UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 No.: 0-11353
CIRCUIT RESEARCH LABS, INC.
(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0344671
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1330 W. Auto Drive, Tempe, Arizona 85284
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (602) 438-0888
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of each class of our common equity as of
May 15, 2003 is as follows:
Class of Common Equity Number of Shares
- ---------------------- ----------------
Common Stock, par value $.10 3,837,204
Circuit Research Labs, Inc.
Index to Form 10-QSB Filing
For the Quarter Ended March 31, 2003
Table of Contents
Page
PART I - FINANCIAL INFORMATION ............................................3
ITEM 1. FINANCIAL STATEMENTS ..........................................3
Condensed Consolidated Balance Sheets -
March 31, 2003 (unaudited) and December 31, 2002 ..................3
Condensed Consolidated Statements of Operations -
Three Months ended March 31, 2003 and 2002 (unaudited) ............5
Condensed Consolidated Statements of Cash Flows -
Three Months ended March 31, 2003 and 2002 (unaudited) ............6
Notes to Condensed Consolidated Financial Statements .............8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION ...................................................15
ITEM 3. CONTROLS AND PROCEDURES .....................................30
PART II - OTHER INFORMATION ...............................................31
ITEM 1. LEGAL PROCEDINGS ............................................31
ITEM 2. CHANGES IN SECURITIES .......................................31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................31
SIGNATURE ...................................................................33
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $184,295 $214,401
Accounts receivable, trade, net 907,380 645,655
Inventories 2,370,389 2,305,194
Other current assets 165,413 105,161
----------- -----------
Total current assets 3,627,477 3,270,411
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 657,938 750,206
----------- -----------
OTHER ASSETS:
Goodwill, net 7,476,008 7,476,008
Other 287,732 287,582
----------- -----------
7,763,740 7,763,590
TOTAL $12,049,155 $11,784,207
=========== ===========
3
(continued)
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,401,146 $1,196,967
Notes payable 8,688,150 8,520,150
Current portion of long-term debt 1,126,513 1,053,254
Accrued salaries and benefits 431,620 373,603
Customer deposits 151,609 255,281
Other accrued expenses and liabilities 859,463 565,014
----------- -----------
Total current liabilities 12,658,501 11,964,269
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 332,001 461,242
----------- -----------
Total Liabilities 12,990,502 12,425,511
----------- -----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $100 par value - authorized
500,000 shares, none issued
Common stock, $.10 par value - (authorized
20,000,000 shares, 3,806,846 issued as of
March 31, 2003 and 3,767,404
as of December 31, 2002) 380,685 376,741
Additional paid-in capital 5,457,937 5,434,785
Accumulated deficit (6,779,969) (6,452,830)
----------- -----------
Total stockholders' deficit (941,347) (641,304)
----------- -----------
TOTAL $12,049,155 $11,784,207
=========== ===========
See accompanying notes to consolidated condensed financial statements.
4
CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
March 31, March 31,
2003 2002
----------- -----------
NET SALES $2,775,575 $2,962,526
COST OF GOODS SOLD 1,312,088 1,560,004
----------- -----------
Gross profit 1,463,487 1,402,522
----------- -----------
OPERATING EXPENSES
Selling, general and administrative 1,041,877 1,125,519
Research and development 379,195 315,000
Depreciation 82,973 86,156
----------- -----------
Total operating expenses 1,504,045 1,526,675
----------- -----------
LOSS FROM OPERATIONS (40,558) (124,153)
----------- -----------
OTHER (INCOME) EXPENSE:
Sundry Income (11,393) (4,913)
Interest Expense 297,974 283,424
----------- -----------
Total other expense 286,581 278,511
----------- -----------
LOSS BEFORE INCOME TAXES (327,139) (402,664)
PROVISION FOR INCOME TAXES 0 0
NET LOSS ----------- -----------
($327,139) ($402,664)
=========== ===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED ($0.09) ($0.12)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted 3,806,846 3,472,569
=========== ===========
See accompanying notes to consolidated condensed financial statements.
5
CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2003 2002
----------- -----------
OPERATING ACTIVITIES:
Net Loss ($327,139) ($402,664)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 105,992 104,890
Provision for uncollectable accounts (267)
Stock compensation 27,096 50,000
Changes in assets and liabilities:
Accounts receivable (261,725) (515,841)
Inventories (65,195) 393,277
Prepaid expenses and other assets (60,402) (22,319)
Accounts payable and accrued expenses 452,974 334,242
----------- -----------
Net cash used in operating activities (128,399) (58,682)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (13,724) (2,700)
----------- -----------
Net cash used in investing activities (13,724) (2,700)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from shareholder advances 168,000 23,405
Principal payments on notes payable (0) (50,733)
Principal payments on long-term debt (55,983) (37,689)
Proceeds from sale of common stock 0 18,000
----------- -----------
Net cash provided by (used in)
financing activities 112,017 (70,422)
----------- -----------
NET DECREASE IN CASH (30,106) (131,804)
CASH AT BEGINNING OF PERIOD 214,401 280,895
----------- -----------
CASH AT END OF PERIOD $189,295 $149,091
=========== ===========
See accompanying notes to consolidated condensed financial statements.
6
(continued)
CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2003 2002
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid for interest $107,916 $277,201
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Fair value of assets acquired including goodwill $2,034,563
Debt issued to seller (750,000)
Common Stock issued to seller (1,250,000)
Costs paid in 2002 (34,563)
===========
$0
Common stock issued for consulting $0 $50,000
=========== ===========
Common stock issued for compensation $27,096 $0
=========== ===========
See accompanying notes to consolidated condensed financial statements.
7
CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Consolidated Condensed Financial Statements included herein have been
prepared by Circuit Research Labs, Inc. ("CRL" or the "Company"), pursuant to
the rules and regulations of the Securities and Exchange Commission. The
Consolidated Condensed Balance Sheet as of March 31, 2003 and the Consolidated
Condensed Statements of Operations for the three months ended March 31, 2003 and
2002 and the Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 have been prepared without audit.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these Consolidated Condensed Financial Statements be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2002.
In the opinion of management, the Consolidated Condensed Financial
Statements for the unaudited interim periods presented herein include all
adjustments, consisting only of normal recurring adjustments, necessary to
present a fair statement of the results of operations for such interim periods.
Net operating results for any interim period may not be comparable to the same
interim period in previous years, nor necessarily indicative of the results that
may be expected for the full year.
2. Significant Accounting Policies are as follows:
a. Net loss per share
In calculating earnings per share for the three months ended March 31, 2003
the effects of 1,995,005 shares relating to options to purchase common stock and
1,395,690 shares relating to warrants were not used for computing diluted
earnings per share because the result would be anti-dilutive. For the three
months ended March 31, 2002 the options and warrants to purchase 1,000,000 and
1,708,158 shares respectively, of common stock were not used in computing
diluted earnings because the result would be anti-dilutive. Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
establishes standards for computing and presenting earnings per share. It also
requires the dual presentation of basic and diluted earnings per share on the
face of the statement of operations. Earnings per share is calculated as
follows:
8
Three Months Ended
March 31,
2003 2002
----------- -----------
Numerator
Net loss ($327,139) ($402,664)
=========== ===========
Denominator
Weighted average shares 3,806,846 3,472,569
=========== ===========
Basic and diluted loss per share ($0.09) ($0.12)
=========== ===========
b. New accounting pronouncements
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), "Accounting for Obligations Associated with the Retirement
of Long-Lived Assets." 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 adoption of this standard will have no effect on its
consolidated results of operations or financial position.
In December 2002 the FASB issued SFAS 148 "Accounting for Stock Based
Compensation". This SFAS amends SFAS 123 and provides new guidance regarding the
transition should an entity change from the intrinsic value method to the fair
value method of accounting for employee stock based compensation cost.
Additional information is now required to be disclosed regarding such cost in
the financial statements of public companies. The company does not presently
plan to adopt fair value accounting for employee stock based compensation cost.
Statement of Financial Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, amends and clarifies
financial accounting and reporting for derivative instruments for certain
decisions made by the Financial Accounting Standards Board identified during the
implementation of Statement 133 and amends Statement 133 to clarify the
definition of a derivative. This statement is not expected to impact the
company's financial reporting.
9
3. INVENTORIES
Inventories consist of the following at March 31, 2003 and December 31,
2002:
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
Raw materials and supplies $2,506,373 $2,388,922
Work in process 969,522 993,160
Finished goods 435,888 464,506
----------- -----------
Total 3,913,783 3,846,588
Less obsolescence reserve (1,541,394) (1,541,394)
----------- -----------
Inventories, net $2,370,389 $2,305,194
=========== ===========
4. LONG-TERM DEBT
Long term-debt at March 31, 2003 consisted of the following:
Note to stockholder $178,905
Avocet Instruments, Inc. 38,100
Dialog4 Engineering GmbH (see Note 6) 597,055
Solectron GmbH (see Note 6) 603,511
Vendor note 28,003
Employee note 12,940
----------
Total long-term debt $1,458,514
Less current portion (1,126,513)
----------
Total long-term debt, less current portion $332,001
==========
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 percent 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 made payments in
2001 sufficient for interest and some principal. On November 12, 2001, the
Company and the stockholder agreed to defer the payments to January 2002 with
interest accruing at the rate of 7.5% per annum. As of March 31, 2003, the
Company has made partial payments on the accrued interest, and the outstanding
principal balance of this debt was $178,905, plus over due interest of $4,065.
10
On June 12, 2000, we borrowed $68,387 from an employee to assist us in the
purchase of the assets of Orban. The unsecured promissory note evidencing the
debt bears interest at 12 percent per annum. The note was originally due
September 12, 2000 but was extended to September 30, 2001 without payment of a
fee. In order to further extend the note, we agreed to make 12 monthly
installment payments of principal and interest over a one-year period commencing
September 1, 2001. We did not pay a fee in connection with this extension. As
part of the agreement, the note continues to bear interest at 12 percent per
annum, but is compounded monthly. As of March 31, 2003, we had paid a total of
$55,447 on the note and the remaining unpaid balance was $12,940.
On May 31, 2001, CRL acquired the assets of Avocet Instruments, Inc. for
$82,980 plus other costs of $3,350. 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 paid 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. Accounts payable converted to
notes payable in 2002 amounted to $27,553. As of March 31, 2003 the balance of
the notes payable and long-term debt has been reduced to $66,153, all of which
is current.
5. NOTES PAYABLE
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 $8,500,000 loan from Harman to CRL Systems. The agreement was
executed in conjunction with the Asset Sale Agreement between Harman and CRL
Systems, Inc. The loan is evidenced by two promissory notes, the Senior
Subordinated Tranche A Note (the "Tranche A Note") and the Senior Subordinated
Tranche B Note (the "Tranche B Note"). The Tranche A Note, in the amount of
$5,000,000, originally bore interest at 8 percent per annum and required
quarterly principal payments beginning March 31, 2001, with a balloon payment of
$3,000,000 due on March 31, 2003. The Tranche B Note, in the amount of
$3,500,000, originally bore interest at 8 percent per annum for the period from
June 1, 2000 to July 31, 2000 and 10 percent per annum from August 1, 2000 up to
its September 30, 2000 maturity date. The notes are collateralized by, among
other things, all receivables, inventory and equipment, investment property,
including CRL's capital stock in CRL Systems, and intellectual property of CRL
and CRL Systems, as defined in the Guarantee and Collateral Agreement. In
addition, all proceeds of debt or equity or sales of assets are to be first
applied to the remaining balance due on the notes, with the exception of
proceeds from the sale of stock to the Company's President and Chief Executive
Officer, Charles Jayson Brentlinger, pursuant to a Stock Purchase Agreement
between the Company and Mr. Brentlinger which was entered into prior to the date
of the Orban acquisition.
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
rates 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 and was due in full on April 30, 2002. Also, the first principal payment on
the Tranche A note of $250,000, originally due March 31, 2001, was extended to
September 30, 2001 with the remaining quarterly principal payments deferred
until April 30, 2002. Interest only payments are payable monthly for both notes.
11
On October 1, 2001, the Company and Harman entered into an Amendment to the
Credit Agreement (the "Amended Credit Agreement") under which both the
short-term and the long-term promissory notes were amended and restated. Under
the Amended Credit Agreement, both promissory notes were converted to demand
notes payable upon the demand of Harman. Interest is paid monthly at 12 percent
per annum. Additionally, under the Amended Credit Agreement, the first
principal payment on the Tranche A Note of $250,000, the due date of which had
been extended to September 30, 2001, was increased to $1,250,000 and the
maturity date was extended to April 30, 2002.
On May 1, 2002, the Company entered into a Second Amendment to Credit
Agreement with Harman under which the long- and short-term demand notes were
amended and restated to remove the requirement for quarterly payments on the
long-term note and to extend the maturity dates for the notes to December 31,
2003, unless Harman demands payment at an earlier date. Interest only payments
remain payable monthly at 12 percent per annum for both notes and are also due
on demand.
On August 19, 2002 the Company executed a Letter of Agreement to extend the
interest payments due July 15, 2002, August 1, 2002 and August 15, 2002 each in
the amount of $42,410, for a total of $127,230 to be payable to Harman on or
before November 15th, 2002.
In November, 2002 the Company and Harman verbally agreed (which was later
formalized) to further extend the interest payments due July 15, 2002, August 1,
2002 and August 15, 2002 each in the amount of $42,410 and added the interest
payments due September 15, 2002 along with the semi monthly payments due in
October and November, each in the amount of $42,410 for a total that amounts to
$339,280 to be payable to Harman on or before December 6, 2002. The formalized
agreement amended the verbal agreement to require the Company to pay $100,000 of
interest in arrears on or before December 20, 2002 and to continue to make
timely payments.
Currently, as of May 16, 2003, we are in arrears for the interest
installments on the Harman Obligation in an aggregate amount of $748,290. On
March 27, 2003, we entered into an agreement with Harman that would allow a
restructuring of the Harman debt where the Company would privately place $1.5
million in common stock for cash consideration prior to April 30, 2003. The
Company would then make a $1 million cash principal payment on its outstanding
debt to Harman. Harman would allow the Company to retain the cash raised by the
sale of its common stock in excess of the payment to Harman. Harman would agree
to exchange $3.5 million principal amount of the debt owed to Harman by the
Company and its outstanding warrant to purchase shares of CRL common stock, for
a number of shares of CRL common stock such that Harman would own 19% of the
then-outstanding shares of CRL common stock on a fully-diluted basis after
giving effect to the private placement of equity securities by CRL referred to
in paragraph 1 above. The shares of CRL common stock issued to Harman would be
subject to (i) a registration rights agreement with terms similar to the
registration rights granted to Harman in the warrant to be surrendered,
including multiple demand rights, and (ii) anti-dilution protection for
issuances of equity securities following the restructuring.
Harman would exchange the remaining $3.982 million plus accrued interest
due from the Company into a single, senior note with an interest fixed at 1.5%
above the prime rate. Interest would be paid monthly. Mandatory principal
payments would also be required on the anniversary of restructuring for the next
five years at the rate of $250,000 per year for the first two years, $500,000
per year for the following two years, and the balance due at the end of the five
years. The transaction was conditioned upon the $1,000,000 principal payment
prior to April 30, 2003. On May 2, 2003 Harman agreed to extend the
restructuring until May 16, 2003 at which time the Company had paid $200,000
toward the required $1,000,000 principal payment. Harman agreed to further
extend the debt restructuring to May 31, 2003.
12
On January 23, 2003, Jayson Russell Brentlinger, the father of the
Company's president, Jayson Russell Brentlinger, loaned the Company $100,000 for
its short term working capital needs. The loan is repayable April 30, 2003,
without interest. To induce Jayson Russell Brentlinger to make the loan, the
Company issued options to him to purchase 1,250,000 shares of common stock of
the Company for a purchase price of $0.55 per share, the market price of the
shares on the date the option was issued. Jayson Russell Brentlinger may
exercise the option at any time during the next 3 years. As of May 9, 2003, the
loan was paid was paid in full. Jayson Russell Brentlinger has not exercised any
of the options.
6. ACQUISITION OF DIALOG4 ASSETS
On January 18, 2002, the Company 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.
The Company 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 the Company from its working capital or by the Company's
President and Chief Executive Officer, Charles Jayson Brentlinger. On April 8,
2002, the Company executed an amendment to the Asset Sale and Purchase Agreement
with Dialog4. The amended agreement extends the term of the Company's 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.
We still owe Dialog4 approximately $597,000, payable $37,500 monthly plus
interest, for the purchase of the Dialog4 assets and we still need to register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets. The
Company has not made any payments since August 2002 due to disputes with
Solectron and other companies that have claims against Dialog4. The company made
an effort and failed to negotiate with the Dialog4's creditors to assume some of
Dialog4's liabilities in lieu of making payments directly to Dialog4. Dialog4
has since given notice of default for not completing payments and has
accelerated all amounts due. On February 14, 2003, Dialog4 demanded we register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets.
On April 29, 2003, the Company was notified that Dialog4 has filed a demand
for Arbitration. Currently, no date has been set for the Arbitration hearing.
There is no assurance that we can achieve a satisfactory settlement with
Dialog4. If we are unable to do so, we will need to satisfy or settle the
demands of Dialog4 for payment under the original asset purchase agreement. We
believe we have defenses and claims against Dialog4 arising from the asset sale.
The acceleration of the amounts due by Dialog4 constitutes a default under the
existing credit agreements between the Company and Harman International, Inc.
and would continue to constitute a default even if our recent agreement is
finalized with Harman relating to the restructuring of the $8.5 million in notes
that we currently owe Harman.
13
On August 9, 2002, the Company agreed to purchase all existing inventory of
parts related to its Sountainer product from Solectron GmbH for a total price of
$829,328, payable in 24 equal monthly installments including interest. Solectron
had purchased the inventory pursuant to an agreement with Dialog4 approximately
two years prior to the purchase of the assets of Dialog4 by the Company. The
price was equal to the amount paid by Solectron for the inventory of which the
Company expects to realize from future sales of that inventory. The agreement
settled a dispute between the Company and Solectron in which Solectron claimed
the Company became liable for the obligation of Dialog4 to purchase the
inventory when the Company acquired the assets of Dialog4. The Company
maintains it did not undertake the obligation of Dialog4, but to settle the
dispute, agreed to purchase the inventory, which it will use in the manufacture
of Sountainer products. An amount of $233,000 is reported in other assets
pending delivery of that amount of inventory by Solectron.
We were obligated to pay Solectron GmbH $34,555 per month through July
2004. The first monthly payment of $34,555 was made August 14, 2002 with
subsequent payments due and payable on the 15th of every month. On November 11,
2002, we and Solectron executed a letter of understanding in connection with a
Settlement Agreement under which Solectron has allowed us to defer the October
15, 2002, November 15, 2002 and the December 15, 2002 payments. The three
deferred payments were to be made over the period of one year beginning in
January 2003, increasing the installments to $43,194 per month over the same
period of time,(through July 2004). Beginning in January 2004, the installments
were to revert to $34,555 per month until the balance is paid in full in July
2004. Mr. Brentlinger will also be required to sign a personal guarantee under
the revised Settlement Agreement. The Company further agreed to indemnify Mr.
Brentlinger should he be required to make any payment under this guarantee. .
On March 11, 2003 the Board of Directors resolved that Mr. Brentlinger be
compensated for his guaranteeing the Solectron note and the Dialog4 note. His
compensation of $143,995 (including $98,028 unpaid at March 31, 2003) was
determined by calculating the difference between the stated interest rates of
the notes and the interest rate we would have to pay for a high risk loan of
20%. Mr. Brentlinger has been given a choice to receive his compensation in the
form of cash, shares, options or any combination
there of.
On March 4, 2003, the Company and Solectron GmbH agreed to defer the
payments on the note until March 15, 2003, when the Company would commence
making principal and interest payments in $15,000 monthly installments through
August 15, 2003. Beginning September 15, 2003, the Company will increase its
principal and interest monthly installments to $40,068. Subsequent monthly
installments will be reduced each month by $194 effectively discounting the
monthly principal and interest payments due and payable until December 15, 2004,
when the company will make its final installment of $7,403.20.
14
ITEM 2. 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 2, "Management's Discussion and Analysis or Plan of Operation -
Risk Factors." We qualify any forward-looking statements entirely by these
cautionary factors.
RECENT DEVELOPMENTS
Harman Debt
On May 2, 2003 Harman agreed to extend the restructuring until May 16, 2003
at which time the Company paid $200,000 toward the required $1,000,000 principal
payment. Harman agreed to further extend the debt restructuring agreement to May
31, 2003. This is an extension of agreement we entered into on March 27, 2003
with Harman that would allow a restructuring of the Harman debt whereby the
Company would privately place $1.5 million in common stock for cash
consideration prior to April 30, 2003. The Company would then make a $1 million
cash principal payment on its outstanding debt to Harman. Harman would allow the
Company to retain the cash raised by the sale of its common stock in excess of
the payment to Harman. Harman would agree to exchange $3.5 million principal
amount of the debt owed to Harman by the Company and its outstanding warrant to
purchase shares of CRL common stock, for a number of shares of CRL common stock
such that Harman would own 19% of the then-outstanding shares of CRL common
stock on a fully-diluted basis after giving effect to the private placement of
equity securities by CRL. The shares of CRL common stock issued to Harman would
be subject to (i) a registration rights agreement with terms similar to the
registration rights granted to Harman in the warrant to be surrendered,
including multiple demand rights, and (ii) anti-dilution protection for
issuances of equity securities following the restructuring.
Harman would exchange the remaining $3.982 million plus accrued interest
due from the Company into a single, senior note with an interest fixed at 1.5%
above the prime rate. Interest would be paid monthly. Mandatory principal
payments would also be required on the anniversary of restructuring for the next
five years at the rate of $250,000 per year for the first two years, $500,000
per year for the following two years, and the balance due at the end of the five
years. The transaction was conditioned upon the $1,000,000 principal payment
prior to April 30, 2003. On May 2, 2003 Harman agreed to extend the
restructuring until May 16, 2003 at which time the Company had paid $200,000
toward the required $1,000,000 principal payment. Harman agreed to further
extend the debt restructuring to May 31, 2003.
On January 23, 2003, Jayson Russell Brentlinger, the father of the
Company's president, Charles Jayson Brentlinger, loaned the Company $100,000 for
its short term working capital needs. The loan is repayable April 30, 2003,
without interest. To induce Jayson Russell Brentlinger to make the loan, the
Company issued options to him to purchase 1,250,000 shares of common stock of
the Company for a purchase price of $0.55 per share, the market price of the
shares on the date the option was issued. Charles Brentlinger may exercise the
option at any time during the next 3 years. As of May 9, 2003, the loan was paid
was paid in full. Jayson Russell Brentlinger has not exercised any of the
options.
Dialog4
We still owe Dialog4 approximately $597,000, payable $37,500 monthly plus
interest, for the purchase of the Dialog4 assets and we still need to register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets. The
Company has not made any payments since August 2002 due to disputes with
Solectron and other companies that have claims against Dialog4. The company made
an effort and failed to negotiate with the Dialog4's creditors to assume some of
Dialog4's liabilities in lieu of making payments directly to Dialog4. Dialog4
has since given notice of default for not completing payments and has
accelerated all amounts due. On February 14, 2003, Dialog4 demanded we register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets.
15
On April 29, 2003, the Company was notified that Dialog4 has filed a demand
for arbitration. Currently, no date has been set for the arbitration hearing.
There is no assurance that we can achieve a satisfactory settlement with
Dialog4. If we are unable to do so, we will need to satisfy or settle the
demands of Dialog4 for payment under the original asset purchase agreement. We
believe we have defenses and claims against Dialog4 arising from the asset sale.
The acceleration of the amounts due by Dialog4 constitutes a default under the
existing credit agreements between the Company and Harman International, Inc.
and would continue to constitute a default even if our recent agreement is
finalized with Harman relating to the restructuring of the $8.5 million in notes
that we currently owe Harman.
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 producer of ISO/MPEG, audio, ISDN,
satellite transmission, networking and storage.
We are still in the process of integrating the operations of our most
recently acquired operations, 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, difficult legal system and different accounting and
reporting regulations. We will also face new risks arising from foreign currency
fluctuations.
The events of September 11, 2001, have had a significant impact on the
market for audio processing equipment. We have experienced a reduction in
orders for new audio equipment from many radio and television stations. We
believe this reduction is due in part to the decrease in advertising revenue
realized by these stations. We expect this trend to continue at least through
the third quarter of 2003.
On January 31, 2003 the Company changed its main supplier for its Codec
products, which account for about 9% of the Company's net sales. The Company has
not been able to ship many products from its German office since then and
anticipates the new supplier to be shipping by mid June, 2003.
16
We incurred losses of $2,135,039 and $2,046,640 during the years ended
December 31, 2002 and 2001, respectively. Our deteriorating financial results
and reduced liquidity caused us to renegotiate our $8.5 million loan agreement
with Harman. Under the terms of the debt restructure agreement, Harman can
demand at any time that we immediately pay in full the outstanding balance.
Should this happen, we would immediately be forced to file for protection under
Chapter 11 of the United States Bankruptcy Code. 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 have resulted in
our independent public accountants adding a going concern emphasis paragraph to
their report by including a statement that such factors raise substantial doubt
about our ability to continue as a going concern. In addition to our efforts to
reduce costs and increase sales, we are currently seeking sources of long-term
financing. However, the inclusion of a going concern emphasis paragraph
generally makes it more difficult to obtain trade credit or additional capital
through public or private debt or equity financings. We have currently engaged
HD Brous & Co., Inc. to advise and assist us in capital raising efforts. We
cannot offer any assurances 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.
On March 27, 2003, we entered into an agreement with Harman that would
allow a restructuring of the Harman debt whereby the Company would privately
place $1.5 million in common stock for cash consideration prior to April 30,
2003. The Company would then make a $1 million cash principal payment on its
outstanding debt to Harman. Harman would allow the Company to retain the cash
raised by the sale of its common stock in excess of the payment to Harman.
Harman would agree to exchange $3.5 million principal amount of the debt owed to
Harman by the Company and its outstanding warrant to purchase shares of CRL
common stock, for a number of shares of CRL common stock such that Harman would
own 19% of the then-outstanding shares of CRL common stock on a fully-diluted
basis after giving effect to the private placement of equity securities by CRL.
The shares of CRL common stock issued to Harman would be subject to (i) a
registration rights agreement with terms similar to the registration rights
granted to Harman in the warrant to be surrendered, including multiple demand
rights, and (ii) anti-dilution protection for issuances of equity securities
following the restructuring.
Harman would exchange the remaining $3.982 million plus accrued interest
due from the Company into a single, senior note with an interest fixed at 1.5%
above the prime rate. Interest would be paid monthly. Mandatory principal
payments would also be required on the anniversary of restructuring for the next
five years at the rate of $250,000 per year for the first two years, $500,000
per year for the following two years, and the balance due at the balance due at
the end of the five years. The transaction is conditioned upon the $1,000,000
principal payment prior to April 30, 2003.
On May 2, 2003 Harman agreed to extend the proposed restructuring until
May 16, 2003 at which time the Company paid $200,000 toward the required
1,000,000 principal payment. Harman agreed to further extend the debt
restructuring agreement to May 31, 2003.
17
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain summary
operating results:
For the Three Months Ended
March 31,
2003 2002
----------- -----------
Revenues:
Net sales $2,775,575 $2,962,526
Other income 11,393 4,913
----------- -----------
Total revenues $2,786,968 $2,967,439
=========== ===========
Gross profit on net sales $1,463,487 $1,402,522
Gross profit margin 53% 47%
EBITDA (1) $76,827 ($33,084)
Net cash used in operating activities ($128,399) ($58,682)
Net cash used in investing activities ($13,724) ($2,700)
Net cash provided by (used in)
financing activities $112,017 ($70,422)
Net loss ($327,139) ($402,664)
Net loss as a percent of net sales (12%) (14%)
Loss per share - basic and diluted ($0.09) ($0.12)
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. Companies and analysts do not calculate this measure in the same
fashion and, as a result, the measure presented may not be comparable to
similarly titled measures reported by other companies. EBITDA should be
considered in addition to, not as a substitute for or superior to, operating
income, cash flows or other measures of financial performance prepared in
accordance with accounting principles generally accepted in the United States.
This information is not intended to assist investors in an analysis of our
liquidity because there are a number of uses of cash that are excluded from the
EBITDA measurement, as reported in our statement of cash flows. Rather,
investors may wish to use this information as one of a number of points of
comparison between our reported net loss in 2003 and 2002. None of the funds
depicted by the EBITDA measure above were available for management's
discretionary use. Management uses EBITDA to provide supplemental information
that facilitates internal comparisons to historical operating performance and
external comparisons to competitors operating performance. We include the EBITDA
as a financial measure to provide transparency to investors.
18
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002
Net Sales. Net sales during the three months ended March 31, 2003 were
$2.8 million compared to $3.0 million during the comparable period in 2002
reflecting a decrease of 7%. The decrease in net sales was primarily
attributable to a decrease in net sales for our German location due to the
change of our supplier for our Codec products. These products accounted for
about 9% of our net sales for fiscal period ending December 31, 2002. It is
anticipated the new supplier will be shipping by mid June 2003. Our Orban
division reported net sales of $2.7 million for the three months ended March 31,
2003 as compared to $2.8 million for the same period in 2002. This decrease was
primarily a result from our inability to ship product from our German location.
However, demand for our Orban Optimod products has picked up resulting in a
backlog of $2.5 million as of March 31, 2003. Our CRL division reported net
sales of $64,000 for the three months ended March 31, 2003 as compared to
$172,000 for the same period in 2002, representing a decrease of 63%. This
decrease was the result of our move on December 12, 2002. The Company moved its
Tempe corporate offices and manufacturing to a new facility after the sale of
the Tempe building. Orban Europe reported net sales of $71,000 during the three
months ended March 31, 2003 compared to $327,000 during the comparable period
in 2002 reflecting a decrease of 79%.
Gross Profit. Gross profit was 53% of net sales for the first quarter
ended March 31, 2003 compared to 47% for the same period in 2002. The 6%
increase in gross profit is primarily due to increased production at the San
Leandro facility while maintaining the same fixed overhead costs.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") for the three months ended March 31, 2003 was $1,042,000, a
decrease of 8% compared to $1,126,000 reported the first quarter of 2002. As a
percentage of net sales, SG&A was 38% for the three months ended March 31, 2003
compared to 39% for the same period in 2002. The decrease in SG&A expense is
due in part to the variable component of SG&A relating to our domestic and
international sales and marketing expenses.
Research and Development. Research and development expense was $379,000
for the three months ended March 31, 2003, an increase of 21% compared to
$315,000 for the same period in 2002. The increase resulted from increased
personnel.
Other (Income) Expense. Other expense, net for the three months ended
March 31, 2003 was $287,000 of which $254,000 represents interest expense 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, net for the three months ended March 31, 2002 was $279,000, of which
$255,000 represented interest expense to Harman. Interest expense was $298,000
for the three months ended March 31, 2003, a 2% increase over $283,000 reported
for the same period in 2002. The increase represents the interest expense
associated with the Second Amendment to the Asset purchase of Dialog4 assets and
the Solectron note.
Operationally, we are reporting a $77,000 profit for the three months
ended March 31, 2003 before interest, taxes, depreciation and amortization
(EBITDA) which represents approximately 3% of the total net sales in 2003 as
compared to 2002 in which we reported a $33,000 loss before interest, taxes,
depreciation and amortization (EBITDA) representing 1% of net sales. The
increase in EBITDA is primarily due to the increased production of products at
the San Leandro facility and reduced costs associated with SG&A.
19
Net Loss. Net loss was $327,139 for the three months ended March 31, 2003
compared to $402,664 for the same period in 2002. Excluding the impact of the
non-cash items, we would have reported a net loss $194,051 for the three months
ended March 31, 2003 compared to a net loss of $248,041 for the same period in
2002.
Non-cash expense items for the three months ended March 31, 2003 were as
follows:
$27,096 Stock compensation
105,992 Depreciation
--------
$133,088 Total (representing 41% of the net loss for the year)
========
Non-cash expense items for the three months ended March 31, 2002 were as
follows:
$(267) Decrease in provision for uncollectible accounts
50,000 Stock compensation
104,890 Depreciation
--------
$154,623 Total (representing 39% of the net loss for the year)
========
LIQUIDITY AND CAPITAL RESOURCES
We had negative net working capital of approximately $9.0 million at March
31, 2003, and the ratio of current assets to current liabilities was .29 to 1.
At March 31, 2002, we had net negative working capital of approximately $8.7
million and a current ratio of .27 to 1. The decrease in working capital is in
part a result of our increased debt associated with our acquisition of the
Dialog4 assets and in part from an increase in our in our payables and accrued
liabilities.
The negative working capital primarily resulted from the conversion to
demand notes of the $3.5 million short-term note and the $5 million long-term
notes payable to Harman. The notes are payable on December 31, 2003 or upon the
earlier demand of Harman, as specified in the Second Amendment to Credit
Agreement that we entered into with Harman effective May 1, 2002.
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
As described in Item 2 under the recent developments section, Harman and
the Company are negotiating a transaction by which a principal reduction will be
made by May 31, 2003.
20
Our substantial obligation to Harman 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 largely 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.
We have currently engaged HD Brous & Co., Inc. to advise and assist us in
capital raising efforts. We cannot offer any assurances 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.
On March 27, 2003, we entered into an agreement with Harman that would
allow a proposed restructuring of the Harman debt where the Company would
privately place $1.5 million in common stock for cash consideration prior to
April 30, 2003. The Company would then make a $1 million cash principal payment
on its outstanding debt to Harman. Harman would allow the Company to retain the
cash raised by the sale of its common stock in excess of the payment to Harman.
Harman would agree to exchange $3.5 million principal amount of the debt owed to
Harman by the Company and its outstanding warrant to purchase shares of CRL
common stock, for a number of shares of CRL common stock such that Harman would
own 19% of the then-outstanding shares of CRL common stock on a fully-diluted
basis after giving effect to the private placement of equity securities by CRL
referred to in paragraph 1 above. The shares of CRL common stock issued to
Harman would be subject to (i) a registration rights agreement with terms
similar to the registration rights granted to Harman in the warrant to be
surrendered, including multiple demand rights, and (ii) anti-dilution protection
for issuances of equity securities following the restructuring.
Harman would exchange the remaining $3.982 million plus accrued interest
due from the Company into a single, senior note with an interest fixed at 1.5%
above the prime rate. Interest would be paid monthly. Mandatory principal
payments would also be required on the anniversary of restructuring for the next
five years at the rate of $250,000 per year for the first two years, $500,000
per year for the following two years, and the balance due at the balance due at
the end of the five years. The transaction is conditioned upon the $1,000,000
principal payment prior to April 30, 2003. On May 2, 2003 Harman agreed to
extend the restructuring until May 16, 2003 at which time the Company paid
$200,000 toward the required $1,000,000 principal payment. Harman agreed to
further extend the debt restructuring agreement to May 31, 2003.
21
Currently, as of May 16, 2003, we are in arrears for the interest
installments on the Harman Obligation in an aggregate amount of $748,290.
On January 18, 2002, with Harman's consent, we acquired the assets of
Dialog4 System Engineering GmbH. We purchased the assets of Dialog4 pursuant to
an Asset Sale and Purchase Agreement for $2 million, comprised of 1,250,000
shares of our 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.
We still owe Dialog4 approximately $597,000, payable $37,500 monthly plus
interest, for the purchase of the Dialog4 assets and we still need to register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets. The
Company has not made any payments since August 2002 due to disputes with
Solectron and other companies that have claims against Dialog4. The company made
an effort and failed to negotiate with the Dialog4's creditors to assume some of
Dialog4's liabilities in lieu of making payments directly to Dialog4. Dialog4
has since given notice of default for not completing payments and has
accelerated all amounts due. On February 14, 2003, Dialog4 demanded we register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets.
On April 29, 2003, the Company was notified that Dialog4 has filed a demand
for arbitration. Currently, no date has been set for the arbitration hearing.
There is no assurance that we can achieve a satisfactory settlement with
Dialog4. If we are unable to do so, we will need to satisfy or settle the
demands of Dialog4 for payment under the original asset purchase agreement. We
believe we have defenses and claims against Dialog4 arising from the asset sale.
The acceleration of the amounts due by Dialog4 constitutes a default under the
existing credit agreements between the Company and Harman International, Inc.
and would continue to constitute a default even if our recent agreement is
finalized with Harman relating to the restructuring of the $8.5 million in notes
that we currently owe Harman.
As a result of our acquisition of the Dialog4 assets, we are further
obligated to pay Solectron GmbH $34,555 per month through July 2004. The first
monthly payment of $34,555 was made August 14, 2002 with subsequent payments due
and payable on the 15th of every month. On November 11, 2002, the Company and
Solectron executed a letter of understanding in connection with the Settlement
Agreement under which Solectron has allowed us to defer the October 15, 2002,
November 15, 2002 and the December 15, 2002 payments. The three deferred
payments where to be made over the period of one year beginning in January 2003,
increasing the installments to $43,194 per month over the same period of time.
Beginning in January 2004, the installments will revert to $34,555 per month
until the balance is paid in full July 2004.
Working capital generated from 2003 operations will be used to service our
commitments as detailed above, excluding our obligations to Harman. Any excess
working capital generated from 2003 operations will be applied to expand our
business operations. The terms of the Harman debt restrict our ability to obtain
financing for these types of expansion expenditures, as well as financing for
other purposes. Accordingly, our ability to expand will primarily depend on our
ability to generate sufficient working capital from operations. We will closely
monitor our working capital in 2003 as we evaluate any expenditures related to
expansion.
22
Accounts receivable were $907,000 at March 31, 2003 compared to $645,000 at
December 31, 2002 representing a net increase of $262,000 or 29%. The increase
is primarily due to an increase in sales from for the quarter ended March 31,
2003 compared to the quarter ended December 31, 2002.
Total inventories were $2,370,000 at March 31, 2003 compared to total
inventories of $2,305,000 at December 31, 2002. The value of inventory
increased $65,000 or 3% due in part to the increased purchases of raw materials
and work in process to meet the increased demand for our Optimod products.
For the year ending December 31, 2003, 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.
On May 31, 2000, our wholly owned subsidiary, CRL Systems, Inc., acquired
the assets of Orban, Inc., a wholly owned subsidiary of Harman International
Industries, Inc. 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. 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
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. Effective May 1, 2002, we entered into a Second Amendment to Credit
Agreement with Harman under which both demand notes were amended and restated to
remove the requirement for quarterly payments on the long-term note and to
extend the maturity dates for the notes to December 31, 2003, unless Harman
demands payment at an earlier date. Interest only payments remain payable
monthly at 12 percent per annum for both notes and are also due on demand.
Approximately $9,573,000 of our total indebtedness is due and payable by
December 31, 2003, unless with respect to the $8,482,000 due Harman, payment is
demanded at an earlier date. Our President, Mr. Charles Jayson Brentlinger,
has committed to exercise his outstanding 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 have currently engaged HD
Brous & Co., Inc. to advise and assist us in capital raising efforts. We cannot
offer any assurances 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.
On June 12, 2000, we borrowed $68,387 from a non-management employee to
assist us in the purchase of the assets of Orban. The unsecured promissory note
evidencing the debt bears interest at 12 percent per annum. The note was
originally due September 12, 2000 but was extended to September 30, 2001 without
payment of a fee. In order to further extend the note, we agreed to make 12
monthly installment payments of principal and interest over a one-year period
commencing September 1, 2001. We did not pay a fee in connection with this
extension. As part of the agreement, the note continues to bear interest at 12
percent per annum, but is compounded monthly. As of March 31, 2003, we had paid
a total of $55,447 on the note and the remaining unpaid balance was $12,940.
23
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 30, 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.
24
THE EXISTENCE OF AN UNQUALIFIED OPINION CONTAINING A GOING CONCERN EMPHASIS
PARAGRAPH 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. The inclusion of a going
concern emphasis paragraph generally makes it more difficult to obtain trade
credit, insurance or additional capital through public or private debt or equity
financings. We may also find 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 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.
25
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 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.
26
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.
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 822,035 at December 31, 2002 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 31, 2003, 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.
27
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
* the number of shares available for resale in the public markets under
applicable securities laws.
28
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.
29
ITEM 3. CONTROLS AND PROCEDURES.
Within 90 days prior to the filing date of this 2003 Form 10-QSB, we carried out
an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in alerting
them in a timely manner to material information required to be disclosed in our
periodic reports filed with the SEC. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their most recent
evaluation.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
On April 29, 2003, the Company was notified that Dialog4 has filed a demand
for arbitration before the German Institution of Arbitration. Currently, no date
has been set for the arbitration hearing. There is no assurance that we can
achieve a satisfactory settlement with Dialog4. If we are unable to do so, we
will need to satisfy or settle the demands of Dialog4 for payment under the
original asset purchase agreement. We believe we have defenses and claims
against Dialog4 arising from the asset sale. The acceleration of the amounts due
by Dialog4 constitutes a default under the existing credit agreements between
the Company and Harman International, Inc. and would continue to constitute a
default even if our recent agreement is finalized with Harman relating to the
restructuring of the $8.5 million in notes that we currently owe Harman.
As of February 14, 2003, Berthold Burkhardtsmaier ceased to be an employee
of the company. Mr. Burkhardtsmaier still remains a member of the Board of
Directors. Berthold Burkhardtsmaier was Dialog4's managing director, and had
become our Vice President of European Operations and was appointed to our board
of directors in connection with the acquisition of the assets of Dialog4. We
terminated Mr. Burkhardtsmaier for cause and he has appealed his termination to
the labor court in Ludwigsburg, Germany., the location of our European office.
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information concerning sales of our common stock (or
transactions deemed to be sales) during the quarter ended March 31, 2003 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.
On January 18, 2002, our wholly owned subsidiary, CRL Systems, Inc. doing
business as Orban, Inc., acquired the assets of Dialog4 System Engineering GmbH,
a worldwide leader in ISO/MPEG, audio, ISDN, satellite transmission, networking
and storage. Orban/CRL purchased the assets of Dialog4 pursuant to an Asset
Sale and Purchase Agreement for $2 million, comprised of 1,250,000 shares of our
common stock, valued at $1.00 per share, and $750,000 cash. In connection with
this transaction, we relied on the exemption from registration under Section
4(2) of the Act.
Mr. Phil Zeni was issued an aggregate of 39,442 shares during the quarter
ended March 31 2003. Under his employment contract, Mr. Zenis' monthly base
compensation is paid to him in shares of stock. The value of the stock for
purposes of these payments is the monthly average closing price for the month in
which the salary is earned.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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.
10.1(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
10.2(2) 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
10.3(3) Second Amendment to Credit Agreement, dated as of May 1, 2002, by and
among Circuit Research Labs, Inc., as Parent, CRL Systems, Inc. as
Borrower, and Harman Acquisition Corporation (formerly known as Orban,
Inc.), as Lender
10.4(3) Second Amended and Restated Tranche A Note, dated as of May 1, 2002,
from CRL Systems, Inc. to Harman Acquisition Corporation (formerly known
as Orban, Inc.) in the amount of $5,000,000
10.5(3) Second Amended and Restated Tranche B Note, dated as of May 1, 2002,
from CRL Systems, Inc. to Harman Acquisition Corporation (formerly known
as Orban, Inc.) in the amount of $3,500,000
10.6(4) Form of Circuit Research Labs, Inc. Stock Option Agreement
31
99.1(5) Letter Agreement between Circuit Research Labs, Inc. and Harman
Acquisition Corp. dated as of March 27, 2003
99.2 * Letter Agreement among Circuit Research Labs, Inc., CRL Systems, Inc.
and Harman Acquisition Corp. dated as of May 16, 2003
99.3 * Section 906 Certification of Chief Executive Officer of the Company
99.4 * Section 906 Certification of Chief Financial Officer of the Company
* 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 Report on Form 10-KSB for the
fiscal year ended December 31, 2001.
(3) Incorporated by reference to the Registrant's Report on Form 8-K dated May
13, 2002.
(4) Previously filed with the Registrant's Form 10-QSB for the first quarter
ended March 31, 2002.
(5) Incorporated by reference to the Registrant's Report on Form 8-K dated April
1, 2003.
(b) During the three months ended March 31, 2003, the Registrant filed
the following reports on Form 8-K:
None
32
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CIRCUIT RESEARCH LABS, INC.
Dated: May 20, 2003 By: /s/ Robert W. McMartin
--------------------------------
Robert W. McMartin
Vice President, Treasurer and
Chief Financial Officer
33
CERTIFICATIONS
I, C. Jayson Brentlinger, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Circuit Research
Labs, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ C. Jayson Brentlinger
----------------------------
Chief Executive Officer,
President and
Chairman of the Board
34
I, Robert W. McMartin, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Circuit Research
Labs, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003 /s/ Robert W. McMartin
------------------------
Chief Financial Officer,
Vice President and Treasurer
35
EXHIBIT INDEX
Exhibit Description
Number
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.
10.1(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
10.2(2) 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
10.3(3) Second Amendment to Credit Agreement, dated as of May 1, 2002, by and
among Circuit Research Labs, Inc., as Parent, CRL Systems, Inc. as
Borrower, and Harman Acquisition Corporation (formerly known as Orban,
Inc.), as Lender
10.4(3) Second Amended and Restated Tranche A Note, dated as of May 1, 2002,
from CRL Systems, Inc. to Harman Acquisition Corporation (formerly known
as Orban, Inc.) in the amount of $5,000,000
10.5(3) Second Amended and Restated Tranche B Note, dated as of May 1, 2002,
from CRL Systems, Inc. to Harman Acquisition Corporation (formerly known
as Orban, Inc.) in the amount of $3,500,000
10.6(4) Form of Circuit Research Labs, Inc. Stock Option Agreement
99.1(5) Letter Agreement between Circuit Research Labs, Inc. and Harman
Acquisition Corp. dated as of March 27, 2003
99.2 * Letter Agreement among Circuit Research Labs, Inc., CRL Systems, Inc.
and Harman Acquisition Corp. dated as of May 16, 2003
99.3 * Section 906 Certification of Chief Executive Officer of the Company
99.4 * Section 906 Certification of Chief Financial Officer of the Company
* 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 Report on Form 10-KSB for the
fiscal year ended December 31, 2001.
(3) Incorporated by reference to the Registrant's Report on Form 8-K dated May
13, 2002.
(4) Previously filed with the Registrant's Form 10-QSB for the first quarter
ended March 31, 2002.
(5) Incorporated by reference to the Registrant's Report on Form 8-K dated April
1, 2003.
36