Board. The market price of our common stock is
likely to be affected by:
* changes in general conditions in the economy or the financial markets;
* variations in our quarterly operating results;
* changes in financial estimates by securities analysts;
* other developments affecting us, our industry, customers or competitors;
* the operating and stock price performance of companies that investors
deem comparable to us; and
20
* the number of shares available for resale in the public markets under
applicable securities laws.
THE LIQUIDITY OF OUR COMMON STOCK COULD BE RESTRICTED BECAUSE OUR COMMON STOCK
FALLS WITHIN THE DEFINITION OF A PENNY STOCK.
Under the rules and regulations of the Securities and Exchange Commission
(SEC), as long as the trading price of our common stock on the OTC Bulletin
Board is less than $5 per share, our common stock will come within the
definition of a "penny stock." On April 1, 2002, the last sale price of our
common stock on the OTC Bulletin Board was $1.33 per share. Generally speaking,
the definition of a "penny stock" does not include stock that is traded on
Nasdaq or on a national securities exchange. Since our common stock is traded
on the OTC Bulletin Board, rather than on Nasdaq or a national securities
exchange, our common stock falls within the definition of a "penny stock"
while it is trading below $5 per share. As a result, the trading of our common
stock is subject to certain "penny stock" rules and regulations.
The SEC rules and regulations require that broker-dealers, prior to
effecting any transaction in a penny stock, satisfy certain disclosure and
procedural requirements with respect to the prospective customer. These
requirements include delivery to the customer of an SEC-prepared risk disclosure
schedule explaining the nature and risks of the penny stock market, disclosure
to the customer of the commissions payable to both the broker-dealer and any
other salesperson in connection with the transaction, and disclosure to the
customer of the current quotations for the stock to be purchased. In addition,
if the broker-dealer is the sole market maker, it must disclose this fact and
the broker-dealer's presumed control over the market. Finally, prior to
effecting any penny stock transaction, broker-dealers must make individualized
written suitability determinations and obtain a written agreement from customers
verifying the terms of the transaction. Subsequent to any sale of penny stock,
broker-dealers must send monthly statements disclosing recent price information
for the penny stock held in the customer's account and certain other information
relating to the limited market in penny stocks. These rules, regulations and
procedural requirements may restrict the ability of broker-dealers to sell our
common stock or discourage them from doing so. As a result, purchasers may find
it more difficult to dispose of, or to obtain accurate quotations for, our
common stock.
BECAUSE OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY, INFRINGEMENT ON OUR PROPRIETARY RIGHTS COULD LEAD TO COSTLY LITIGATION
AND DECREASED REVENUES.
Our copyrights, patents, trademarks, trade secrets and similar intellectual
property are critical to our success. To establish and protect our proprietary
rights, we rely on a combination of copyright, trademark, patent and trade
secret laws, confidentiality and non-disclosure agreements and contractual
provisions with employees and third parties, and license agreements with
consultants, vendors and customers. Despite such protections, there can be no
assurance that these steps will be adequate, that we will be able to secure
trademark registrations for all of our marks in the United States or other
countries or that third parties will not infringe upon or misappropriate our
copyrights, patents, trademarks and similar proprietary rights. In addition,
effective copyright, patent and trademark protection may be unenforceable or
limited in certain countries. In the future, litigation may be necessary to
enforce and protect our trade secrets, copyrights, patents and other
intellectual property rights. We may also be subject to litigation to defend
against claims of infringement of the rights of others or to determine the scope
and validity of the intellectual property rights of others. Any such litigation
could cause us to incur substantial expenses and would adversely affect our
financial condition.
21
ITEM 7. FINANCIAL STATEMENTS
INDEX
Page
----
Independent Auditors' Report .............................................. 23
Report of Independent Public Accounts ..................................... 24
Consolidated Balance Sheets - December 31, 2001 and 2000 .................. 27
Consolidated Statements of Operations -
For the Years Ended December 31, 2001 and 2000 ........................ 29
Consolidated Statements of Stockholder's Equity (Deficit) -
For the Years Ended December 31, 2001 and 2000 ........................ 30
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 2001 and 2000 ........................ 31
Notes to Financial Statements ............................................. 33
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Circuit Research Labs, Inc.
We have audited the accompanying consolidated balance sheet of Circuit Research
Labs, Inc. and Subsidiaries as of December 31, 2001 and the related consolidated
statement of operations, stockholders' equity (deficit) and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of Circuit Research Labs, Inc. and Subsidiaries as of
December 31, 2000 were audited by other auditors whose report dated April 16,
2001, (May 17, 2001 as to Note 4 and 10, and October 1, 2001 as to Note 11),
which expressed an unqualified opinion on those consolidated financial
statements with emphasis of matter paragraphs covering a restatement and
substantial doubt regarding the Company's ability to continue as a going
concern.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 2001 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit
Research Labs, Inc. and Subsidiaries as of December 31, 2001 and the results of
their operations and their cash flows for the year then ended in conformity with
U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 11, the
Company's deteriorating financial results and liquidity have caused it to
renegotiate certain loan agreements. These events and circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 11.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.
Altschuler, Melvoin and Glasser LLP
Los Angeles, California
March 29, 2002
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Circuit Research Labs, Inc.
Tempe, Arizona
We have audited the accompanying consolidated balance sheet of Circuit Research
Labs, Inc. and subsidiaries (the "Company") as of December 31, 2000
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 10, the accompanying 2000 financial statements have been
restated.
We have not audited any financial statements of the Company for any period
subsequent to December 31, 2000. However, as discussed in Note 11 to the
financial statements, effective October 1, 2001, the Company entered into an
amendment to its credit agreement whereby $8,500,000 of debt is due on demand,
or if no demand is sooner made, on the dates and in the amounts specified in the
related credit agreement. The Company is attempting to renegotiate the terms of
the loan agreement and also is seeking other sources of long-term financing.
The Company's inability to pay its demand notes should payment be demanded, its
difficulties in meeting its financing needs and its negative working capital
position created from these demand notes raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 11. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
April 16, 2001
(May 17, 2001 as to Notes 4 and 10)
(October 1, 2001 as to Note 11)
24
INDEPENDENT AUDITORS' CONSENT
We have issued our report dated March 29, 2002, accompanying the consolidated
financial statements included in the Annual Report of Circuit Research Labs,
Inc. on Form 10-KSB for the year ended December 31, 2001. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
Circuit Research Labs, Inc. on Form SB-2 (File No. 333-69712).
Altschuler, Melvoin & Glasser LLP
Los Angeles, California
April 15, 2002
25
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-69712 of Circuit Research Labs, Inc. on Form SB-2 of our report dated
April 16, 2001 (May 17, 2001 as to Notes 4 and 10 and October 1, 2001 as to
Note 11) (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the ability of Circuit Research Labs, Inc. to
continue as a going concern), appearing in this Annual Report on Form 10-KSB of
Circuit Research Labs, Inc. for the year ended December 31, 2001.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
April 16, 2002
26
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
2001 2000
--------- ---------
CURRENT ASSETS:
Cash $ 280,895 $ 272,203
Accounts receivable, trade, net of allowance
for doubtful accounts of $98,663 in 2001
and $14,955 in 2000 641,156 727,001
Inventories 2,828,198 3,258,683
Other current assets 93,861 177,662
--------- ---------
Total current assets 3,844,110 4,435,549
--------- ---------
PROPERTY, PLANT AND EQUIPMENT - Net 1,413,607 1,809,355
--------- ---------
OTHER ASSETS:
Goodwill, net of amortization of $1,672,907
in 2001 and $615,908 in 2000 5,734,180 6,774,984
Deferred acquisition costs 34,563 0
Other 41,399 39,000
--------- ---------
5,775,579 6,813,984
--------- ---------
TOTAL $11,067,859 $13,058,888
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,011,955 $ 836,965
Notes payable 8,583,588 0
Current portion of long-term debt 227,196 483,280
Accrued salaries and benefits 262,430 283,226
Accrued professional fees 48,672 100,198
Customer deposits 50,271 275,502
Due to stockholder 0 25,000
Other accrued expenses and liabilities 281,011 282,912
----------- -----------
Total current liabilities 10,465,123 2,287,083
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 485,410 8,738,466
----------- -----------
Total liabilities 10,950,533 11,025,549
----------- -----------
27
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000 - continued
2001 2000
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value -
authorized, 500,000 shares, None issued
Common stock, $.10 par value -
authorized, 20,000,000 shares 2,388,880
and 2,269,522 shares issued and
outstanding at December 31, 2001 and 2000 238,888 226,952
Additional paid-in capital 4,196,229 4,077,538
Accumulated deficit (4,317,791) (2,271,151)
----------- -----------
Total stockholders' equity 117,326 2,033,339
----------- -----------
TOTAL $11,067,859 $13,058,888
=========== ===========
See Notes to Consolidated Financial Statements.
28
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001 and 2000
2001 2000
----------- -----------
NET SALES $13,066,365 $ 7,259,910
COST OF GOODS SOLD 6,589,519 3,683,518
----------- -----------
Gross profit 6,476,846 3,576,392
----------- -----------
OPERATING EXPENSES
Selling, general and administrative 4,690,331 3,139,469
Research and development 1,408,208 1,052,496
Depreciation 329,752 267,581
Amortization 1,056,999 615,908
----------- -----------
Total operating expenses 7,485,290 5,075,454
----------- -----------
LOSS FROM OPERATIONS (1,008,444) (1,499,062)
----------- -----------
OTHER (INCOME) EXPENSE:
Sundry income (32,221) (18,170)
Interest expense 1,070,417 777,229
----------- -----------
Total other expense 1,038,196 759,059
----------- -----------
LOSS BEFORE INCOME TAXES (2,046,640) (2,258,121)
INCOME TAXES 0 0
----------- -----------
NET LOSS ($ 2,046,640) ($ 2,258,121)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED ($0.88) ($1.28)
======= =======
See Notes to Consolidated Financial Statements.
29
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2001 and 2000
Common
---------------------
Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- --------- ---------- ------------ ----------
Balance, January 1, 2000 1,195,364 $ 119,536 $1,577,706 $(13,030) $1,684,212
Issuance of common shares 1,074,158 107,416 1,449,832 1,557,248
Issuance of warrants 1,050,000 1,050,000
Net loss (2,258,121) (2,258,121)
--------- --------- ---------- ------------ ----------
Balance, December 31, 2000 2,269,522 226,952 4,077,538 (2,271,151) 2,033,339
Issuance of common shares 119,358 11,936 118,691 130,627
Net loss (2,046,640) (2,046,640)
--------- --------- ---------- ------------ ----------
Balance, December 31, 2001 2,388,880 $ 238,888 $4,196,229 $(4,317,791) $117,326
========= ========= ========== ============ ==========
See Notes to Consolidated Financial Statements.
30
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 and 2000
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net Loss ($2,046,640) ($2,258,121)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 1,477,258 883,489
Provision for uncollectable accounts 83,708
Provision for inventories reserve 532,815 (55,718)
Changes in assets and liabilities:
Accounts receivable 2,137 385,173
Inventories (40,840) 136,513
Other assets 89,529 256,974
Accounts payable, accrued expenses and deposits 55,439 997,594
------------ ------------
Net cash provided by operating activities 153,406 345,904
------------ ------------
INVESTING ACTIVITIES:
Purchase of net assets of Orban, Inc. (2,586,881)
Purchase of assets of Avocet Instruments, Inc. (8,350)
Proceeds from sale or maturity of securities 383,905
Capital expenditures (15,866) (32,316)
Deferred acquisition costs (34,563) 0
------------ ------------
Net cash used in investing activities (58,779) (2,235,292)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from debt issuance 430,341
Payments on stockholder advances 122,500
Principal payments on notes payable (6,488)
Principal payments on long-term debt (79,447) (11,095)
Proceeds from sale of common stock 1,557,248
------------ ------------
Net cash provided by (used in) financing
activities (85,935) 2,098,994
------------ ------------
NET INCREASE IN CASH 8,692 209,606
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 and 2000 - continued
2001 2000
------------ ------------
CASH AT BEGINNING OF YEAR 272,203 62,597
------------ ------------
CASH AT END OF YEAR $ 280,895 $ 272,203
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $1,041,084 $774,829
============ ============
Income Taxes $0 $0
============ ============
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Fair value of net assets acquired,
including goodwill $86,330 $12,640,096
Debt issued to seller (77,980) (8,500,000)
Fair values of warrants issued to seller (1,050,000)
Debt issued to stockholder (205,000)
Costs paid (298,215)
------------ ------------
$8,350 $2,586,881
============ ============
Conversion of stockholder loan to equity $97,500 $0
============ ============
Conversion of stockholder advance to equity $33,127 $0
============ ============
Conversion of accounts payable to notes payable
and long-term debt $179,903 $0
============ ============
See Notes to Consolidated Financial Statements.
32
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Circuit Research Labs, Inc. (the "Company" or "CRL") is an electronics company
developing, manufacturing and marketing high quality audio processing and
transmission encoding equipment for the radio, television and professional audio
markets worldwide.
Principles of Consolidation - The consolidated financial statements include the
accounts of Circuit Research Labs, Inc. and its wholly owned subsidiaries:
CRL Systems, Inc. ("CRL Systems") and CRL International, Inc. (collectively, the
"Company"). Significant intercompany accounts and transactions have been
eliminated in consolidation.
On May 31, 2000, CRL Systems acquired the net assets of Harman Acquisition Corp.
formerly known as Orban, Inc. ("Orban"), a wholly owned subsidiary of Harman
International Industries, Inc. ("Harman"). Including the $500,000
non-refundable deposit previously paid to Harman, the total stated purchase
price was $10.5 million, $2 million of which was paid in cash, the balance was
financed through a combination of short-term and long-term seller financing. In
addition to the stated purchase price, CRL issued to Harman warrants to purchase
1,000,000 shares of its common stock, immediately exercisable for $2.25 per
share. The warrants were valued at $1,050,000 at the time of the purchase to be
part of the total purchase price of $11,550,000. The Asset Sale Agreement
between CRL Systems and Harman contains a provision to allow Harman 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 Harman 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 Harman as liquidating damages. The note has since been
extended to April 30, 2002 with Harman retaining the option to rescind the
agreement. As part of the acquisition, CRL Systems purchased the rights to the
name "Orban" and operates a portion of its business under the "Orban" trade
name.
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
$7.1 million is being amortized over 7 years.
On May 31, 2001, CRL acquired the assets of Avocet Instruments, Inc., for
$82,980 plus other costs of $3,350. 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 $16,195 and is being amortized over 7 years.
The following unaudited pro-forma summary combines the consolidated results of
operations of the Company and Orban as if the acquisition had occurred on
January 1, 2000 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 the Company and Orban had been combined during such period.
Moreover, the pro-forma summary is not intended to be indicative of the results
of operations to be attained in the future.
33
2000
-----------
Net revenue $12,255,000
Net loss (1,647,000)
Net loss per common share (.93)
Significant accounting policies are as follows:
a. Inventories are stated at the lower of cost (first-in, first-out method) or
market.
b. Property, plant and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets ranging from 3 to 5 years for furniture,
fixtures, machinery and equipment, and 31.5 years for building and
improvements.
c. Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired, which is amortized on the straight-line basis over
7 years.
d. Deferred acquisition costs as of December 31, 2001 are related to a 2002
asset purchase. There were no costs deferred as of December 31, 2000.
e. Long-lived assets - In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company reviews
the carrying value of its long-lived assets and identifiable intangibles
for possible impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. For assets to
be disposed of, the Company reports long-lived assets and certain
identifiable intangibles at the lower of carrying amount or fair value
less cost to sell.
f. Revenue is recognized on sales of products when title transfers to
customers, which is generally at the time of shipment.
g. Research and development costs totalling $1,408,208 and $1,052,496 for the
years ended December 31, 2001 and 2000, respectively, are charged to
expense as incurred.
h. Income taxes - Income tax expense is calculated under the liability method
as required under SFAS No. 109, "Accounting for Income Taxes". Under the
liability method, deferred tax assets and liabilities are determined based
upon the differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities, and are measured at the tax
rates that will be in effect when these differences reverse. The benefit of
the Company's operating loss carryforwards has been reduced 100% by a
valuation allowance at December 31, 2001 and 2000.
i. Financial instruments - SFAS No. 107 "Disclosures About Fair Value of
Financial Instruments" requires disclosures of the estimated fair value of
certain financial instruments. The Company has estimated the fair value of
its financial instruments using available market data. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. The use of different market assumptions or
methodologies may have a material effect on the estimates of fair value.
The carrying values of cash, receivables, accounts payable and long-term
debt approximate fair values due to the short-term maturities or market
rates of interest of these instruments.
34
j. Net loss per share - In calculating net loss per share for the year ended
December 31, 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 net loss per share because the result would be
anti-dilutive. For the year ended December 31, 2000, the options and
warrants to purchase 1,026,500 and 1,708,158 shares respectively, of common
stock were not used in computing diluted net loss per share because the
result would be anti-dilutive. SFAS No. 128, "Earnings per Share"
establishes standards for computing and presenting net loss per share. It
also requires the dual presentation of basic and diluted net loss per share
on the face of the statement of operations. Net loss per share is
calculated as follows:
Year Ended
December 31,
-----------------------------
2001 2000
------------ ------------
Numerator
Net loss ($2,046,640) ($2,258,121)
Denominator
Weighted average shares 2,326,848 1,770,265
Basic and diluted net loss per share ($0.88) ($1.28)
k. New accounting pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS Nos. 141
and 142 ("SFAS 141" and "SFAS 142"), "Business Combinations" and "Goodwill
and Other Intangibles Assets". SFAS 141 replaces APB Opinion No. 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. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS 142, goodwill will be at least tested annually and
whenever events or circumstances occur indicating that goodwill might be
impaired. SFAS 141 and SFAS 142 are effective for all business combinations
initiated after June 30, 2001.
Upon adoption of SFAS 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 SFAS 141 will be reclassified to goodwill. Companies are
required to adopt SFAS 142 for fiscal years beginning after December 15,
2001. The Company will adopt SFAS 142 on January 1, 2002. In connection
with the adoption of SFAS 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
consolidated results of operations and financial position.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("SFAS 143)". SFAS 143 establishes accounting standards
for the recognition and measurement of an asset retirement obligation and
its associated asset cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets.
SFAS 143 is
35
effective in fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company plans to adopt SFAS 143 effective
January 1, 2003. The Company has not determined the effect of adopting
SFAS 143 on its consolidated results of operations or financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes a single accounting
model for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS 144 superseded Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The provisions of SFAS
144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively.
The Company plans to adopt SFAS 144 effective January 1, 2002 and has not
yet determined the impact, if any, this standard will have on its
consolidated results of operations and financial statements.
l. Use of estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
m. Reclassifications - Certain reclassifications have been made to the 2000
consolidated financial statements to conform to the classifications used in
2001 and have no effect on previously reported net loss.
36
2. INVENTORIES
Inventories consist of the following
at December 31: 2001 2000
---------- ----------
Raw materials and supplies $2,176,797 $2,062,872
Work in process 1,286,942 1,262,536
Finished goods 737,834 774,836
---------- ----------
Total 4,201,574 4,100,244
Less obsolescence reserve 1,373,376 841,561
---------- ----------
Inventories, net $2,828,198 $3,258,683
========== ==========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist
of the following at December 31: 2001 2000
---------- ----------
Land $130,869 $130,869
Building and improvements 879,660 874,697
Furniture and fixtures 90,393 90,393
Computer equipment 847,737 836,834
Machinery and equipment 1,141,896 1,135,395
---------- ----------
3,090,555 3,068,188
Less accumulated depreciation and amortization 1,676,948 1,258,833
---------- ----------
Property, plant and equipment - net $1,413,607 $1,809,355
========== ==========
Provision for depreciation and amortization charged to operations for the years
ended December 31, 2001 and 2000 amounted to $420,259 and $549,768,
respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2001:
2001 2000
---------- ----------
Orban, Inc. Tranche A Note $0 $5,000,000
Orban, Inc. Tranche B Note 3,500,000
Notes to stockholder 178,905 291,359
Avocet Instruments, Inc. 55,104
Mortgage note 349,082 362,000
Vendor notes 86,629
Employee note 42,886 68,387
---------- ----------
Total long-term debt 712,606 9,221,746
Less current portion 227,196 483,280
---------- ----------
Total long-term debt, less current portion $485,410 $8,738,466
========== ==========
37
On May 31, 2000, CRL Systems, Inc. and Harman Acquisition Corp. (formerly known
as Orban, Inc.) entered into a Credit Agreement to establish the terms and
conditions of the $8,500,0000 loan from Harman to CRL Systems. The agreement
was executed in conjunction with the Asset Sale Agreement between Harman and CRL
Systems, Inc.(see note 1) 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 received several payment extensions on the Tranche A and B Notes.
First, in exchange for $150,000 cash and an increase in the interest rate to 12
percent per annum for both the Tranche A and Tranche B Notes, Harman 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.
Also, the first principal payment on the Tranche A Note of $250,000, originally
due March 31, 2001, was extended to April 30, 2002 with the remaining quarterly
principal payments deferred to March 31, 2003. Interest only payments are
payable monthly for both notes. The Asset Sale Agreement between CRL Systems
and Harman contains a provision to allow Harman to rescind the transaction if,
as of November 30, 2000, CRL Systems had not paid in full the $3.5 million
Tranche B Note. If Harman 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 Harman as liquidating damages.
On October 1, 2001, the Company and Harman entered into an Amendment to the
Credit Agreement (the "Amended Credit Agreement") under which both Notes were
amended and restated. Under the Amended Credit Agreement, both Notes were
converted to demand notes payable. Interest is paid monthly at 12 percent per
annum. Additionally, $1,250,000 is due April 30, 2002, unless Harman demands
payment at an earlier date.
In consideration for arranging the purchase financing of Orban, the Company
incurred fees of $97,500 to a stockholder, 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 May 14, 2001 and
accrued interest of 7.5 percent per annum. On August 11, 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 stockholder in consideration for his role in
such acquisition. 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 some principal. On November 12, 2001, the
Company amended the agreement whereby the Company and the stockholder verbally
agreed to defer the payments to January 2002 with interest accruing at the rate
of 7.5% per annum.
38
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, with the full principal balance due on
November 30, 2000. Prior to the December 2000 extended maturity date, the
Company refinanced the unpaid balance and entered into two new mortgage
agreements for $300,000 and $62,000, respectively. 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, the Company agreed to make
12 monthly installments of principal and interest over a one-year period
commencing September 1, 2001. As part of the agreement, the note will continue
to bear interest at 12 percent per annum, but will be compounded monthly.
On May 31, 2001, CRL acquired the assets of Avocet Instruments, Inc., for
$82,980 plus other costs of $3,350. 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 $16,195 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 the terms and conditions of the
purchase price. The loan is evidenced by an agreement whereby the Company will
pay the Sellers $25,000 interest-free, paid $5,000 on the Closing Date, and
$5,000 in each of the following four months. Thereafter, the balance ($57,980)
is being paid in monthly installments of $1,200, including interest at the rate
of five percent per annum for 54 months.
In the fourth quarter of 2001, the Company converted various trade
payables into notes payable and long-term debt totaling $179,903, of which
$90,076 was short-term debt and $89,827 was long-term debt. Principal payments
totaling $9,686 were made during 2001.
Future minimum payments as of December 31, 2001 on the long-term debt are as
follows:
2002 $227,196
2003 103,450
2004 67,100
2005 36,526
2006 278,334
Thereafter 0
--------
$712,606
========
39
5. STOCKHOLDERS' EQUITY
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
stockholders of record as of the close of business on July 31, 2000. All share
and per share amounts included in the accompanying consolidated financial
statements have been retroactively adjusted to give effect to the stock
dividend.
During the second and third quarters of 2000, the Company sold in a private
placement, for $1.50 per share, 708,158 units of common stock and warrants under
a subscription agreement (the "Subscription Agreement") with accredited
investors. Under the Subscription Agreement, each unit consists of one share of
the Company's common stock and one warrant (the "Class A Warrants") to purchase
at an exercise price of $1.75 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 $2.00 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 $2.25 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 $2.50 per share one share of Company's common
stock. As of December 31, 2001 and 2000, none of the warrants had been
exercised.
On November 15, 2001, the Company extended the time in which the Class A
Warrants may be exercised by adding 10 days on to the sixty-day period following
the registration of the shares issuable. Subsequently, on January 23, 2002, the
Company extended the exercise date for the Class A Warrants to February 23, 2002
while lowering the strike price from $1.75 to $1.00.
On March 22, 2001, the Company issued 26,500 shares of common stock to Charles
Jayson Brentlinger Brentlinger, its President, for converting part of the
existing stockholder payable at the share price of $1.25 offered to
Mr. Brentlinger in accordance to the June 23,1999 Stock Purchase Agreement.
On August 10, 2001, the Company issued to Glenn Serafin 92,858 shares of
restricted common stock for converting one of his existing notes to equity at
the market price of $1.05 per share.
On January 18, 2002, the Company issued 1,250,000 shares of restricted common
stock and a note payable in the amount of $750,000 to Dialog4 System Engineering
GmbH pursuant to an asset sale and purchase agreement.
40
6. STOCK OPTIONS
In May 1994, the Company's stockholders approved the Company's 1994 Stock Option
Plan, which set aside an aggregate of 120,000 shares of common stock for which
options may be granted to employees, officers, directors, and consultants.
Options are typically exercisable upon the grant date for up to three years at a
price equal to 100% of the fair market value at the date of grant. There are no
options outstanding under this plan at December 31, 2001 and 2000.
In September 1999, the Company entered into two stock agreements with its
President, Charles Jayson Brentlinger. The first, pursuant to the terms of a
Stock Purchase Agreement, required the President to purchase 342,500 shares of
the Company's common stock at $1.25 per share within 1 year. Prior to such
date, he purchased 160,000 shares under the agreement. On October 20, 2000, the
purchase date was extended to December 31, 2000. As of December 31, 2000 he
remained obligated to purchase 26,500 shares on or before December 31, 2000 for
a total price of $33,125. In consideration of the cash advances received from
the President to the Company, the Board of Directors issued a resolution
extending the terms of the stock purchase agreement to February 8, 2001 and
subsequently Mr. Brentlinger fulfilled his remaining obligation.
The second agreement with the President was a grant of stock options, which
vested immediately, to purchase 1,000,000 shares over the next 5 years for $1.25
per share. No options have been exercised under this grant. Mr. Brentlinger
has committed to exercise his options, if necessary, in order to satisfy the
Company's debt payments, if operating cash flows are inadequate.
41
7. INCOME TAXES
The principal reasons for the difference between the income tax
benefit provision and the amounts computed by applying the
statutory income tax rates to the loss for the years ended
December 31, are as follows:
2001 2000
----------- -----------
Federal tax at statutory rates ($695,900) ($767,800)
State tax at statutory rates (122,800) (135,500)
Permanent items 16,900 0
Other (10,300) 0
Increase in valuation allowance 812,100 903,300
----------- -----------
Total $ 0 $ 0
=========== ===========
At December 31, deferred taxes represent the tax effect of temporary differences
related to:
2001 2000
----------- -----------
Current deferred taxes:
Inventory capitalization $ 113,100 $ 138,400
Prepaid expenses 0 (4,800)
Inventory obsolescence reserve 549,400 336,200
Allowance for doubtful accounts 39,500 6,100
Warranty and other reserves 81,100 54,000
Accrued expenses 58,900 45,300
Deferred tax valuation allowance (842,000) (575,200)
----------- -----------
Total $ 0 $ 0
=========== ===========
Non-current deferred taxes:
Goodwill amortization $ 357,100 $ 131,500
Depreciation and amortization (101,300) (61,200)
Operating loss carry forward 1,315,800 956,000
Federal general business credit
carry forward 65,400 65,400
Deferred tax valuation allowance (1,637,000) (1,091,700)
----------- -----------
Total $ 0 $ 0
=========== ===========
At December 31, 2001 and 2000, valuation allowances totaling $2,479,000 and
$1,666,900, respectively, were recorded which related to, among other items,
federal and state net operating losses and federal general business credit carry
forwards for which the utilization is not reasonably assured. Net operating
loss carryforwards of approximately $3,014,000, which expire through 2021, are
available for federal income tax purposes.
42
8. SEGMENT REPORTING, SALES TO MAJOR CUSTOMERS AND EXPORT SALES
The Company manufactures and distributes audio processing and Radio and TV
studio equipment. The Company's primary end user market is radio and TV
stations and also the internet market. The chief operating decision makers are
provided information about revenue generated by product line, with all products
having similar production processes, customers and distribution channels. The
Company's long-lived assets are all located in the United States. Accordingly,
the Company operates in one segment.
Sales for the years ended December 31, 2001 and 2000 were conducted primarily
through wholesale distributors and dealers. In 2001, approximately 19% of the
net sales where generated from one customer while in 2000 approximately 33% of
the net sales where generated from the same customer.
International sales in 2001 and 2000 totaled $6,702,430 and
$3,148,018, respectively. International sales are made through the Company's
wholly-owned foreign sales corporation, CRL International, Inc. The Company
requires that all export sales be paid in U.S. currency. Accordingly, there are
no foreign currency gains or losses for the years ended December 31, 2001 and
2000.
The Company's export sales by region are as follows:
Region 2001 % 2000 %
----------------------- ---------- ---- ---------- ----
Europe $2,676,880 40% $1,679,659 53%
Pacific Rim 2,217,607 33 731,994 23
Latin and South America 712,026 11 527,618 17
Canada and Mexico 908,442 13 179,339 6
Other 187,475 3 27,408 1
---------- ---- ---------- ----
Total $6,702,430 100% $3,148,018 100%
========== ==== ========== ====
9. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) profit sharing plan (the "Plan") for the benefit
of all employees who meet certain eligibility requirements. The Company matches
50% of employee contributions up to a maximum contribution by the Company of 3%
of a participant's annual compensation. Total annual contributions to a
participant's account may not exceed 25% of compensation. Company contributions
made to the Plan were $74,261 and $35,063 in 2001 and 2000, respectively.
On August 24, 2001, the Company's Board of Directors approved a monthly employee
stock purchase plan to be effective September 1, 2001. The plan is offered to
substantially all employees, including officers. Employees may purchase the
Company's common stock through payroll deductions not exceeding $250 per week.
A non-affiliated dealer on the open market purchases shares at the market price.
During 2001, the plan had 10 participants and purchased 4,861 shares of the
Company's common stock.
43
10. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company maintains its principal offices and warehouse in
leased facilities in San Leandro, California, under an operating lease which
expires on December 31, 2006. The lease agreement provides for minimum monthly
rental payments ranging from $27,022 to $31,612. The Company is also responsible
for the payments of (i) common area operating expenses (as defined),
(ii) utilities, and (iii) taxes.
Future minimum lease payments relating to the above operating leases at December
31, 2001 are as follows:
December 31, Amount
------------ ----------
2002 $324,264
2003 337,224
2004 350,724
2005 364,752
2006 379,344
----------
Total $1,756,308
==========
Rent expense amounted to $374,489 (net of sublease rental income of $83,000) and
$194,223 for the years ended December 31, 2001 and 2000, respectively.
11. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred losses of $2,046,640 and
$2,258,121 during the years ended December 31, 2001 and 2000, respectively. The
Company's deteriorating financial results and reduced liquidity have caused it
to renegotiate its loan agreement with Harman. Under the terms of the new
agreement, Harman could demand at any time that the Company immediately pay in
full the outstanding balance under the agreement. Should this happen, the
Company would be forced to immediately file for protection under Chapter 11 of
the United States Bankruptcy Code (Chapter 11). In addition, Harman can rescind
the purchase agreement. If Harman exercises its option, the Company's operations
would be significantly impacted.
The Company's deteriorating financial results and lack of liquidity indicate
that the Company may not be able to continue as a going concern for a reasonable
period of time. The Company's ability to continue as a going concern is
dependent upon several factors, including, but not limited to, (i) the ability
to generate sufficient cash flows to meet its obligations, (ii) obtain
additional or restructure financing, (iii) continue to obtain uninterrupted
supplies from vendors, and (iv) reduce capital expenditures and operating
expenses.
The Company is considering alternatives to raise additional capital and improve
liquidity. However, there can be no assurance that the Company's efforts to
raise adequate liquidity will be timely or successful. The accompanying
consolidated financial statements do not include any adjustments relating to the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that might be necessary should the
Company file for protection under Chapter 11 and/or be unable to continue as a
going concern.
44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 19, 2001, our Board of Directors approved a recommendation from its
Audit Committee that the Company's independent public accounting firm, Deloitte
& Touche LLP, be dismissed and that the independent public accounting firm of
Altschuler, Melvoin and Glasser LLP be engaged, effective as of June 26, 2001,
to audit the Company's consolidated financial statements for the year ending
December 31, 2001.
The Audit Committee was formed in August 1985 and is responsible for
recommending selection of the Company's independent public accountants. The
Audit Committee solicited proposals to render accounting and tax services to the
Company from several independent public accounting firms.
During the two most recent fiscal years, there were no disagreements
between the Company and Deloitte & Touche on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Deloitte & Touche, would have
caused them to make reference thereto in connection with their reports.
The consolidated financial statements of Circuit Research Labs, Inc. and
Subsidiaries as of December 31, 2000 that were audited by Deloitte & Touche LLP
and whose report dated April 16, 2001, (May 17, 2001 as to note 4 and 10, and
October 1, 2001 as to note 11), which expressed an unqualified opinion on those
consolidated financial statements with an emphasis paragraph covering a
restatement and substantial doubt regarding the Company's ability to continue as
a going concern. No report of Deloitte & Touche LLP on the statements for
either the past two years contained an adverse or qualified opinion or
disclaimer of opinion, audit scope or accounting principals.
45
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our directors, executive officers and key employees, and their ages as of
March 29, 2002 are:
Name Age Positions
-------------------------- --- ------------------------------------
Charles Jayson Brentlinger 47 Chief Executive Officer, Chairman of
the Board and President
Berthold F. Burkhardtsmaier 45 Director and Vice President of
European Operations
Gary D. Clarkson 49 Secretary, Vice President, General
Manager and Director
Robert A. Orban 56 Vice President, Chief Engineer and
Director
Carl E. Matthusen 58 Director
Phillip T. Zeni, Sr. 60 Director
Robert W. McMartin 39 Vice President, Treasurer and Chief
Financial Officer
Greg J. Ogonowski 46 Vice President of New Product
Development
William R. Devitt 57 Vice President of Manufacturing and
Production
Directors
Charles Jayson Brentlinger has served as our President, Chief Executive
Officer and a director since June 1999, and as our Chairman of the Board since
October 1999. He was formerly the President and owner of Rainbow Broadcasting
Inc. and Brentlinger Broadcasting, Inc. In May 2000, Mr. Brentlinger sold all of
his broadcast ownership interests to his family. Mr. Brentlinger has over 27
years of experience in the radio industry. He has worked as a broadcast
consultant for nearly every radio station in the Phoenix area. Mr. Brentlinger
formed his own broadcast engineering firm in 1986. Some of his many clients
have included Scripps Howard Broadcasting, Adams Radio Communications
Corporation, Adams Satellite/ABC, Transtar Radio Network, Pulitzer Broadcasting
Phoenix, Duchossois Communications Corporation, Sundance Communications
Corporation, Arizona Radio and Television Corporation, Cook Inlet Corporation,
First Media Corporation, Duffey II Corporation and TransCOM/Transcolumbia
Corporation. Mr. Brentlinger attended DeVry Institute of Technology and the
University of Arkansas at Little Rock. He is a member of the Society of
Broadcast Engineers and National Association of Broadcasters. He holds a FCC
General Radiotelephone license, valid for life.
Berthold F. Burkhardtsmaier has served as our Vice President of European
Operations and a director since January 2002. In 1992, he founded Dialog4 System
Engineering GmbH in Ludwigsburg,
46
Germany and served as its Managing Director for 10 years. During this time, he
introduced the "MusicTAXI" and "Soundtainer" product lines, established a
world-wide product distribution network and received ISO-9001 certification in
1998. From 1989 to 1992, he was employed by Shure Bros., Inc. to establish their
European Subsidiary in Heilbronn, Germany and serve as its Managing Director.
From 1986 to 1989, he was employed by Harman Deutschland in Germany as a product
manager for the JBL and Shure product lines and was responsible for establishing
new market segments in cinema, professional sound reinforcement and industrial
sound. In 1986, Mr. Burkhardtsmaier received a masters degree in
electromechanical engineering from the Technical University in Munich, Germany
where he specialized in acoustics and communication systems.
Gary D. Clarkson is one of our founders and has served as our Vice
President and General Manager since August 2000, our Secretary since October
1999 and as a director since our incorporation in 1978. He also served as our
Treasurer from August 2000 to June 2001. Following the death of our other
founder, Mr. Ronald R. Jones, Mr. Clarkson served as our Chief Executive
Officer, President and Chairman from January 1998 to June 1999. Mr. Clarkson
began his broadcasting career by serving in assistant and chief engineering
positions at several Phoenix area radio stations from 1971 until 1978. Since
our founding in 1974, Mr. Clarkson has devoted substantially all of his business
efforts to our business and served as our design engineer from 1974 to 1998.
Mr. Clarkson holds an associate degree in electronics engineering technology
from DeVry Institute of Technology, Phoenix, Arizona.
Robert A. Orban has served as a Vice President since June 2001 and director
since May 2000. In 1975, he co-founded Orban Associates, Inc. with his late
business partner, Mr. John Delantoni. Since that time, Mr. Orban has served as
Chief Engineer for Orban Associates (and its successor, Orban, Inc.) where he
has concentrated on the theoretical support for and subjective tuning of that
company's products. In 1975, he introduced Orban Associates' standard-setting
OPTIMOD line of audio processors, including the OPTIMOD-FM processors which are
among the most widely used FM processors in the world. Mr. Orban is the holder
of 25 patents, and he has been widely published in such publications as the
Journal of the Audio Engineering Society and the NAB Engineering Handbook.
In 1993, Mr. Orban shared (with Dolby Labs) a Scientific and Technical Award
from the Academy of Motion Picture Arts and Sciences, and in 1995 he received
the Radio Engineering Achievement Award from the National Association of
Broadcasters. Mr. Orban received a B.S. in Electrical Engineering from
Princeton University in 1967 and an M.S. in Electrical Engineering from Stanford
University in 1968.
Carl E. Matthusen has served as a director since February 1988.
Mr. Matthusen began his career in the broadcast industry in 1963 serving in
various capacities at seven radio broadcast stations in Arizona, Wisconsin,
Minnesota and Virginia. Since 1978, he has been General Manager of KJZZ-FM,
KBAQ-FM and Sun Sounds Radio Reading Service operated by Rio Salado College in
Mesa, Arizona. Mr. Matthusen served on the board of directors of National
Public Radio from 1990 to 1996, and was chairman of the board from 1992 to 1996.
Since 1999, Mr. Matthusen has served as a member of the board of the
International Association of Audio Information Services.
Phillip T. Zeni, Sr. has served as a director since May 2000. Mr. Zeni's
professional and business career spans more than three decades and includes
ownership and senior management positions in consulting, publishing and
broadcasting. Since 1993, he has served as President of Transcontinental
Publishing, Inc., a publishing house specializing in international and regional
trade publications for the construction industry. Mr. Zeni is also Executive
Vice President of Palmieri USA, an importer and distributor of construction
equipment, and the owner and Managing Director of PhysicianNet.com, a
six-year-old Web site that serves the medical community. Previously, Mr. Zeni
served as managing partner of a Dallas-based group of broadcasting stations and
as Director of Business Development for NBC Radio and Westinghouse-Group "W"
Broadcasting in Chicago. He has also served as a Vice President
47
of Multimedia Communications, and as general manager of two of that company's
major broadcasting properties in the South. Mr. Zeni has presented seminars for
the National Association of Broadcasters and the Radio Advertising Bureau.
Mr. Zeni holds a B.A. from the University of Illinois. He has served as an
adjunct professor at the University of Arkansas at Little Rock and at Millikin
University in Decatur, Illinois. Mr. Zeni has also guest lectured at the
University of Wisconsin, Michigan State University, the University of Illinois
and Arkansas State University. Mr. Zeni has been active in a wide range of
charitable, civic and social organizations throughout his career. His time in
public service included serving on the staff of Illinois Governor Richard
Ogilvie, followed by two White House assignments during the Ford and Carter
administrations. Currently, Mr. Zeni serves as President and on the board of
directors of the University Club of Phoenix.
Executive Officers
Robert McMartin has served as our Treasurer since January 2002, and as our
Vice President and Chief Financial Officer since June 2001. Prior to joining
us, Mr. McMartin served as the Chief Financial Officer of IMSure Network, Inc.,
a technology company providing eCommerce Internet technology products, from
March to December 2000. From November 1999 to March 2000, Mr. McMartin served
as the Director of Finance of Fox Animation Studios, Inc. in Phoenix, Arizona.
Prior to that time, he was Corporate Controller of Trapeze Software Group, Inc.,
a software solutions manufacturer and developer, from April 1998 to November
1999. Mr. McMartin was employed as a staff accountant for Cotton Parker Johnson,
L.L.P. from June 1998 to October 1998, and held a similar position with The
O'Connor Group, P.C. from November 1997 to May 1998. From 1992 to 1995, Mr.
McMartin served as Senior Financial Analyst for Blackwell Financial, Inc., a
capital investment firm. Mr. McMartin holds a B.S. in Finance from Westminster
College and a Post Baccalaureate Certificate in Accountancy from Arizona State
University.
Greg J. Ogonowski has served as our Vice President of New Product
Development since October 2000. In 1975, Mr. Ogonowski founded Gregg
Laboratories, an audio processing equipment manufacturing company. From 1998 to
October 2000, Mr. Ogonowski served as Technical Director for KBIG/KLAC in Los
Angeles, California, where he designed and installed a computer network and
digital audio delivery system that resulted in KBIG/KLAC being one of the first
radio stations to directly stream audio to the Internet with internal encoders
and servers. Mr. Ogonowski has also been directly responsible for other
technical facilities at many major market radio stations, including stations in
Detroit, Dallas and Seattle. As technical director for KTNQ/KLVE, Heftel
Broadcasting, Los Angeles, from 1985 to 1991, Mr. Ogonowski relocated studio
facilities and constructed a new efficient alternative use AM transmission
facility. In 1984, Mr. Ogonowski founded Modulation Index, a broadcast
engineering consulting company. He has conducted studies on broadcast
modulation measurement instrumentation and FM modulators, including STLs and
exciters. As a result of these studies, Mr. Ogonowski has developed
modifications for popular monitors, STLs and exciters to improve their dynamic
transient accuracy and competitiveness. A technical paper was presented before
the National Association of Broadcasters regarding these findings.
William R. Devitt has served as our Vice President of Manufacturing and
Production since January 2001. Mr. Devitt began his career at Orban, Inc. in
1991 when he became Technical Services Manager. In this capacity, Mr. Devitt
developed service and technical support operations, setup administration,
technical staff policies and procedures. In 1996, his responsibilities were
expanded to include product engineering for manufacturing of new and existing
products. In February 2000, Mr. Devitt became Director of Manufacturing. His
duties were expanded to include administration of all manufacturing operations,
design services, materials and production.
48
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission ("SEC") initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Such reports are filed on Form 3,
Form 4, and Form 5 under the Exchange Act. Directors, executive officers and
greater-than-10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 3, 4, or 5
were required for those persons, the Company believes that all directors,
executive officers, and greater-than-10% beneficial owners have complied with
all Section 16(a) filing requirements applicable to such persons or entities
during the 2001 fiscal year with the exception of the following:
(1) James J. Seemiller, the Company's former Vice President of Sales, Marketing
and New Business Development who was elected to that position on August 25,
2000, failed to file his Form 3 until October 11, 2001; Mr. Seemiller had no
transactions or holdings to report on such Form 3; (2) Carl E. Matthusen, who
was elected to the Company's board of directors on February 8, 1988, failed
to file his Form 3 until February 11, 2002; Mr. Matthusen had no transactions or
holdings to report on such Form 3; (3) Phillip T. Zeni, Sr., who was elected to
the Company's board of directors on May 23, 2000, failed to file his Form 3
until February 11, 2002; Mr. Zeni had no transactions or holdings to report on
such Form 3; (4) Robert A. Orban, who was elected to the Company's board of
directors on May 23, 2000 and who filed his initial Form 3 on April 10, 2001,
filed an amendment to his Form 3 on March 25, 2002 to report the acquisition of
warrants to purchase shares of the Company's common stock on May 23, 2000;
(5) Greg J. Ogonowski, who became the Company's Vice President of New Product
Development on November 13, 2000 and who filed his initial Form 3 on April 13,
2001, filed an amendment to his Form 3 on March 25, 2002 to report the
acquisition of warrants to purchase shares of the Company's common stock on
May 23, 2000; (6) Robert W. McMartin, who became the Company's Vice President
and Chief Financial Officer on June 19, 2001, failed to file his Form 3 until
October 15, 2001; Mr. McMartin had no transactions or holdings to report on such
Form 3; and (7) William R. Devitt, who became the Company's Vice President of
Manufacturing and Production on January 15, 2001, failed to file his Form 3
until November 5, 2001; Mr. Devitt had no transactions or holdings to report on
such Form 3.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and
long-term compensation paid or accrued to the Chief Executive Officer and the
four highest compensated executive officers whose salary and bonus exceeded
$100,000 during 2001.
49
Summary Compensation Table
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary Bonus Options (#)(1) Compensation
- --------------------------- ---- ----------- --------- -------------- ------------
Charles Jayson Brentlinger 2001 $169,739 - 1,365,005(2) -
President, Chief Executive 2000 125,000 - - -
Officer and Chairman 1999 49,846(3) $2,884(4) 1,000,000(5) -
of the Board
Robert A. Orban 2001 $178,093 - - -
Vice President and 2000 93,910(6) - - -
Chief Engineer
Greg J. Ogonowski 2001 $149,627 - - -
Vice President of New 2000 17,308(7) - - -
Product Development
James Seemiller 2001 $114,746(8) - - $25,000(9)
Vice President of 2000 33,646(10) - - 8,000(9)
Sales, Marketing and
New Business Development
(1) On July 7, 2000, the Board of Directors declared a one hundred percent
stock dividend effective as of August 15, 2000, payable to record holders
of our common stock as of July 31, 2000. The number of shares of our
common stock underlying options reflects this stock dividend.
(2) Represents options received by Mr. Brentlinger pursuant to the Stock
Purchase Agreement (see Footnote 5 below) and options received after giving
effect to the anti-dilution provisions of the Stock Purchase Agreement.
For a discussion of the anti-dilution provisions, see Item 12 Certain
Relationships and Related Transactions - Transactions with Management.
(3) Represents Mr. Brentlinger's compensation from June 28, 1999 to
December 31, 1999.
(4) Represents bonus for vacation and sick time not used during the calendar
year. Prior to October 8, 2001, it was our policy to pay any employee who
had not used all of his or her vacation time by the end of the calendar
year the unused portion in January of the following year. It was also our
policy to pay any employee who had used less than three days of sick time
by the end of the calendar year the unused portion in January of the
following year.
(5) On June 23, 1999, we entered into a Stock Purchase Agreement with Mr.
Brentlinger. Pursuant to the Stock Purchase Agreement, Mr. Brentlinger
received a five-year option to purchase 1,000,000 shares for $1.25 per
share. This option expires on September 30, 2004. No options have been
exercised under this grant.
(6) Represents Mr. Orban's compensation from May 31, 2000 to December 31, 2000.
(7) Represents Mr. Ogonowski's compensation from November 13, 2000 to
December 31, 2000.
50
(8) Mr. Seemiller's employment with the Company terminated effective as of
January 31, 2002.
(9) Represents consulting fees paid to ATB Broadcasting Corporation, a labor
management consulting company of which Mr. Seemiller is the owner and
President. See "Employment Contracts" below for additional details with
respect to the Company's consulting agreement with ATB Broadcasting
Corporation.
(10) Represents Mr. Seemiller's compensation from September 1, 2000 to
December 31, 2000.
Compensation of Directors
We pay our directors (other than directors who are also employees) for
their service. Each director receives $100 for each board meeting and committee
meeting attended, either in person or by telephone. During the year ended
December 31, 2001, outside directors were paid a total of $1,500 for attendance
at board meetings.
Employment Contracts
We have an employment agreement with our President, Chief Executive Officer
and Chairman of the Board, Charles Jayson Brentlinger. This agreement commenced
on January 1, 2002, and continues through May 31, 2005 unless earlier terminated
by the Company for cause. The agreement will continue in effect after May 31,
2005 unless earlier terminated by either party. Pursuant to the agreement, Mr.
Brentlinger will serve on a full-time basis as our President and Chief Executive
Officer. The agreement provides that Mr. Brentlinger will receive an annual
base salary of not less than $175,000. The agreement includes provisions
relating to other customary employee benefits and the confidentiality of our
proprietary information.
We have an employment agreement with our Vice President and Chief Engineer,
Robert A. Orban. The agreement is dated as of May 31, 2000, and has a five-year
term, unless otherwise earlier terminated by either party. Pursuant to this
agreement, Mr. Orban is employed on a full-time basis as Chief Engineer of our
wholly owned subsidiary, CRL Systems, Inc. doing business as Orban. The
agreement provides that Mr. Orban will receive an annual base salary of
$178,560, subject to increase annually based upon changes in the consumer price
index. Mr. Orban may also receive an annual bonus based on the net sales of
Orban products. The agreement includes provisions relating to other customary
employee benefits, the confidentiality of our proprietary information and Mr.
Orban's assignment to Circuit Research Labs, Inc. of inventions conceived or
developed by Mr. Orban during the term of the agreement.
We have an employment agreement with Greg J. Ogonowski, our Vice President
of New Product Development. This agreement commenced on January 1, 2002 and
continues through May 31, 2005 unless earlier terminated by the Company for
cause. The agreement will continue in effect after May 31, 2005 unless earlier
terminated by either party. Pursuant to this agreement, Mr. Ogonowski will
serve on a full-time basis as our Vice President of New Product Development.
The agreement provides that Mr. Ogonowski will receive an annual base salary of
not less than $150,000. The agreement includes provisions relating to other
customary employee benefits and the confidentiality of our proprietary
information.
51
We had a one-year employment and consulting agreement with James Seemiller
and ATB Broadcasting Corporation, a labor management consulting company of which
Mr. Seemiller is the owner and President. The agreement, which was dated as of
March 9, 2001, was terminated effective as of January 31, 2002. Pursuant to the
agreement, Mr. Seemiller served as our Chief Financial Officer and Vice
President of Sales, Marketing and New Business Development at an annual base
salary of approximately $111,000. Additionally, the agreement provided for the
payment of annual consulting fees of approximately $24,000 to ATB Broadcasting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of March 29, 2002, for each of
our directors and named executive officers, all directors and executive officers
as a group and each person known by us to be the beneficial owner of more than
five percent of our common stock.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each shareholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the shareholder. Shares of common stock
subject to options and warrants that are exercisable or exercisable within 60
days of March 29, 2002 are considered outstanding and beneficially owned by the
person holding the options or warrants for the purpose of computing the
percentage ownership of that person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
Number of
Shares Percent
Beneficially of
Name of Beneficial Owner Title of Class Owned(1) Class(2)
- --------------------------------- -------------- --------- ------
Directors and Executive Officers:
Charles Jayson Brentlinger(3)(4) Common Stock 3,435,323 67.7%
Berthold Burkhardtsmaier(5) Common Stock 1,250,000 33.7%
Gary D. Clarkson(6) Common Stock 50,338 1.3%
Robert A. Orban(6) Common Stock 66,600 1.8%
Carl E. Matthusen(6) Common Stock 50,000 1.3%
Phillip T. Zeni, Sr.(6) Common Stock 50,000 1.3%
William R. Devitt Common Stock 135 *
Robert McMartin Common Stock 677 *
Greg J. Ogonowski Common Stock 6,666 *
All directors and executive
officers as a group (9 persons) Common Stock 3,659,739 69.4%
5% Holders:
Glenn W. Serafin(7) Common Stock 207,858 5.61%
Dialog4 System Engineering GmbH(5) Common Stock 1,250,000 33.7%
Cornelia Burkhardtsmaier(5) Common Stock 1,250,000 33.7%
Friedrich Maier(5) Common Stock 1,250,000 33.7%
Harman Acquisition Corporation(8) Common Stock 1,279,775 25.6%
52
Unless otherwise noted, the address of each person named in the
table is 2522 West Geneva Drive, Tempe, Arizona 85282.
* Less than 1%.
(1) On July 7, 2000, our Board of Directors declared a one hundred percent
stock dividend effective as of August 15, 2000, payable to record holders
of our common stock as of July 31, 2000. The number of shares of our
common stock beneficially owned by each shareholder listed reflects this
stock dividend. The inclusion herein of any shares of common stock does
not constitute an admission of beneficial ownership of such shares, but are
included in accordance with rules of the Securities and Exchange
Commission.
(2) On the basis of 3,706,880 shares of common stock outstanding as of
March 29, 2002.
(3) Includes 1,365,005 shares subject to exercisable options granted to Mr.
Brentlinger pursuant to the Stock Purchase Agreement that we entered into
with him on June 23, 1999. Under the Stock Purchase Agreement, we granted
Mr. Brentlinger a five-year option to purchase 1,000,000 shares of our
common stock at an exercise price of $1.25 per share. This option was
exercisable upon its grant, and expires on September 30, 2004. No options
have been exercised under this grant. On January 16, 2002, Mr. Brentlinger
assigned 200,000 of these options to his father, Mr. Jayson Russell
Brentlinger. Mr. Brentlinger has acquired an additional 565,005 options
pursuant to anti-dilution modifications made to the Stock Purchase
Agreement by the Board of Directors on May 15, 2001. Such anti-dilution
modifications are retroactive to June 23, 1999.
(4) Includes 1,250,000 shares subject to an irrevocable proxy granted to Mr.
Brentlinger pursuant to a Stock Purchase Agreement, dated as of
November 16, 2001, among Mr. Brentlinger, Dialog4 System Engineering GmbH,
Berthold Burkhardtsmaier, Cornelia Burkhardtsmaier, and Friedrich Maier.
(5) Based on the information provided in the Schedule 13D filed jointly by
Dialog4 System Engineering GmbH ("Dialog4") and Berthold Burkhardtsmaier,
Cornelia Burkhardtsmaier, and Friedrich Maier (collectively, the
"Shareholders") with the Securities and Exchange Commission on March 15,
2002. The Shareholders are deemed to have indirect beneficial ownership of
the shares owned by Dialog4 based on their status as controlling
shareholders of Dialog4. The address of Dialog4 and the Shareholders is
Businesspark Monrepos 55, Ludwigsburg, Germany D-71634. For a discussion
of our acquisition of the assets of Dialog4 and the shares issued to
Dialog4 in connection with the acquisition, see Item 1 Description of
Business - Recent Events.
(6) Includes 50,000 shares subject to immediately exercisable options granted
to this person by the Board of Directors on January 23, 2002. The options
have an exercise price of $1.00 per share and expire on January 23, 2005.
No options have been exercised under this grant.
(7) The address of Mr. Serafin is Post Office Box 262888, Tampa, Florida 33685.
(8) Based on the information provided in the Schedule 13D filed jointly by
Harman Acquisition Corporation and Harman International Industries, Inc.
with the Securities and Exchange Commission on March 13, 2002. The address
of Harman Acquisition Corporation is 8500 Balboa Boulevard, Northridge,
California 91329. The address of Harman International Industries, Inc. is
1101 Pennsylvania Avenue, Washington, D.C. 20004.
53
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Management
On June 23, 1999, we entered into a Stock Purchase Agreement with Mr.
Brentlinger, our current President, Chief Executive Officer and Chairman of the
Board. On September 30, 1999, pursuant to the Stock Purchase Agreement, Mr.
Brentlinger purchased 375,000 authorized but previously unissued shares of our
common stock for $1.525 per share, or $571,875. (All amounts of shares and
purchase prices reported in this item have been adjusted to reflect the effects
of a one for one stock dividend paid by us on August 15, 2000 to record holders
of our common stock as of July 31, 2000.) Pursuant to the Stock Purchase
Agreement, Mr. Brentlinger also purchased all of the shares of common stock
owned by Mr. Clarkson, our current Secretary, consisting of 242,624 shares, also
for $1.525 per share. Mr. Brentlinger agreed to purchase an additional 342,500
shares of our authorized but previously unissued common stock on or before
September 30, 2000, for a purchase price of $1.25 per share. Following an
extension of the purchase deadline, Mr. Brentlinger fulfilled his obligation to
purchase these shares on February 8, 2001. Pursuant to the Stock Purchase
Agreement, Mr. Brentlinger also received a five-year option to purchase an
additional 1,000,000 shares for $1.25 per share. This option expires on
September 30, 2004. On May 15, 2001, the Board of Directors retroactively
amended the Stock Purchase Agreement to include anti-dilution provisions with
respect to this option. The anti-dilution provisions are triggered in the event
that the Company (1) declares or pays a stock dividend, (2) subdivides its
outstanding shares of common stock, (3) combines its outstanding shares of
common stock, (4) issues any shares of its common stock in a reclassification or
reorganization of the common stock, or (5) issues authorized but previously
unissued shares of its common stock as payment for the stock or assets of
another entity
Mr. Brentlinger loaned us $195,000 in a short-term non-interest bearing
advance during the second quarter of 2000, to assist us in the purchase of the
assets of Orban, Inc. On November 30, 2000, Mr. Brentlinger purchased 156,000
shares of our common stock for $1.25 per share in partial fulfillment of his
contractual obligation to purchase 342,500 shares of our common stock pursuant
to the Stock Purchase Agreement. Mr. Brentlinger paid for these 156,000 shares
by cancellation of the debt we owed to him for the $195,000 advance.
On February 8, 2001, Mr. Brentlinger purchased 26,500 shares of our common stock
for $1.25 per share thus fulfilling his contractual obligation to purchase
342,500 shares of our common stock pursuant to the Stock Purchase Agreement.
We had a one-year employment and consulting agreement with James Seemiller
and ATB Broadcasting Corporation, a labor management consulting company of which
Mr. Seemiller is the owner and President. The agreement, which was dated as of
March 9, 2001, was terminated effective as of January 31, 2002. Pursuant to the
agreement, Mr. Seemiller served as our Chief Financial Officer and Vice
President of Sales, Marketing and New Business Development at an annual base
salary of approximately $111,000. Additionally, the agreement provided for the
payment of annual consulting fees of approximately $24,000 to ATB Broadcasting.
54
Acquisition of Orban, Inc.
On May 31, 2000, we acquired the assets of Orban, Inc., a wholly owned
subsidiary of Harman International Industries, Inc., including the rights to the
name "Orban." Including the $500,000 previously paid to Harman as
non-refundable deposits in 1999, the total stated purchase price was $10.5
million, of which $2 million was paid in cash and the balance of which was paid
by means of a combination of short-term and long-term promissory notes that we
issued to the seller. In order to raise the $2 million cash necessary for the
purchase, we sold approximately $1,171,000 in common stock and warrants through
a private placement, and we mortgaged our Tempe, Arizona office building for
$335,000. We also received a $150,000 advance from our majority shareholder,
Mr. Brentlinger. We obtained the remainder of the purchase price from cash on
hand. The seller financing consisted of a $3.5 million short-term note and a
$5 million long-term note payable to Harman.
We received several extensions on the long-term and short-term notes.
First, in exchange for $150,000 cash and an increase in the interest rates to
12 percent per annum for both notes, Harman extended the maturity date of the
short-term note to November 30, 2000. The maturity date of the short-term note
was subsequently extended several times without fees or other significant
changes to the original terms of the note and is due April 30, 2002.
Additionally, the first principal payment on the long-term note of $250,000,
originally due March 31, 2001, was extended to September 30, 2001, with the
remaining quarterly principal payments deferred until April 30, 2002.
On October 1, 2001, we entered into an Amendment to Credit Agreement with
Harman under which both the long-term and the short-term notes were amended and
restated. Under the Amended Credit Agreement, both promissory notes were
converted to demand notes payable on the demand of Harman or, if no demand is
sooner made, on the dates and in the amounts specified in the Amended Credit
Agreement. Interest only payments remain payable from time to time for both
notes and are also due on demand. Additionally, under the Amended Credit
Agreement, the first principal payment on the long-term note of $250,000, the
due date of which had been extended to September 30, 2001, was increased to
$1,250,000 and is now due April 30, 2002, unless Harman demands payment at an
earlier date. Interest has been paid according to the scheduled due dates.
In addition to the stated purchase price, we issued to Harman warrants to
purchase 1,000,000 shares of our common stock, exercisable for $2.25 per share.
The warrants have a three-year term and can be exercised either (i) by payment
in cash, (ii) by reducing the amount of the unpaid principal on the long-term or
short-term note, or (iii) by any combination of (i) and (ii). We obtained an
independent valuation of the warrants in November 2000 from Houlihan Valuation
Advisors which valued the warrants at $1,050,000 as of May 31, 2000. When
combined with the cash purchase price, this results in a total purchase price of
Orban's assets of $11,550,000. As part of the acquisition, we also purchased
the rights to the name "Orban" and our Orban division is currently operating
under that name.
Other
We issued $205,000 in long-term debt to one of our shareholders, Mr. Glenn
Serafin, in consideration for his role in the acquisition of the net assets of
Orban. The promissory note that evidences our debt to Mr. Serafin bears
interest at 7.5 percent per annum, with principal and interest due monthly
beginning August 1, 2000 and continuing for four years. We also incurred fees
of $97,500 to Mr. Serafin for arranging the purchase financing of Orban, the
total of which was due on May 14, 2001, but has since been extended to
August 14, 2001. On August 11, 2001, the note was converted to equity at the
market price of $1.05 per share.
55
On January 18, 2002, we acquired the assets of Dialog4 System Engineering
GmbH, a worldwide leader in ISO/MPEG, audio, ISDN, satellite transmission,
networking and storage. As part of the acquisition the company entered into an
employment agreement with Berthold Burkhardtsmaier where he will serve on a
full-time basis as Vice President of European Operations and as a member of
the Company's board of Directors. Subsequently, the Company amended the Asset
Sale and Purchase Agreement where Mr. Burkhardtsmaier acts in the capacity of
both the Managing Director of Dialog4 System Engineering GmbH and as Vice
President of European Operations for Orban Europe. The agreement extended the
terms of payment from 10 months to 20 months reducing the monthly installments
to $37,500 while adding interest on the remaining unpaid principal at a rate of
10 percent per annum with monthly principal and interest payments due on the
20th day of each month starting April 20, 2002.
56
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following is a list of the consolidated financial statements of
Circuit Research Labs, Inc. included at Item 7 of Part II of this Form 10-KSB.
Financial Statements:
--------------------- Page
-----
Independent Auditors' Report 23
Report of Independent Public Accountants 24
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and 2000 27
Consolidated Statements of Operations -
For the Years Ended December 31, 2001 and 2000 29
Consolidated Statements of Stockholders' Equity -
For the Years Ended December 31, 2001 and 2000 30
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 2001 and 2000 31
Notes to Financial Statements - December 31, 2001 and 2000 33
(a) Exhibits.
Exhibit
Number Description
2.1(1) Asset Sale and Purchase Agreement, dated as of November 16, 2001,
among Dialog4 System Engineering GmbH, Berthold Burkhardtsmaier,
Cornelia Burkhardtsmaier, Friedrich Maier, Circuit Research Labs, Inc.
and CRL Systems, Inc.
3.1(2) Restated Articles of Incorporation of the Company
3.1a(2) Articles of Amendment to the Company's Restated Articles of
Incorporation
3.1b(2) Articles of Amendment to the Company's Restated Articles of
Incorporation
3.2(3) Bylaws of the Company
4.1(4) Warrant to Harman Acquisition Corp. (formerly known as Orban, Inc.),
dated as of May 31, 2000
4.2(5) Form of Class A Stock Purchase Warrant dated as of May 30, 2000
4.3* Form of Class B Stock Purchase Warrant dated as of February 25, 2002
10.1(6) Circuit Research Labs, Inc. 1994 Stock Option Plan
10.2(4) Asset Sale Agreement, dated as of May 31, 2000, by and between
CRL Systems, Inc. and Orban, Inc.
10.3(4) Guarantee and Collateral Agreement, dated as of May 31, 2000, by and
between Circuit Research Labs, Inc., as Parent, CRL Systems, Inc., as
Borrower, and Orban, Inc., as Lender
10.4(4) Credit Agreement, dated as of May 31, 2000, by and between
CRL Systems, Inc., as Borrower, and Orban, Inc., as Lender
10.4.1(4) First Extension Agreement, dated as of September 29, 2000, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to November 30, 2000
57
Exhibit
Number Description
10.4.2(2) Second Extension Agreement, dated as of November 28, 2000, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to January 20, 2001
10.4.3(2) Third Extension Agreement, dated as of January 18, 2001, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to February 20, 2001
10.4.4(2) Fourth Extension Agreement, dated as of February 22, 2001, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to May 14, 2001
10.4.5(2) Tranche A Note Extension Agreement, dated as of March 30, 2001, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc.
10.4.6(2) Tranche A Note and Tranche B Note Extension Agreement, dated as of
April 16, 2001, by and between CRL Systems, Inc. and Harman
Acquisition Corporation, formerly known as Orban, Inc.
10.5(4) Tranche A Note, dated as of May 31, 2000, from CRL Systems, Inc. to
Orban, Inc. in the amount of $5,000,000
10.6(4) Tranche B Note, dated as of May 31, 2000, from CRL Systems, Inc. to
Orban, Inc. in the amount of $3,500,000
10.7(7) Amendment to Credit Agreement, dated as of October 1, 2001, by and
between CRL Systems, Inc. as Borrower, and Harman Acquisition
Corporation (formerly known as Orban, Inc.), as Lender
10.8(7) Amended and Restated Tranche A Note, dated as of October 1, 2001, from
CRL Systems, Inc. to Harman Acquisition Corporation (formerly known as
Orban, Inc.) in the amount of $5,000,000
10.9(7) Amended and Restated Tranche B Note, dated as of October 1, 2001, from
CRL Systems, Inc. to Harman Acquisition Corporation (formerly known as
Orban, Inc.) in the amount of $3,500,000
10.10(1) Amendment to Existing Agreements and Closing Declaration, dated as of
January 18, 2002, among Dialog4 System Engineering GmbH, Berthold
Burkhardtsmaier, Cornelia Burkhardtsmaier, Friedrich Maier, Circuit
Research Labs, Inc., CRL Systems, Inc. and Charles Jayson Brentlinger
10.11* Second Amendment to Existing Agreements and Closing Declaration, dated
as of March 26, 2002, among Dialog4 System Engineering GmbH, Berthold
Burkhardtsmaier, Cornelia Burkhardtsmaier, Friedrich Maier, Circuit
Research Labs, Inc., CRL Systems, Inc. and Charles Jayson Brentlinger
10.12* Employment Agreement, dated as of January 1, 2002, by and between
Charles Jayson Brentlinger and Circuit Research Labs, Inc.
10.13(1) Service Contract, dated November 16, 2001, by and between Circuit
Research Labs, Inc. and Berthold Burkhardtsmaier
10.14* Employment Agreement, dated as of January 1, 2002, by and between
Gary D. Clarkson and Circuit Research Labs, Inc.
10.15* Employment Agreement, dated as of January 1, 2002, by and between
William R. Devitt and Circuit Research Labs, Inc.
10.16* Employment Agreement, dated as of January 1, 2002, by and between
Robert W. McMartin and Circuit Research Labs, Inc.
10.17* Employment Agreement, dated as of January 1, 2002, by and between
Greg J. Ogonowski and Circuit Research Labs, Inc.
58
Exhibit
Number Description
10.18(5) Employment Agreement dated as of May 31, 2000 by and between Robert A.
Orban and Circuit Research Labs, Inc.
10.19(5) Employment and Consulting Agreement, dated as of March 9, 2001, by and
between James Seemiller, ATB Broadcasting Corporation and Circuit
Research Labs, Inc.
10.20(8) Stock Purchase Agreement, dated as of June 23, 1999, by and between
Charles Jayson Brentlinger, Circuit Research Labs, Inc., and
Gary D. Clarkson
16.1(9) Letter on Change in Certifying Accountant
21.1* Subsidiaries of Circuit Research Labs, Inc.
23.1 Consent of Altschuler, Melvoin and Glasser LLP (included on page 25 of
this Report on Form 10-KSB)
23.2 Consent of Deloitte & Touche LLP (included on page 26 of this Report
on Form 10-KSB)
24.1 Power of Attorney (included on signature pages of this Report on Form
10-KSB)
* Filed herewith.
(1) Incorporated by reference to the Registrant's Report on Form 8-K dated
February 4, 2002.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 333-69712) effective November 13, 2001.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-18 (File No. 2-85779-LA) effective October 14, 1983.
(4) Incorporated by reference to the Registrant's Report on Form 8-K/A dated
October 12, 2000.
(5) Incorporated by reference to the Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 2000.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 33-82176).
(7) Incorporated by reference to the Registrant's Report on Form 8-K dated
October 26, 2001.
(8) Incorporated by reference to Exhibit A of Schedule 13D filed with the
Commission by Charles Jayson Brentlinger on July 7, 1999
(File No. 005-56483).
(9) Incorporated by reference to the Registrant's Report on Form 8-K dated
June 26, 2001.
(b) During the three months ended December 31, 2001, the Registrant
filed the following reports on Form 8-K:
Form 8-K (Item 5) filed on October 26, 2001 reporting the
Registrant's execution of an Amendment to Credit Agreement, dated as of
October 1, 2001, with Harman Acquisition Corporation. Under the Amended Credit
Agreement, the long and short-term promissory notes payable to Harman were
converted to demand notes payable on the demand of Harman or, if no demand is
sooner made, on the dates and in the amounts specified in the Amended Credit
Agreement. For more information concerning the Amended Credit Agreement, see
Item 12 Certain Relationships and Related Transactions - Acquisition of
Orban, Inc.
59
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-KSB to
be signed on its behalf by the undersigned, thereunto duly authorized, this 16th
day of April, 2002.
CIRCUIT RESEARCH LABS, INC.
By: /s/ Charles Jayson Brentlinger
-----------------------------------
Charles Jayson Brentlinger
Chief Executive Officer, President and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Charles Jayson Brentlinger and
Robert W. McMartin, and any of them (with full power to each of them to act
alone), as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-KSB
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and to perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents and/or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-KSB has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
Signature Title Date
/s/ Charles Jayson Brentlinger President, Chairman of the April 16, 2002
- ------------------------------ Board and Chief Executive
Charles Jayson Brentlinger Officer
/s/ Gary D. Clarkson Director, Secretary, Vice April 16, 2002
- ------------------------------ President and General
Gary D. Clarkson Manager
/s/ Robert A. Orban Vice President and April 16, 2002
- ------------------------------ Director
Robert A. Orban
/s/ Phillip T. Zeni Director April 16, 2002
- ------------------------------
Phillip T. Zeni
/s/ Carl E. Matthusen Director April 16, 2002
- ------------------------------
Carl E. Matthusen
/s/ Robert W. McMartin Vice President and Chief April 16, 2002
- ------------------------------ Financial Officer
Robert W. McMartin (principal accounting
officer)
60
Exhibit Index
Exhibit
Number Description
2.1(1) Asset Sale and Purchase Agreement, dated as of November 16, 2001,
among Dialog4 System Engineering GmbH, Berthold Burkhardtsmaier,
Cornelia Burkhardtsmaier, Friedrich Maier, Circuit Research Labs, Inc.
and CRL Systems, Inc.
3.1(2) Restated Articles of Incorporation of the Company
3.1a(2) Articles of Amendment to the Company's Restated Articles of
Incorporation
3.1b(2) Articles of Amendment to the Company's Restated Articles of
Incorporation
3.2(3) Bylaws of the Company
4.1(4) Warrant to Harman Acquisition Corp. (formerly known as Orban, Inc.),
dated as of May 31, 2000
4.2(5) Form of Class A Stock Purchase Warrant dated as of May 30, 2000
4.3* Form of Class B Stock Purchase Warrant dated as of February 25, 2002
10.1(6) Circuit Research Labs, Inc. 1994 Stock Option Plan
10.2(4) Asset Sale Agreement, dated as of May 31, 2000, by and between
CRL Systems, Inc. and Orban, Inc.
10.3(4) Guarantee and Collateral Agreement, dated as of May 31, 2000, by and
between Circuit Research Labs, Inc., as Parent, CRL Systems, Inc., as
Borrower, and Orban, Inc., as Lender
10.4(4) Credit Agreement, dated as of May 31, 2000, by and between
CRL Systems, Inc., as Borrower, and Orban, Inc., as Lender
10.4.1(4) First Extension Agreement, dated as of September 29, 2000, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to November 30, 2000
10.4.2(2) Second Extension Agreement, dated as of November 28, 2000, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to January 20, 2001
10.4.3(2) Third Extension Agreement, dated as of January 18, 2001, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to February 20, 2001
10.4.4(2) Fourth Extension Agreement, dated as of February 22, 2001, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc., extending the maturity date of the Tranche B
Note to May 14, 2001
10.4.5(2) Tranche A Note Extension Agreement, dated as of March 30, 2001, by and
between CRL Systems, Inc. and Harman Acquisition Corporation, formerly
known as Orban, Inc.
10.4.6(2) Tranche A Note and Tranche B Note Extension Agreement, dated as of
April 16, 2001, by and between CRL Systems, Inc. and Harman
Acquisition Corporation, formerly known as Orban, Inc.
10.5(4) Tranche A Note, dated as of May 31, 2000, from CRL Systems, Inc. to
Orban, Inc. in the amount of $5,000,000
10.6(4) Tranche B Note, dated as of May 31, 2000, from CRL Systems, Inc. to
Orban, Inc. in the amount of $3,500,000
10.7(7) Amendment to Credit Agreement, dated as of October 1, 2001, by and
between CRL Systems, Inc. as Borrower, and Harman Acquisition
Corporation (formerly known as Orban, Inc.), as Lender
10.8(7) Amended and Restated Tranche A Note, dated as of October 1, 2001, from
CRL Systems, Inc. to Harman Acquisition Corporation (formerly known as
Orban, Inc.) in the amount of $5,000,000
61
Exhibit
Number Description
10.9(7) Amended and Restated Tranche B Note, dated as of October 1, 2001, from
CRL Systems, Inc. to Harman Acquisition Corporation (formerly known as
Orban, Inc.) in the amount of $3,500,000
10.10(1) Amendment to Existing Agreements and Closing Declaration, dated as of
January 18, 2002, among Dialog4 System Engineering GmbH, Berthold
Burkhardtsmaier, Cornelia Burkhardtsmaier, Friedrich Maier, Circuit
Research Labs, Inc., CRL Systems, Inc. and Charles Jayson Brentlinger
10.11* Second Amendment to Existing Agreements and Closing Declaration, dated
as of March 26, 2002, among Dialog4 System Engineering GmbH, Berthold
Burkhardtsmaier, Cornelia Burkhardtsmaier, Friedrich Maier, Circuit
Research Labs, Inc., CRL Systems, Inc. and Charles Jayson Brentlinger
10.12* Employment Agreement, dated as of January 1, 2002, by and between
Charles Jayson Brentlinger and Circuit Research Labs, Inc.
10.13(1) Service Contract, dated November 16, 2001, by and between Circuit
Research Labs, Inc. and Berthold Burkhardtsmaier
10.14* Employment Agreement, dated as of January 1, 2002, by and between
Gary D. Clarkson and Circuit Research Labs, Inc.
10.15* Employment Agreement, dated as of January 1, 2002, by and between
William R. Devitt and Circuit Research Labs, Inc.
10.16* Employment Agreement, dated as of January 1, 2002, by and between
Robert W. McMartin and Circuit Research Labs, Inc.
10.17* Employment Agreement, dated as of January 1, 2002, by and between
Greg J. Ogonowski and Circuit Research Labs, Inc.
10.18(5) Employment Agreement dated as of May 31, 2000 by and between Robert A.
Orban and Circuit Research Labs, Inc.
10.19(5) Employment and Consulting Agreement, dated as of March 9, 2001, by and
between James Seemiller, ATB Broadcasting Corporation and Circuit
Research Labs, Inc.
10.20(8) Stock Purchase Agreement, dated as of June 23, 1999, by and between
Charles Jayson Brentlinger, Circuit Research Labs, Inc., and
Gary D. Clarkson
16.1(9) Letter on Change in Certifying Accountant
21.1* Subsidiaries of Circuit Research Labs, Inc.
23.1 Consent of Altschuler, Melvoin and Glasser LLP (included on page 25 of
this Report on Form 10-KSB)
23.2 Consent of Deloitte & Touche LLP (included on page 26 of this Report
on Form 10-KSB)
24.1 Power of Attorney (included on signature pages of this Report on Form
10-KSB)
* Filed herewith.
(1) Incorporated by reference to the Registrant's Report on Form 8-K dated
February 4, 2002.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 333-69712) effective November 13, 2001.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-18 (File No. 2-85779-LA) effective October 14, 1983.
(4) Incorporated by reference to the Registrant's Report on Form 8-K/A dated
October 12, 2000.
62
(5) Incorporated by reference to the Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 2000.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 33-82176).
(7) Incorporated by reference to the Registrant's Report on Form 8-K dated
October 26, 2001.
(8) Incorporated by reference to Exhibit A of Schedule 13D filed with the
Commission by Charles Jayson Brentlinger on July 7, 1999
(File No. 005-56483).
(9) Incorporated by reference to the Registrant's Report on Form 8-K dated
June 26, 2001.
63