U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
December 31, 1997 0-11353
For the year ended) (Commission File No.)
CIRCUIT RESEARCH LABS, INC.
Arizona 86-0344671
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
Address of principal executive offices:
2522 West Geneva Drive Tempe, Arizona 85282
Registrant's Telephone No.
(602) 438-0888
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
This registrant has filed all reports required to be filed by Section 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers in response to Item 405 of Regulation SB is
not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge in definitive proxy or information statements,
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB.
The registrant's revenues for fiscal 1997 were $ 1,964,705.
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on February 27, 1998, based on the closing
sales price for such stock in the
Over-the-Counter market as reported by NASDAQ on such date was $683,839.
At February 27, 1998, 597,682 shares of the registrant's common stock were
issued and outstanding.
The registrant's December 31, 1997 Annual Report to Stockholders is
incorporated by reference in Parts I, II and III.
Exhibit Index located on page Seventeen.
Page 1<PAGE>
CIRCUIT RESEARCH LABS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
PART I Page
Item 1 Description of Business 3
Item 2 Description of Property 9
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of
Security Holders 10
PART II
Item 5 Market for Common Equity and Related
Stockholder Matters 11
Item 6 Management's Discussion and Analysis or
Plan of Operations 11
Item 7 Financial Statements 11
Item 8 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 11
PART III
Item 9 Directors, Executive Officers, Promoters
and Control Persons: Compliance with
Section 16(a) of the Exchange Act 12
Item 10 Executive Compensation 14
Item 11 Security Ownership of Certain Beneficial
Owners and Management 16
Item 12 Certain Relationships and Related
Transactions 17
Item 13 Exhibits and Reports on Form 8-K 17
Page 2<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
General
This information is incorporated by reference to "Corporate Profile" and
"Selected Financial Information" on page 1 of Circuit Research Labs, Inc's.
("CRL" or the "Company") 1997 Annual Report to Stockholders (the "1997
Report"); "Corporate Overview" on page 3 of the 1997 Report; and Notes 1, 2
and 7 to the Company's Consolidated Financial Statements on pages 17-24 of
the 1997 Report. In addition, reference is made to "Patents and Trademarks"
on page 7, "Competition" on page 7, and "Dependence on Major Customers" on
page 8 of this Form 10-KSB.
Audio Processing
Audio processing equipment produced by the Company is used by radio and
television stations, entertainers and recording studios. The Company's
equipment "repackages" audio signals produced by microphones, recordings and
other audio sources. The equipment alters such signals to control audio
loudness (amplitude) and tonal balance (equalization) prior to transmission.
Audio processing shapes the audio sound wave when it is in electrical
impulse form before it is transmitted by a carrier wave.
Radio stations utilize audio processing equipment to control the electrical
amplitude limit of audio signals (modulation limit) as required by
government regulations and to control the quality of radio station signals
received by listeners. All radio stations utilize some type of audio
processing to comply with governmental and environmental regulations and to
improve the apparent quality of their signals. Approximately 10,800 AM and
FM stations in the United States use audio processing, as well as more than
19,000 radio stations in other countries. Of the approximately 1,600
television stations in the United States, about two-thirds of them now
broadcast in stereo, which requires audio processing. Based on replacement
equipment orders, the Company estimates that the average useful life of
audio processing equipment is less than five years. Other recently
developed products are appropriate for the audio processing needs of the
recording and performing industry.
The Principal Products
Audio Processing Products
CRL's audio processing equipment for radio broadcast can be separated into
four different series or product families, Digital Series, Modular Series,
Amigo Series and the Signature Series.
Digital Series
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The newest addition to CRL's radio processors is the Digital Series. CRL
digital products are on the leading edge of technology with 100% digital
architecture. The principal products are:
DP-100 Digital Processor The CRL DP-100 digital processor is the
newest addition to our FM processing line. It is currently the
only digital audio processor to use 32 bit floating-point
technology. Its advance design allows the unit to serve a long
life in it customer's hands. The modular construction makes it
possible for CRL to offer specific PCB upgrades without changing
the main chassis. This design approach allows CRL to sell
additional upgrade products to current users of the DP-100. The
DP-100 FM digital processor gives a strong, high quality sound
that attracts and holds the listening audience. The radio audience
will enjoy a clear, bright and appealing sound that is easy to
listen to for long periods of time. The DP-100 uses the latest
digital technology to its fullest potential to produce the most
advanced digital processor on the market. The DP-100 includes a
true digital stereo multiplex generator, gated AGC (Audio Gain
Controller), 5 band compressor, multi-band limiter and graphic
equalizer. Also included is CRL's exclusive stereo sound
enhancement.
SC-100 RDS/RBDS (Radio Data Systems/Radio Broadcast Data Systems)
allows a FM radio station to transmit additional streams of
digital information giving the station new promotional methods,
new public service opportunities and exciting new revenue
possibilities. CRL's SC-100 is a RDS/RBDS generator using the
latest in DSP (Digital Signal Processing) digital technology. The
visual text message that the SC-100 sends to the new "smart
radios" can be used for call letter and slogan recognition,
traffic and weather reports, emergency alert messages and display
advertising. The SC-100 can also be used for paging, billboard
sign control, global positioning, plus other exciting
applications. In addition, CRL has become a value added reseller
of equipment to build RDS/RBDS paging systems. CRL configures the
system to the customer's requirements and, for an additional fee,
oversees the installation of the system.
Modular Series
In its Modular Series, CRL designed the entire AM or FM processing chain as
building blocks. As a result, the station can start simply, with just a
limiter and stereo generator, for instance, and then add a compressor later
as its processing needs change and its budget allows. The modular approach
allows the radio station to buy just what it needs. The principal Modular
systems are:
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FM1g A basic FM audio processing system consisting of CRL's
automatic gain controller (AGC) /limiter and digitally synthesized
stereo generator.
FM2g A complete system with an AGC, a limiting system and
digitally synthesized stereo generator.
FM2g+ A comprehensive FM system with an AGC, a limiter, a
digitally synthesized stereo generator and four band compressor.
AM2m An AGC and a peak limiter are the two components of this
basic mono AM system.
AM4m CRL's most popular AM system is a three unit system
consisting of an AGC, a modulation limiter and four band
compressor.
AM2s CRL's basic stereo AM system includes a stereo AGC and a
limiter.
AM4s Three components form CRL's enhanced stereo AM system. The
system includes a stereo AGC, four band compressor/equalizer and
matrix limiter.
Amigo Series
The next family of radio processing is the Amigo Series. The Amigo family of
processors is an integrated "one box" processing system designed for the
small to mid-size station in both international and domestic markets. The
Amigo family of processors is one of the best performing processors in its
class. The principal Amigo systems are:
Amigo The Amigo is a combination of a dual band AGC, a variable
pre-emphasis multi-band limiter and digitally synthesized stereo
generator. The single unit contains a complete FM audio processing
system. The Amigo is flexible and powerful, yet designed for easy
set up and use. The Amigo FM is one of CRL's most popular selling
systems.
Amigo AM The Amigo AM is a complete stereo audio processing
system. It includes CRL's patented AM stereo processing circuitry
as found in the modular AM systems. The system includes a dual
band AGC, triband limiter, and NRSC (National Radio Systems
Committee) output filtering. The Amigo AM can be used on mono for
customers waiting to convert to stereo.
BAP-2000 A complete stand alone audio processor for any mono FM.
The system consists of an advanced dual band audio AGC and
limiter. Internal options selected by the radio station allow the
BAP-2000 to be tailored to handle most any mono audio control job.
Signature Series
The Signature Series is a high performance audio processing system. The
principal products are:
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Audio Signature The Audio Signature gives the power of digital
control with multi-band compression and limiting for high
performance power. The FM Audio Signature includes a stereo AGC
and four band compressor with a sophisticated set of processing
controls to produce the radio station's own unique and distinctive
sound.
Modulation Signature The Modulation Signature features a digitally
modulated stereo generator and a fully adjustable limiting system.
Real Time Event Sequencer The Real Time Event Sequencer is a
programmable event timer that can control any combination of eight
outputs and store up to 255 events. Events can be programmed to
the second for each day of the week, for each different month of
the year.
Television Products
CRL has a complete line of quality audio processing, plus Stereo, SAP
(secondary audio program, primarily designed for public second language
usage) and PRO channel (non-public use with integrated input limiter, data
and telemetry inputs) generators. The audio processing was designed with
surround sound compatibility in mind. Many first generation stereo users are
converting over to the TVS-3000 series of products because of it surround
sound capabilities.
TVS-3001 The TVS-3001 is a state-of-the-art stereo television
processing system that offers maximum control of the audio program
material. It includes a precision tri-band AGC with horizontal
sync rejection filter, exclusive CRL/CBS loudness control
circuitry, reversed phase audio corrector and audio asymmetry
removal circuits.
TVS-3003 The TVS-3003 is a digitally synthesized MTS generator
with dbx encoding, advanced transfer function pre-emphasis limiter
and a proprietary stereo sound field enhancer.
TVS-3004 The TVS-3004 Professional Channel (PRO) generator is a
digitally synthesized subcarrier generator for non-public use with
integrated input limiter, data and telemetry inputs.
TVS-3005 The TVS-3005 is a digitally synthesized subcarrier
generator for a secondary audio program (SAP) channel, primarily
designed for public second language usage.
BAP-2000 The BAP-2000 is a complete audio processor with
horizontal sync rejection filter for mono television applications.
Noise Reduction Systems
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DX1 & DX2 For the professional audio and music industry, CRL
manufactures noise reduction systems incorporating an integrated
circuit patented under the dynafexR name. The dynafexR noise reduction
system effectively reduces tap hiss and other background noises from
virtually any audio source. The dynafex system is available in mono
(DX1) and stereo (DX2). The dynafex chip is also utilized in all CRL
products where possible.
Test and Measurement
DAA-50 With the conversion of audio technology to digital, CRL
recognized the need for an inexpensive test and analysis tool and
developed the DAA-50. The DAA-50 receives and decodes audio data. A
variety of information about the signal can be determined through
easily defined LED status indicator lights. Compact and light weight,
the DAA-50 can be used when and wherever it's needed.
Technology Research and Development
Tektronix AM70 CRL licensed certain digital audio testing technology
to Tektronix. Tektronix's Pathfinder AM70 Audio Analyzer/Generator is
the product of this combined effort. The AM70 is a handheld
programmable audio product that operates in three modes: generator
(serves as source of analog and digital signals), monitor (provides
visual and audible output), and modify (allows real-time editing).
New Products
The Company continued to add new features and improvements to the DP100
Digital Processor and the SC-100 RDS/RBDS generator for paging. In addition,
CRL is continuing to research and develop new products for release in the
coming years.
Research and Development
This information is incorporated by reference to "Corporate Strategy" on
page 3 of the 1997 Report and to that part of "Management's Discussion and
Analysis" on page 9 of the 1997 Report.
Patents and Trademarks
The Company holds eight United States patents including three acquired by
purchase in July 1985 and a British patent. These patents cover circuitry
components that appear basic to the design of the Company's current audio
processing equipment, AM Stereo and its dynafexR chip. During 1993, the
Company entered into a licensing agreement with Tektronix. This information
is incorporated by reference on page 7 of the 1997 Report.
Page 7<PAGE>
"CRL Systems", "CRL Audio" and "dynafexR" are registered trade names
utilized by the Company.
Backlog and Backlog Comparisons
The backlog at December 31, 1997 was approximately $138,570 compared to
$228,350 at December 31, 1996. The current backlog is expected to be filled
within the current fiscal year. Additional information is incorporated by
reference to "Selected Financial Information" on page 1 of the 1997 Report.
Effect of Existing or Probable Government Regulations
The Company's current and forthcoming products are not regulated by any
government. The Company's domestic customers are highly regulated by the
Federal Communications Commission ("FCC") and the Company's products perform
certain audio processing to control a radio station's signals within FCC
limits. The Company's stereo generators assist its domestic customers in
maintaining certain specifications set by the FCC. The Company's AM limiters
and FM TV stereo generators assist its domestic customers in maintaining
certain specifications set by the FCC.
Competition
Audio processing equipment for broadcast application is produced by several
small companies with less than 100 employees. Based on limited information
available from Dun & Bradstreet, the largest of the companies providing
audio processing equipment is Orban Associates, now a wholly-owned
subsidiary of a US corporation. The Company competes with Orban on the
basis of uniqueness of design, quality and price. Custom audio processing
equipment is provided by several very small competitors.
Marketing and Distribution
This information is incorporated by reference to "Management's Discussion
and Analysis" relative to results of operations on page 9 of the 1997 Report
and to Note 10 to the Company's Consolidated Financial Statements on page 23
of the 1997 Report. In addition, reference is made to "Foreign Operations
and Export Sales" on page 9 of this Form 10-KSB.
Warranties and Service
The Company provides a one-year limited warranty against defects in product,
materials and workmanship on it radio line equipment. The standard warranty
for the DP-100, SC-100 and TV series products is three years. Company
employees perform all warranty and repair service at the Company's
Page 8<PAGE>
facilities. Warranty claims have been minimal throughout the history of the
Company.
Delivery and Installation
The Company delivers FOB its audio processing equipment for installation by
the user. For a fee, the Company will provide installation service or
assistance.
Seasonality
Historically, sales of the Company's equipment have been seasonal in that
demand tends to increase before and after market rating periods for radio
stations. The market rating periods for various areas are now staggered,
making such seasonality less important. However, sales do increase after
major trade shows, such as the National Association of Broadcasters.
Sales Terms
Company products are currently sold and shipped domestically with payment
due 30 days from the invoice date. Products returned in 1997 were
approximately 3.0% of sales. International shipments are made against
letters of credit or are prepaid by wire transfers.
Dependence on Major Customers
The current industry market is primarily comprised of individual and small
group ownerships of the broadcast properties. The Company, however, markets
its products through wholesale distributors and agents. Additional
information is incorporated by reference to Note 10 of the Company's
Consolidated Financial Statements on page 23 of the 1997 Report.
Production and Assembly
The Company produces products at facilities in Tempe, Arizona. The Company
assembles certain components, particularly those utilizing proprietary
information, and subcontracts certain other subassemblies. Other components
are purchased from manufacturers and included in the Company's final
assembly.
In a move to diversify, CRL purchased late in 1995, the assets, name and
backlog of a small subcontractor, Desert Assemblies. Desert Assemblies has
been CRL's contract printed circuit board assembler for several years with
proven high quality and ontime delivery. With the downsizing of many
electronic manufacturers in the Phoenix area, the potential market for
subcontract work expanded beyond the capacity of Desert Assemblies. CRL had
excess manufacturing capacity, including inventory handling. This purchase
allows a consolidation of the subcontract operation into the CRL facility
Page 9<PAGE>
making for a more efficient operation for both CRL and Desert Assemblies.
Desert Assemblies operates as a division of CRL.
Sources and Availability of Raw Materials
The Company has experienced no problems in obtaining needed components and
materials. However, because it purchases components and raw material from
outside suppliers, the Company is dependent on those manufacturers and
suppliers. The Company has made informal arrangements with suppliers for
materials and components, and has second and third sources of supply for
most items. The Company has attempted to exclude materials, parts, and
supplies from its product designs for which availability is not reasonably
assured.
Compliance with Environmental Laws
The Company believes that it is in compliance with all environmental laws
and regulations applicable to its operations.
Employees
The Company employs 24 persons, all of whom are full-time, including
clerical, sales, technical and manufacturing personnel, all in Tempe,
Arizona. The Company has not had, and does not expect to have difficulty in
recruiting and training its labor force.
Governmental Approval of Principal Products
No governmental approval is required for the production and sale of any of
the Company's products. Certain international shipments require export
licenses.
Foreign Operations and Export Sales
The Company has no foreign operations. For the year ended December 31,
1997, the Company's export sales totaled approximately $1,140,000 which was
58% of total sales. All foreign sales were made through CRL International,
Inc., the Company's wholly-owned Foreign Sales Corporation, which was
incorporated in Guam in January 1991. The Company's 1997 export sales by
region are as follows:
Region Export Sales Percentage
Europe $ 186,100 16%
Pacific Rim 507,500 44
Latin and South America 77,200 7
Canada and Mexico 214,000 19
Other 155,200 14
Total $1,140,000 100%
ITEM 2 - DESCRIPTION OF PROPERTY
Page 10<PAGE>
In June 1983, the Company contracted for the purchase of land and
construction of a building at 2522 West Geneva Drive, Tempe, Arizona. In
February 1984, the Company moved its operations into this 5,300 square foot
building on a 37,500 square foot parcel of land that currently houses the
Company's executive, administrative, sales and research facilities. This
property is subject to a mortgage collateralizing the property and is
referred to in Note 6 to the Company's Consolidated Financial Statements on
page 21 of the 1997 Report.
In August 1990, the Company entered into a contract for the construction of
an addition to the existing building at 2522 West Geneva Drive. The project
was completed in January 1991 and was financed through cash reserves. The
5,000 square foot addition is being utilized by corporate manufacturing. The
Company believes its plant, equipment and offices are in good condition and
are adequate for the Company's foreseeable future.
It is the Company's policy to not invest in real estate other than that real
estate necessary for the operations of the business.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Page 11<PAGE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
This information is incorporated by reference to "Stock Market Information"
on page 25 of the 1997 Report.
Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This information is incorporated by reference to "Management's Discussion
and Analysis" on pages 8 through 12 of the 1997 Report.
ITEM 7 - FINANCIAL STATEMENTS
This information is incorporated by reference to the Consolidated Financial
Statements on pages 13 through 24 of the 1997 Report.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 12<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Name Age Position
Gary D. Clarkson(1) 45 Chief Executive Officer,
President and a
Director
Erle M. Constable 79 Assistant Treasurer
and Director
Carl E. Matthusen 54 Director
Gary M. Hamker 61 Director
Royce T. Jones 48 Director
Dennis L. Drew 52 Secretary/Treasurer
and Vice President of
Operations
DIRECTORS
Gary D. Clarkson In January 1998, following the death of Mr. Ronald R.
Jones, Mr. Clarkson was elected to the positions of Chief Executive Officer,
President and Chairman. Mr. Clarkson had been Secretary and a director of
the Company since its incorporation and was elected Treasurer in July 1992.
Mr. Clarkson founded Circuit Research Labs with Mr. Jones in 1974, and has
devoted substantially all of his business efforts to the Company's business
since that time. He has been a design engineer for Circuit Research Labs
from 1974 to present. He holds an associate degree in electronics
engineering technology from DeVry Institute of Technology, Phoenix, Arizona.
Mr. Clarkson served as assistant and chief engineer at many radio stations
from 1971 until 1978. Mr. Clarkson is Treasurer and a director of CRL
International, Inc., the Company's wholly owned foreign sales corporation.
Erle M. Constable has served as a director of the Company since 1983 and
Treasurer from January 1987 to November 1988 when he reduced his activity to
Assistant Treasurer. In 1983, Mr. Constable retired from Dynalectron
Corporation (now DYNCORP), then a publicly-held diversified technical
services company where he served as Vice President of Finance and Corporate
Development. He was employed by Dynalectron in 1973, and was in charge of
an acquisition program which merged 15 companies into Dynalectron. Prior to
joining Dynalectron, Mr. Constable worked for Fairchild Industries, Lockheed
Aircraft Corporation, Glenn L. Martin Company and Trans World Airlines. He
holds undergraduate and masters degrees in business administration received
in 1939 and 1940 from the University of Nebraska. Periodically, Mr.
Constable acts as a consultant to the Company and receives an hourly
consulting fee for his services. Mr. Constable is a director of CRL
International, Inc., the Company's wholly owned foreign sales corporation.
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Carl E. Matthusen has served as a director of the Company since February
1988. Mr. Matthusen began his career in the broadcast industry in 1963
serving in various capacities at seven radio
broadcast stations in Arizona, Wisconsin, Minnesota and Virginia. Since
1978, he has been General Manager of KJZZ/Sun Sounds operated by the Mesa
Community College in Mesa, Arizona. In addition, he is a guest lecturer at
Mesa Community College, Phoenix College and Arizona State University as well
as a consultant to Arizona Western Community College and the Arizona
Commission on Post-secondary Education. Mr. Matthusen also served as
Chairman of the Board of Directors of the National Public Radio Network from
1992 to 1996, where he has been a director from 1990 to 1997.
Gary M. Hamker has been a member of the Board of Directors and a Special
Projects Consultant since July 1993. Mr. Hamker is retired from NCR/AT&T
after 30 years in Marketing and Corporate Product Management. While with
NCR/AT&T he had many diversified assignments, including developing new
domestic and international computer product strategies and product/marketing
plans for the worldwide market. He was instrumental in development and
sales strategies of mini-computers and personal computer/network systems
during their infancy. Approval of research and development, new product
specifications, monitoring R&D budgets, developing and approving new product
plans and planning profitable products phase-out, were a few of his
responsibilities. His expertise includes working on system problems, on
proposals to increase market penetration with large multi-national accounts
and on developing internal communications to improve departmental
cooperation and effectiveness. Periodically, Mr. Hamker acts as a
consultant to the Company and receives an hourly consulting fee for his
services.
Royce T. Jones was appointed to the Board of Directors on January 3, 1998
following the death of her husband, Ronald R. Jones. She is employed at the
Wild Toucan restaurant in Sedona, Arizona. Previously she had been a flight
attendant with Hughes Airwest and Northwest Airlines.
OTHER EXECUTIVE OFFICERS
Dennis L. Drew was appointed Secretary/Treasurer in January 1998. Mr. Drew
joined the Company in 1993 as controller. In 1994, he was appointed to the
positions of Vice President of Operations, and Assistant
Secretary/Treasurer. Before joining the Company, Mr. Drew spent three years
as a Project Manager for Computer Cable Specialists. Prior to Computer Cable
Specialists, Mr. Drew held several senior financial management positions
with companies in the computer leasing industry. These positions covered a
wide range of responsibilities including implementing computerized internal
controls to negotiating contracts and loan agreements. Mr. Drew has an MBA
from Arizona State University.
(1) Ronald R. Jones had been Chief Executive Office, President, and a
Director of Circuit Research Labs, Inc. since incorporation in 1978. Mr.
Jones died on January 1, 1998.
Page 14<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
The Company did not pay any individual cash compensation in excess of
$100,000 for services provided during the fiscal year. The following table
sets forth compensation paid or accrued to the chief executive officer
during each of the three years ended December 31, 1997.
Summary Compensation Table
Name and Other
Principal Position Year Salary Bonus Compensation
Ronald R. Jones(1)
President and
Chairman of the Board 1997 $ 72,696 -0- $ 0
1996 72,696 -0- 2,022(2)
1995 72,696 -0- 2,152(2)
(1) Mr. Jones died on January 1, 1998.
(2) Fee paid by Company for the personal guarantee of the SBA loan.
The Company has no employment contracts currently in force. The Company has
agreements with all employees calling for nondisclosure of trade secrets.
The Company has group life, disability, and medical insurance plans, a
401(k) pension plan, and an Employee Stock Purchase Plan. The 1994 Stock
Option Plan was approved by the Company's shareholders at the Company's
annual meeting on May 6, 1994.
Compensation of Directors
During the year ended December 31, 1997, directors received no compensation
for attending meetings.
Employee Pension Plan
The Company sponsors the CRL, INC. 401(k) PROFIT SHARING PLAN (the "Plan")
for the benefit of all employees meeting certain eligibility requirements.
Under the Plan, participants are permitted to make pre-tax contributions to
their plan accounts. The Company will match 50% of a participant's
contributions up to a maximum Company matching contribution of 3% of a
participant's annual compensation. Total annual contributions to a
participant's account may not exceed 25% of annual compensation. In
addition, the Company, at its sole discretion, may make an annual profit
sharing contribution to the Plan out of its current or accumulated profits.
The annual contribution, if any, is allocated to participants based upon
each participant's annual compensation. The Company has not made an annual
contribution and currently has no plans to do so. The Company did not make
a contribution to the account of the individual listed in the preceding cash
compensation table for the year ended December 31, 1997.
Page 15<PAGE>
Stock Purchase Plan
The Company has an employee stock purchase plan which is offered to
substantially all employees, including officers. Employees may purchase the
Company's common stock through payroll deductions not exceeding $50 per week
and shares are purchased at the market price, by a nonaffiliated dealer on
the open market. During 1997, two employees participated in this plan.
Stock Options
The following is a brief summary of the Company's 1994 Stock Option Plan.
The closing bid price of the Company's common stock on the NASDAQ National
Market System on February 27, 1998 was $2.375 per share.
In May 1994, the Company's stockholders approved the Company's 1994 Stock
Option Plan, which set aside an aggregate of 60,000 shares of common stock
for which options may be granted to employees, officers, directors, and
consultants. Options granted and not exercised under the Company's previous
plan were canceled and new options were granted. The Company's Board of
Directors appoints the Stock Option Committee which is authorized to grant
incentive stock options and non qualified stock options under the Plan,
select optionees, determine the number of shares to be granted to each
nominee, select the term of the option (up to ten years), and determine the
price to be paid on the exercise of the option, provided that such price
must not be less than 100% of the market value of the shares subject to the
option at the time it is granted. Each option is exercisable from time to
time subject to such restrictions on exercisability as the Stock Option
Committee may impose at the grant date. This plan expires in April 2004.
As of February 27,1998, options to purchase a total of 15,312 shares were
outstanding to 6 employees and directors.
The following table sets forth information as to all options to purchase
Common Stock under the Plan which were granted to certain officers and
directors and to all officers and directors as a group and which were
outstanding as of February 28, 1998.
Average
Mame Capacities Shares Price
Erle M. Constable Director and
Assistant Treasurer 1,562(1) $1.25
Carl E. Matthusen Director 1,250(2) $1.25
Dennis L. Drew Secretary/Treasurer,
Vice President
Operations 5,000(3) $2.00
Page 16<PAGE>
All officers and directors
as a group (3 individuals) 7,812(4) $1.73
(1) 1,562 shares granted May 6, 1994. All shares became exercisable on
May 6, 1995 and expire May 6, 1999.
(2) 1,250 shares granted May 6, 1994. All shares became exercisable on
May 6, 1995 and expire May 6, 1999.
(3) 5,000 shares granted June 12, 1997. All shares became exercisable on
June 12, 1997 and expire May 6, 1999.
(4) An additional 7,500 shares may be acquired by employees exercising
options which expire May 6, 1999.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. Security Ownership of Certain Beneficial Owners
As of February 27, 1998, the following persons were known by the Company to
be the beneficial owners of more than 5% of the Company's Common Stock:
Amount and
Name and Address of Nature of Percent of
Title of Class Beneficial Owner Beneficial Owner Class(1)
$.10 par value
common Estate of Ronald
R. Jones(2) 187,500 31.4%
of
Charles R. Berry
Titus, Brueckner & Berry, P.C.
Scottsdale Center, Suite B-252
7373 N. Scottsdale Road
Scottsdale, Arizona 85253-3527
$.10 par value
common Gary D. Clarkson 121,312 20.3%
of
Circuit Research Labs, Inc.
2522 West Geneva Drive
Tempe, Arizona 85282
(1) On the basis of 597,682 shares outstanding on February 28, 1998.
(2) It is anticipated that, pursuant to an agreement between the Company
and Ronald R. Jones, the Company will repurchase all of Ronald R. Jones'
187,500 shares from the estate of Ronald R. Jones for the price of
approximately $181,640. The repurchase will take place on or before
May 5, 1998. The Company had a key man life insurance policy on the life of
Ronald R. Jones which is more than sufficient to cover the purchase of the
stock.
B. Security Ownership of Management
Page 17<PAGE>
The stock ownership by directors and officers of the Company as of February
27, 1998 is set forth below. Each person named exercises sole voting power
over all shares beneficially owned.
Amount and
Name and Nature of Percent
Address of Beneficial of Class
Title of Class Beneficial Owner Owner (4)
$.10 par value
common Estate of Ronald
R. Jones 187,500(1) 31.2%
of
% Charles R. Berry
Titus, Brueckner & Berry, P.C.
Scottsdale Center, Suite B-252
7373 N. Scottsdale Road
Scottsdale, Arizona 85253-3527
$.10 par value
common Gary D. Clarkson 121,312 20.2%
$.10 par value
common Erle M. Constable 2,500(2) .4%
$.10 par value
common Carl E. Matthusen 1,250(3) .2%
$.10 par value
common Dennis L. Drew 5,000(4) .8%
All of
Circuit Research Labs, Inc.
2522 West Geneva Drive
Tempe, Arizona 85282
Officer and directors
as a group (5 persons) 317,562(5) 53%(6)
(1) It is anticipated that, pursuant to an agreement between the Company
and Ronald R. Jones, the Company will repurchase all of Ronald R. Jones'
187,500 shares from the estate of Ronald R. Jones for the price of
approximately $181,640. The repurchase will take place on or before May 5,
1998. The Company had a key man life insurance policy on the life of Ronald
R. Jones which is more than sufficient to cover the purchase of the stock.
Royce T. Jones, a Director and widow of Ronald R. Jones, is the beneficiary
of the estate of Ronald R. Jones.
(2) 938 shares owned; 1,562 shares under exercisable options. Held as
community property with Eugenia Constable.
(3) No shares owned; 1,250 shares under exercisable options.
(4) No shares owned; 5,000 shares under exercisable options.
(5) Includes 7,812 shares which may be acquired by exercising stock
options.
(6) Percentage is calculated on the basis that all director and officer
shares under stock options presently exercisable are deemed outstanding, a
Page 18<PAGE>
total of 605,494 shares.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to Notes 6 and 7 of the
Consolidated Financial Statements on pages 21-22 of the 1997 Report.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
The following consolidated financial statements of Circuit Research Labs,
Inc. and subsidiaries are included in the annual report of the registrant to
its stockholders for the year ended December 31, 1997 and are incorporated
by reference in Item 7:
Consolidated balance sheets - December 31, 1997 and
1996.
Consolidated statements of operations - Years ended
December 31, 1997 and 1996.
Consolidated statements of stockholders' equity -
Years ended December 31, 1997 and 1996.
Consolidated statements of cash flows - Years ended
December 31, 1997 and 1996.
Notes to consolidated financial statements - Years
ended December 31, 1997 and 1996.
Exhibit Index
(a) Exhibit No.
11 Schedule of computation of per share earnings - see page
20.
23 Consent of Deloitte & Touche LLP - see page 19.
In addition to the exhibits previously described, the Company
hereby incorporates the following exhibits by reference pursuant to Rule
12B-32, each of which was filed as an exhibit to the Company's Registration
Statement on Form S-18 which was effective October 14, 1983, and
subsequent filings in a timely manner.
3 Articles of Incorporation as Amended and Bylaws
previously filed and incorporated herein by reference
10 Stock Option Plan previously filed and incorporated
herein by reference 1994 Stock Option Plan previously
filed and incorporated herein by reference
13 1997 Annual Report to Security Holders incorporated by
reference Previous Annual Reports to Security Holders and
Forms 10-Q were previously filed in a timely manner and
are incorporated herein by reference.
Page 19<PAGE>
21 Subsidiaries of the Registrant - CRL International, Inc.
the Company's wholly-owned Foreign Sales Corporation was
incorporated in Guam in January 1991.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
1997.
Page 20<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-82176 of Circuit Research Labs, Inc. on Form S-8 of our report dated
March 20, 1998 incorporated by reference in this Annual Report on Form
10-KSB of Circuit Research Labs, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 30, 1998
Page 21<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant
Date: March 29, 1998 By /s/ Gary D. Clarkson
Gary D. Clarkson, Chief
Executive Officer and Chairman
of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 29, 1998 By /s/ Gary D. Clarkson
Gary D. Clarkson,
Chief Executive
Officer and Director
(Principal Executive
Officer)
Date: March 29, 1998 By /s/ Erle M. Constable
Erle M. Constable,
Director
Date: March 29, 1998 By /s/ Carl E. Matthusen
Carl E. Matthusen,
Director
Date: March 29, 1998 By /s/ Gary M. Hamker
Gary M. Hamker,
Director
Date: March 29, 1998 By /s/ Royce Jones
Royce T. Jones,
Director
Date: March 29, 1998 By /s/ Dennis L. Drew
Dennis L. Drew,
Secretary/Treasurer
Vice President
Operations Controller,
CIRCUIT RESEARCH LABS, INC.
CORPORATE PROFILE
Page 22<PAGE>
Circuit Research Labs, Inc. (the "Company") is an electronics company
developing, manufacturing and marketing high quality audio processing and
transmission encoding equipment for the radio, television and professional
audio markets world wide.
The Company's main product lines control the audio quality and range of
radio and television audio reception including generators allowing radio and
television stations to broadcast in stereo. Professional sound
reinforcement and digital audio test equipment is also produced having a
wide range of applications.
SELECTED FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31
1997 1996 1995 1994 1993
Operating Highlights
Net sales $1,953,521 $2,524,870 $1,884,402 $2,074,716 $2,089,390
Other income 11,184 16,860 26,524 29,596 29,119
Total revenues 1,964,705 2,541,730 1,910,926 2,104,312 2,118,509
Net(loss)income(262,296) 123,160 (306,720) (92,427) (126,062)
Net(loss)income
per common share
basic and diluted (.44) .21 (.51) (.15) (.21)
Weighted average
number ofcommon shares
outstanding 597,682 597,682 597,682 597,682 597,682
Balance Sheet Highlights
Current assets$1,263,249 $1,431,175 $1,389,754 $1,466,831 $1,533,432
Current
liabilities 195,746 239,811 321,974 133,355 154,272
Total assets 1,846,598 2,169,590 2,149,670 2,236,761 2,357,265
Long-term
obligations 105,656 122,287 138,458 112,354 119,514
Total liabilities301,402 362,098 460,432 245,709 273,786
Stockholders'
equity 1,545,196 1,807,492 1,689,238 1,991,052 2,083,479
No cash dividends have been declared.
Key Statistics
Current ratio 6.45 5.97 4.32 11.00 9.94
Book value per
share $2.59 $3.02 $2.83 $3.33 $3.49
Working
capital $1,067,503 $1,191,364 $1,067,780 $1,333,476 $1,379,160
Order backlog $138,570 $228,350 $566,720 $103,000 $227,000
Employees 24 35 25 20 26
Page 23 <PAGE>
To CRL Shareholders:
1997 was a disappointing year-not only did we have a reduced sales
volume of approximately $1.9 million ( a 23% decline from 1996) and a net
loss of $262,300, but at the very end of the year we lost our co-founder,
President and Chairman of the Board, Ronald R. Jones.
Ron and I go way back to 1970 when we were students, learning about the
mysteries of radio and television broadcasting. After completing our
technical courses, and in some instances before we completed them, we served
as engineers and technical consultants to local Phoenix, Arizona
broadcasters. In 1978, Circuit Research Labs, Inc. was formed, becoming a
public company in 1983 when you brought in much needed capital and support,
which was greatly appreciated.
Your Company is dedicated to serving the audio processing requirements in
the broadcast industry with high quality products, the best in customer
service and integrity in it dealings. The loyal CRL workforce and I will do
all we possibly can to maintain and improve our reputation and to return the
operation to a profitable level.
During the last few years the majority of our sales have been in the
international marketplace, a major portion of which included the Pacific
Rim, which has recently been hard hit economically. Since marketing our
limited product line worldwide is quite expensive, as we found out in 1997,
we hope to develop a relationship with producers of other broadcast products
for joint marketing efforts, reducing costs for all participants. With
improved products and marketing, we believe that the US and Canada markets
will provide increased sales volume in the near future.
Although we suffered a significant operating loss in 1997, the proceeds
of key man life insurance have provided us with sufficient funds to purchase
the shares in the Company from the estate of Ronald R. Jones, pay off the
mortgage on the building leaving us debt free, and supply working capital to
support our 1998 efforts.
Thank you all for your support
Very truly yours,
Gary Clarkson
President
Page 24<PAGE>
CIRCUIT RESEARCH LABS, INC.
Corporate Overview
Founded in 1974 as broadcast industry consultants, Circuit Research Labs
built upon its understanding of the broadcast industry's needs by expanding
into product development and manufacturing. In 1978, Circuit Research Labs,
Inc., herein after referred to as the Company or CRL, was incorporated , and
in late 1983 became registered as a public company on the NASDAQ stock
exchange.
Since the first product, which was designed to improve the "coverage and
quality" of low powered AM radio stations, CRL has been committed to
improving broadcast quality. CRL's product lines have grown to include
digital and analog audio processing and encoding devices for monaural or
stereo AM or FM radio, international short-wave and mono or stereo
television, RDS/RBDS generators and receivers and digital audio analyzers.
These products are labeled "CRL Systems".
Corporate Strategy
CRL is dedicated to serving the audio processing needs of the broadcast and
professional audio markets with the highest quality products utilizing
state-of-the-art technology. To achieve this goal requires a high level of
research and development and CRL commits a large portion of its revenues to
developing new products and constantly improving existing product
performances. CRL also monitors new technology frontiers in our existing
markets and others for possible product improvements. CRL has confidence in
its engineers' expertise to develop new products on the leading edge of
technology for the broadcast industry.
In order to prevent dependency on one market, when appropriate, consultants,
licensing of technology and acquisition of product lines are also used to
diversify operations. CRL also encourages product engineering and
development for other complementary broadcast manufacturers. Examples
include the development of digital audio analyzers and the acquisition of
Desert Assemblies.
CRL's production capabilities are constantly being improved and new
marketing concepts are being developed to provide increased market share.
Trusting in our dealers internationally and domestically for final product
distribution, the CRL marketing and sales staff works directly in sales
efforts with potential customers along with and for its dealers. Supported
by an efficient customer service department, CRL maintains a reputation for
excellent business ethics and selling standards.
The Broadcast Industry and CRL
Page 25<PAGE>
CRL was a major participant in the National Radio Systems Committee (NRSC)
which developed standards for AM stations adopted by the FCC. During 1987,
CRL developed and produced equipment enabling AM stations to meet certain
NRSC standards and continues to be a market leader in AM processing.
CRL is a member of the National Association of Broadcasters (NAB). The NAB
is the world's largest, most extensive broadcaster's association, offering a
wide variety of services to radio and television stations, as well as
organizations that provide products and/or services to the broadcast
industry. CRL's staff contribute articles and technical papers to various
NAB publications and participate in technical conferences.
CRL is a member of the (Radio Data Systems) RDS Forum. The Forum promotes
the exchange of experience between broadcasters and manufacturers on RDS
system implementation and provides guidance to manufacturers on
broadcasters' operational needs. RDS is a system which enables a FM radio
station to transmit digital data without interfering with the current audio
signal.
In 1985, CRL purchased all rights to the patented dynafexR chip. The
dynafexR noise reduction system effectively reduces tape hiss and other
background noises from virtually any audio source. Two products are being
produced under the dynafexR label and most CRL processors utilize the
dynafexR chip.
In the last quarter of 1995, CRL acquired Desert Assemblies, a contract
electronic assemblies company. The acquisition of Desert Assemblies expanded
and enhanced CRL's production capabilities. CRL now possesses the ability to
design, build and test products for other companies (turnkey production).
CRL holds several patents on component designs for CRL products within the
broadcast industry.
The Principal Products
AUDIO PROCESSING PRODUCTS
CRL's audio processing equipment for radio broadcast can be separated into
four different series or product families, Digital Series, Modular Series,
Amigo Series and the Signature Series.
Digital Series
Page 26<PAGE>
The newest addition to CRL's radio processors is the Digital Series. CRL
digital products are on the leading edge of technology with 100% digital
architecture. The principal products are:
DP-100 Digital Processor The CRL DP-100 digital processor is
CRL's FM digital processing line. It is currently the only major
digital audio processor to use 32 bit floating-point technology.
Its advance design allows the unit to serve a long life in its
customer's hands. The modular construction makes it possible for
CRL to offer specific PCB upgrades without changing the main
chassis. This design approach allows CRL to sell additional
upgrade products to current users of the DP-100. The DP-100 FM
digital processor gives a strong, high quality sound that attracts
and holds the listening audience. The radio audience will enjoy a
clear, bright and appealing sound that is easy to listen to for
long periods of time. The DP-100 uses the latest digital
technology to its fullest potential to produce the most advanced
digital processor on the market. The DP-100 includes a true
digital stereo multiplex generator, gated AGC (Audio Gain
Controller), 5 band compressor, multi-band limiter and graphic
equalizer. Also included is CRL's exclusive stereo sound
enhancement.
SC-100 RDS/RBDS (Radio Data Systems/Radio Broadcast Data Systems)
allows a FM radio station to transmit additional streams of
digital information giving the station new promotional methods,
new public service opportunities and exciting new revenue
possibilities. CRL's SC-100 is a RDS/RBDS generator using the
latest in DSP (Digital Signal Processing) digital technology. The
visual text message that the SC-100 sends to the new "smart
radios" can be used for call letter and slogan recognition,
traffic and weather reports, emergency alert messages and display
advertising. The SC-100 can also be used for paging, billboard
sign control, global positioning, plus other exciting
applications. In addition, CRL has become a value added reseller
of equipment to build RDS/RBDS paging systems. CRL configures the
system to the customer's requirements and, for an additional fee,
oversees the installation of the system.
Modular Series
In its Modular Series, CRL designed the entire AM or FM processing chain as
building blocks. As a result, the station can start simply, with just a
limiter and stereo generator, for instance, and then add a compressor later
as its processing needs change and its budget allows. The modular approach
allows the radio station to buy just what it needs. The principal Modular
systems are:
Page 27<PAGE>
FM1g A basic FM audio processing system consisting of CRL's
automatic gain controller (AGC) /limiter and digitally synthesized
stereo generator.
FM2g A complete system with an AGC, a limiting system and
digitally synthesized stereo generator.
FM2g+ A comprehensive FM system with an AGC, a limiter, a
digitally synthesized stereo generator and four band compressor.
AM2m An AGC and a peak limiter are the two components of this
basic mono AM system.
AM4m CRL's most popular AM system is a three unit system
consisting of an AGC, a modulation limiter and four band
compressor.
AM2s CRL's basic stereo AM system includes a stereo AGC and a
limiter.
AM4s Three components form CRL's enhanced stereo AM system. The
system includes a stereo AGC, four band compressor/equalizer and
matrix limiter.
Amigo Series
The next family of radio processing is the Amigo Series. The Amigo family of
processors is an integrated "one box" processing system designed for the
small to mid-size station in both international and domestic markets. The
Amigo family of processors is the best performing processor in its class.
The principal Amigo systems are:
Amigo The Amigo is a combination of a dual band AGC, a variable
pre-emphasis multi-band limiter and digitally synthesized stereo
generator. The single unit contains a complete FM audio processing
system. The Company believes the Amigo is flexible and powerful,
yet designed for easy set up and use. The Amigo FM is one of CRL's
most popular selling systems.
Amigo AM The Amigo AM is a complete stereo audio processing
system. It includes CRL's patented AM stereo processing circuitry
as found in the modular AM systems. The system includes a dual
band AGC, triband limiter, and NRSC (National Radio Systems
Committee) output filtering. The Amigo AM can be used on mono for
customers waiting to convert to stereo.
BAP-2000 A complete stand alone audio processor for any mono FM.
The system consists of an advanced dual band audio AGC and
limiter. Internal options selected by the radio station allow the
BAP-2000 to be tailored to handle most any mono audio control job.
Signature Series
The Signature Series is a high performance audio processing system. The
principal products are:
Page 28<PAGE>
Audio Signature The Audio Signature gives the power of digital
control with multi-band compression and limiting for high
performance power. The FM Audio Signature includes a stereo AGC
and four band compressor with a sophisticated set of processing
controls to produce the radio station's own unique and distinctive
sound.
Modulation Signature The Modulation Signature features a digitally
modulated stereo generator and a fully adjustable limiting system.
Real Time Event Sequencer The Real Time Event Sequencer is a
programmable event timer that can control any combination of eight
outputs and store up to 255 events. Events can be programmed to
the second for each day of the week, for each different month of
the year.
Television Products
CRL has a complete line of quality audio processing, plus Stereo, SAP
(secondary audio program, primarily designed for public second language
usage) and PRO channel (non-public use with integrated input limiter, data
and telemetry inputs) generators. The audio processing was designed with
surround sound compatibility in mind. Many first generation stereo users are
converting over to the TVS-3000 series of products because of it surround
sound capabilities.
TVS-3001 The TVS-3001 is a state-of-the-art stereo television
processing system that offers maximum control of the audio program
material. It includes a precision tri-band AGC with horizontal
sync rejection filter, exclusive CRL/CBS loudness control
circuitry, reversed phase audio corrector and audio asymmetry
removal circuits.
TVS-3003 The TVS-3003 is a digitally synthesized MTS generator
with dbx encoding, advanced transfer function pre-emphasis limiter
and a proprietary stereo sound field enhancer.
TVS-3004 The TVS-3004 Professional Channel (PRO) generator is a
digitally synthesized subcarrier generator for non-public use with
integrated input limiter, data and telemetry inputs.
TVS-3005 The TVS-3005 is a digitally synthesized subcarrier
generator for a secondary audio program (SAP) channel, primarily
designed for public second language usage.
BAP-2000 The BAP-2000 is a complete audio processor with
horizontal sync rejection filter for mono television applications.
Noise Reduction Systems
Page 29<PAGE>
DX1 & DX2 For the professional audio and music industry, CRL
manufactures noise reduction systems incorporating an integrated
circuit patented under the dynafexR name. The dynafexR noise reduction
system effectively reduces tap hiss and other background noises from
virtually any audio source. The dynafex system is available in mono
(DX1) and stereo (DX2). The dynafex chip is also utilized in all CRL
products where possible.
Test and Measurement
DAA-50 With the conversion of audio technology to digital, CRL
recognized the need for an inexpensive test and analysis tool and
developed the DAA-50. The DAA-50 receives and decodes audio data. A
variety of information about the signal can be determined through
easily defined LED status indicator lights. Compact and light weight,
the DAA-50 can be used when and wherever it's needed.
Technology Research And Development
Tektronix AM70 CRL licensed certain digital audio testing technology
to Tektronix. Tektronix's Pathfinder AM70 Audio Analyzer/Generator is
the product of this combined effort. The AM70 is a handheld
programmable audio product that operates in three modes: generator
(serves as source of analog and digital signals), monitor (provides
visual and audible output), and modify (allows real-time editing).
New Products
The Company continued to add new features and improvements to the DP100
Digital Processor and the SC-100 RDS/RBDS generator for paging. In addition,
CRL is continuing to research and develop new products for release in the
coming years.
Page 30<PAGE>
CIRCUIT RESEARCH LABS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
YEARS ENDED DECEMBER 31, 1997 AND 1996
RESULTS OF OPERATIONS
The following tables set forth financial information for each of the four
quarters of the year ended December 31, 1997 and for the years ended
December 31, 1997 and 1996.
1997 Quarters Ended
Mar 31 Jun 30 Sep 30 Dec 31
Net sales $510,851 $506,287 $557,549 $378,834
Other income 1,587 2,189 1,147 6,261
Total revenues $512,438 $508,476 $558,696 $385,095
Gross profit on net sales $304,014 $228,936 $290,509 $139,436
Gross profit percent 60% 45% 52% 37%
Net income (loss) $ 812 $(51,218) $(16,783) $(195,107)
Net income (loss) percent
of net sales 0% (10%) (3%) (51%)
Income (loss) per share $.00 $(.09) $(.03) $(.32)
Years Ended December 31
1997 1996
Net sales $1,953,521 $2,524,870
Other income 11,184 16,860
Total revenues $1,964,705 $2,541,730
Gross profit on net sales $ 962,895 $1,397,664
Gross profit percent 49% 55%
Net (loss) income $(262,296) $123,160
Net (loss) income percent (13%) 5%
(Loss) income per share $(.44) $. 21
The primary factors affecting the results of the Company's 1997 operations
compared to 1996 are a decrease in sales and a decrease in the gross profit
margin without any corresponding decrease in selling, general and
administrative expenses.
Page 31<PAGE>
Net sales in 1997 decreased 23% to $1,954,000 compared to $2,525,000 for
1996. The decrease is the result of slow demand for CRL's audio processing
equipment, in both the domestic and international markets.
Cost of goods sold in 1997 was 51% of net sales compared to 45% in 1996. The
increase is the result of the expected lower profit margins in the sales of
package paging systems and CRL's circuit board assembly division. The
current profit margins are expected to continue in the future. The Company
also increased its reserve for obsolete inventory which also contributed to
the increase in cost of goods sold. The cost of goods sold on CRL's main
product lines for the year ended December 31, 1997 was 41% which was
comparable to 38% for the same period of 1996.
Selling, general and administrative expense in 1997 of $996,000 was
comparable to the selling, general and administrative expense in 1996 of
$996,000.
Research and development expense for the year ended December 31, 1997 was
$219,000, a decrease of $53,000 compared to $272,000 for the same period of
1996. The decrease was the result of lower developmental cost on new product
lines and lower labor cost resulting from not having contract engineers on
staff.
Interest and other income of $11,000 for the year ended December 31, 1997
was $6,000 lower than 1996 interest of $17,000. The decrease was due to
lower income from investments as a result of the decrease in funds invested.
FINANCIAL CONDITION
At December 31, 1997, the Company had net working capital of $1,068,000 and
a current ratio of 6.45 to 1. In 1997, net cash used in operating activities
increased to $42,000 from $18,000 in 1996, primarily as the result of the
Company's net loss versus net income offset in part by increased non- cash
charges for depreciation, amortization and inventory reserves and changes in
other working capital accounts.
On February 6, 1998, the Company received $1,033,000 as proceeds of an
insurance policy payable upon the death of Ronald R. Jones. Pursuant to an
agreement between the Company and Ronald R. Jones, the Company will
repurchase all of Ronald R. Jones' 187,500 shares from the estate of Ronald
R. Jones for the price of approximately $181,640. The repurchase will
take place on or before May 5, 1998. The Company also anticipates paying off
the balance of the mortgage note collateralized by the Company's operating
facility. The balance of the funds will be available for operations.
The Company's credit line expired on July 1, 1996, and since it had not
been used, the Company did not pursue its renewal. The Company believes
future liquidity needs will be met by a combination of cash generated from
future operations, the reduction of investments and existing cash balances.
Page 32<PAGE>
CRL believes that its financial resources are adequate to fund its
operations in 1998.
Receivables at December 31, 1997 of $112,000 were $78,000 lower than the
December 31, 1996 balance of $190,000. The decrease was due to the decrease
in sales in the fourth quarter of 1997 compared to the fourth quarter of
1996 of $307,716. The Company's credit policy remains the same as in
previous years, with letters-of-credit for international shipments and
short-term extension of payment terms to domestic dealers.
Inventories of $883,000 at December 31, 1997 decreased $73,000 compared to
$956,000 at December 31, 1996. The decrease was due to lower levels of raw
materials and an increase in the allowance for inventory obsolescence,
offset by an increase in finished goods.
There were no major capital expenditures in 1997, and none are anticipated
for 1998.
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 compliance issue. The
Company expects to be Year 2000 compliant by year end 1998 by continuing to
upgrade its current accounting and financial software. The Company's
accounting software for its financial systems is under a maintenance
contract which covers Year 2000 compliance, so no additional costs are
expected to be incurred.
The documents includes "forward-looking" statements within the meaning of
the Private Securities Litigation Reform Act of 1996. Management's
anticipation of future events is based upon assumptions regarding levels of
competition, research and development results, raw material markets, the
markets in which the Company operates, and stability of the regulatory
environment. Any of these assumptions could prove inaccurate, and therefore
there can be no assurance that the forward-looking information will prove to
be accurate.
Page 33<PAGE>
CIRCUIT RESEARCH LABS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
YEARS ENDED DECEMBER 31, 1996 AND 1995
RESULTS OF OPERATIONS
The following tables set forth financial information for each of the four
quarters of the year ended December 31, 1996 and for the years ended
December 31, 1996 and 1995.
1996 Quarters Ended
Mar 31 Jun 30 Sep 30 Dec 31
Net sales $607,264 $599,761 $631,295 $686,550
Other income 5,005 3,461 4,215 4,179
Total revenues $612,269 $603,222 $635,510 $690,729
Gross profit on net sales $390,921 $354,460 $360,987 $291,296
Gross profit percent 64% 59% 57% 42%
Net income $21,232 $ 30,970 $64,984 $5,974
Net income percent 3% 5% 10% .01%
Income per share $.04 $.05 $.10 $.01
Years Ended December 31
1996 1995
Net sales $2,524,870 $1,884,402
Other income 16,860 26,524
Total revenues $2,541,730 $1,910,926
Gross profit on net sales $1,397,664 $1,188,266
Gross profit percent 55% 63%
Net income (loss) $123,160 $(306,720)
Net income (loss) percent of net sales
5% (16)%
Income (loss) per share $.21 $ (.51)
The primary factors affecting the results of the Company's 1996 operations
compared to 1995 were an increase in sales, as well as reductions in
selling, general and administrative expenses and research and development
costs.
Page 34<PAGE>
Net sales in 1996 increased 34% to $2,525,000 compared to $1,884,000 for
1995. The increase was the result of increased sales of CRL's audio
processing equipment, the sales of package paging systems that compliment
the sales of CRL's SC100, and revenues from CRL's circuit board assembly
division.
Cost of goods sold in 1996 was 45% of net sales compared to 37% in 1995. The
increase was the result of the expected lower profit margins in the sales of
package paging systems and CRL's circuit board assembly division. The cost
of goods sold on CRL's main product lines for the year ended December 31,
1996 was 38% which was consistent with 37% for the same period of 1995.
Selling, general and administrative expense in 1996 of $996,000 was
comparable to the selling, general and administrative expense in 1995 of
$1,056,000. The $60,000 decrease was due primarily to a decrease in domestic
and international marketing costs including travel and trade show costs.
Research and development expense for the period ended December 31, 1996 was
$272,000 a decrease of $158,000 compared to the same period of 1995 of
$430,000. The decrease was the result of lower developmental cost on the new
product lines and lower labor cost resulting from not having contract
engineers on staff.
Interest and other income of $17,000 for the period ended December 31, 1996
was $10,000 lower than for the same period of 1995 of $27,000. The decrease
was due to lower income from investments as a result of the decrease in
funds invested.
FINANCIAL CONDITION
At December 31, 1996, the Company had net working capital of $1,191,000 and
a current ratio of 5.97 to 1. In 1996, net cash used in operating activities
decreased to $18,000 from $81,000 in 1995, primarily as the result of the
Company's net income versus net loss offset in part by net reductions in
accounts payable and accrued expenses.
Receivables at December 31, 1996 of $190,000 increased from the December 31,
1995 balance of $162,000, based on fourth quarter sales of $687,000 in 1996
compared to $436,000 in 1995.
Inventories of $956,000 at December 31, 1996 increased $119,000 compared to
$837,000 of inventories at December 31, 1995. The increase was the result of
raw material purchases for the production of the Company's product, the
DP-100.
There were no major capital expenditures in 1996.
Page 35<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Circuit Research Labs, Inc.
Tempe, Arizona
We have audited the accompanying consolidated balance sheets of Circuit
Research Labs, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Circuit Research Labs, Inc.
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 12, the Company's Secretary/Treasurer was appointed
President and Chief Executive Officer on January 2, 1998, following the
death on the previous day of the Company's then President and Chief
Executive Officer.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 20, 1998
Page 36<PAGE>
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash $ 119,851 $ 48,048
Securities available-for-sale (Note 3) 89,607 167,961
Accounts receivable, less allowance for
doubtful accounts of $6,520 112,320 189,616
Inventories (Note 4) 883,125 955,922
Prepaid expenses and other 58,346 69,628
Total current assets 1,263,249 1,431,175
PROPERTY, PLANT AND EQUIPMENT - Net
Notes 5 and 6) 531,555 578,564
OTHER ASSETS - Net 51,794 159,851
TOTAL $1,846,598 $2,169,590
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 53,382 $ 64,650
Accrued salaries and benefits 63,086 65,699
Accrued professional fees 29,302 21,976
Customer deposits 26,180 40,432
Other accrued expenses and liabilities 7,315 31,826
Current portion of long-term debt (Note 6) 16,481 15,228
Total current liabilities 195,746 239,811
LONG-TERM DEBT - Net of current portion
(Note 6) 105,656 122,287
Total liabilities 301,402 362,098
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $100 par value -
authorized, 500,000 shares, none issued
Common stock, $.10 par value - authorized
20,000,000 shares,597,682 shares issued
and outstanding 59,768 59,768
Additional paid-in capital 1,247,240 1,247,240
Retained earnings 238,188 500,484
Total stockholders' equity 1,545,196 1,807,492
TOTAL $1,846,598 $2,169,590
See notes to consolidated financial statements.
Page 37<PAGE>
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
NET SALES (Note 10) $1,953,521 $2,524,870
COST OF GOODS SOLD 990,626 1,127,206
Gross profit 962,895 1,397,664
OPERATING EXPENSES (Note 11):
Selling, general and administrative 995,550 995,882
Research and development 219,090 272,354
Total operating expenses 1,214,640 1,268,236
(LOSS) INCOME FROM OPERATIONS (251,745) 129,428
OTHER INCOME (EXPENSE):
Interest and other income 11,184 16,860
Interest expense (18,685) (23,078)
Total other expense (7,501) (6,218)
(LOSS) INCOME BEFORE INCOME TAX
PROVISION (259,246) 123,210
INCOME TAX PROVISION (Note 9): 3,050 50
NET (LOSS) INCOME $ (262,296) $ 123,160
(LOSS) INCOME PER COMMON SHARE -
BASIC (Note 8) $(.44) $ .21
(LOSS) INCOME PER COMMON SHARE -
DILUTED (Note 8) $(.44) $ .21
See notes to consolidated financial statements.
Page 38<PAGE>
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
Unrealized
Appreciation
Additional On
Common Paid-in Retained Securities
Stock Capital Earnings Available-
for-Sale Total
BALANCE,
JANUARY 1, 1996 $59,768 $1,247,240 $ 377,324 $4,906 $1,689,238
Unrealized
depreciation on
securities available-
for-sale (4,906) (4,906)
Net income 123,160 123,160
BALANCE,
DECEMBER 31, 1996 59,768 1,247,240 500,484 1,807,492
Net loss (262,296) (262,296)
BALANCE,
DECEMBER 31, 1997 $59,768 $1,247,240 $ 238,188 $0 $1,545,196
See notes to consolidated financial statements.
Page 39<PAGE>
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
OPERATING ACTIVITIES:
Net (loss) income $(262,296) $ 123,160
Adjustments to reconcile net
(loss) income to net cash used in
operating activities:
Depreciation and amortization 103,866 80,958
Loss on disposal of assets 10,382
Increase in inventory reserves 44,000 25,000
Changes in assets and liabilities:
Accounts receivable 77,296 (27,374)
Inventories 28,797 (144,294)
Prepaid expenses and other 11,282 (2,385)
Other assets (10,244) 4,832
Accounts payable and accrued
expenses (45,318) (78,255)
Net cash used in operating
activities (42,235) (18,358)
INVESTING ACTIVITIES:
Capital expenditures (36,101) (65,370)
Proceeds on sale of fixed assets 3,000
Purchase of securities (208,437) (264,931)
Proceeds from sale or maturity
of securities 289,764 389,731
Payments received on stockholder notes 1,081
Net cash provided by investing
activities 48,226 60,511
FINANCING ACTIVITIES:
Principal payments on long-term debt (15,378) (20,079)
Redemption of life insurance cash
surrender value 81,190
Net cash provided by (used in)
financing activities 65,812 (20,079)
NET INCREASE IN CASH 71,803 22 074
CASH, BEGINNING OF YEAR 48,048 25,974
CASH, END OF YEAR $ 119,851 $ 48,048
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 18,685 $ 23,078
Cash paid for income taxes $3,050 $ 50
See notes to consolidated financial statements.
Page 40<PAGE>
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Circuit Research Labs, Inc. and its wholly-owned
subsidiaries: CRL Systems, Inc., National Communications Research
Center, Inc. ("NCRC") and CRL International, Inc. (collectively, the
"Company"). Significant intercompany accounts and transactions have
been eliminated in consolidation.
Securities available-for-sale are securities being held for indefinite
periods of time, including securities that management intends to use for
liquidity needs or that may be sold in response to changes in interest
rates, prepayments or other factors and are carried at estimated fair
value, with the net, after-tax unrealized gain or loss recorded as a
separate component of stockholders' equity with no effect on current
results of operations. Realized gains and losses are included in other
income and are computed using specific identification.
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the related assets ranging from 2 to 5 years for furniture, fixtures,
machinery and equipment, and 31.5 years for building and improvements.
Other assets consist principally of cash surrender values on officers'
life insurance and patents which are stated at cost less amortization
computed on the straight-line method over the underlying asset's
estimated useful life. Accumulated amortization of patents was $38,079
and $36,979 at December 31, 1997 and 1996, respectively.
Long-Lived Assets - In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, the Company reviews the carrying
value of its long-lived assets and identifiable intangibles for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets to be held and used may not be recoverable.
For assets to be disposed of, the Company reports long-lived assets and
certain identifiable intangibles at the lower of carrying amount or fair
value less cost to sell. During 1997, the Company wrote off the
remaining $26,000 of non-compete agreement related to its 1995
acquisition of Desert Assemblies as the results of this division were
Page 41<PAGE>
not as profitable as originally anticipated. Such amount has been
included in cost of goods sold.
Revenue is recognized on sales of products at the time of shipment.
Research and development costs are charged to expense as incurred.
Income Taxes - Income tax expense is calculated under the liability
method as required under SFAS No. 109. Under the liability method,
deferred tax assets and liabilities are determined based upon the
differences between financial statement carrying amounts and the tax
bases of existing assets and liabilities and are measured at the tax
rates that will be in effect when these differences reverse.
Financial Instruments - SFAS No. 107 "Disclosures About Fair Value of
Financial Instruments" was adopted for the year ended December 31, 1996.
SFAS No. 107 requires disclosures of the estimated fair value of certain
financial instruments. The Company has estimated the fair value of its
financial instruments using available market data. However, considerable
judgment is required in interpreting market data to develop estimates of
fair value. The use of different market assumptions or methodologies may
have a material effect on the estimates of fair value. The carrying
values of cash, securities available-for-sale, receivables, accounts
payable and long-term debt approximate fair values due to the short-term
maturities or market rates of interest of these instruments.
Income (Loss) Per Share - In March 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share",
which is effective for financial statements for both interim and annual
periods ending after December 15, 1997. The Company has implemented this
Statement and, as required, has restated income (loss) per share ("EPS")
for all periods presented. This new standard requires dual presentation
of "basic" and "diluted" EPS on the face of the statement of operations
and requires a reconciliation of the numerator and denominator of basic
and diluted EPS calculations. (See Note 8). Basic income per common
share is computed on the weighted average number of shares of common
stock outstanding during each period. Diluted income per common share is
computed on the weighted average number of shares of common stock
outstanding plus additional shares representing the exercise of
outstanding common stock options using the treasury stock method.
Preferred stock may be issued in amounts with such designations,
preferences, voting rights, privileges and such other restrictions and
qualifications as the Board of Directors may establish. No preferred
stock has been issued.
New accounting pronouncements - In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information", which are
effective for financial statements for periods beginning after December
Page 42<PAGE>
15, 1997. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional capital in the equity
section of a statement of financial position. SFAS No. 131 establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for disclosures about products and services, geographic areas
and major customers. The Company has not completed evaluating the
effects these statements will have on its financial reporting and
disclosures. The statements will have no effect on the Company's
financial position or results of operations.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Reclassifications - Certain reclassifications were made to the
1996 financial statements to conform with the 1997
presentation.
2. DESCRIPTION OF BUSINESS
The Company develops, manufactures and markets audio processing and
transmission encoding equipment for the broadcast and professional
entertainment industries. In addition,the Company has become a value
added reseller of equipment to build RDS/RBDS paging systems. CRL
configures the system to the customer's requirements and for an
additional fee, can oversee the installation of the system. The Company
also acts as a subcontractor for circuit board assemblies, since
December 4, 1995 when it purchased certain assets of Desert Assemblies,
a former contractor and sub-assembler for the Company.
3. SECURITIES AVAILABLE-FOR-SALE
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" requires the classification of securities at acquisition
into one of three categories: held-to-maturity, available-for-sale or
trading -- with different reporting requirements for each
classification. All of the Company's marketable securities are
classified as available-for-sale. The fair value of the Company's
securities are estimated based on quoted market prices for those or
similar instruments.
Page 43<PAGE>
A summary of the Company's securities is as follows at December 31:
1997 1996
Amortized cost and estimated fair value:
United States Treasury bonds $ 89,607 $117,961
Preferred stocks 50,000
Total $ 89,607 $167,961
At December 31, 1997, the United States Treasury bonds mature
in 1998.
4. INVENTORIES
Inventories consist of the following at December 31:
1997 1996
Raw materials and supplies $176,439 $335,072
Work in process 289,690 314,291
Finished goods 416,996 306,559
Total $883,125 $955,922
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at
December 31:
1997 1996
Land $130,869 $130,869
Building and improvements 497,004 497,004
Furniture and fixtures 300,628 397,546
Machinery and equipment 599,864 616,081
Total 1,528,365 1,641,500
Less accumulated depreciation 996,810 1,062,936
Property, plant and equipment - net $ 531,555 $ 578,564
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1997 1996
12.7% mortgage note collateralized by
the Company's operating facility requiring
monthly principal and interest payments of
$1,913 through April 2004 $ 95,166 $104,385
Noninterest-bearing note issued in
connection with acquisition of Desert
Page 44<PAGE>
Assemblies,requiring annual payments of
$11,000 through January 2000 30,000 39,000
Less unamortized discount based on imputed
interest rate of 10% (3,029) (5,870)
T otal 122,137 137,515
Less current portion (16,481)(15,228)
Long-term debt, net of current portion $105,656 $122,287
Principal payments on long-term debt are scheduled as follows: 1998,
$16,481; 1999, $21,838; 2000, $24,521, 2001, $15,465, 2002 $17,105 and
$26,727 thereafter.
The Board of Directors of the Company has elected to provide
compensation to two principal stockholders for their continuing
guarantee of the long-term note payable for the Company's oper
ating facility. Such compensation is calculated at 3% of the
outstanding balance of the long-term note payable at each fiscal
year-end .
7. STOCK OPTIONS
In May 1994, the Company's stockholders approved the Company's 1994
Stock Option Plan, which set aside an aggregate of 60,000 shares of
common stock for which options may be granted to employees, officers,
directors, and consultants. Options granted and not exercised under the
Company's previous plan were canceled and new options were granted. In
accordance with the plan, 15,312 options have been granted. Information
with respect to the stock option transactions is as follows:
Weighted
Average Exercise
Shares Price
Outstanding at January 1, 1996 14,062 $1.25
Canceled (3,750) $1.25
Outstanding at December 31, 1996 10,312 $1.25
Granted 5,000 $2.00
Outstanding at December 31, 1997 15,312 $1.49
Options are typically exercisable upon the grant date for up to
3 years at a price equal to 100% of the fair market value at
the date of grant. All options are currently exercisable, and
the expiration date is May 6, 1999. The aggregate exercise
price of options outstanding at December 31, 1997 was $22,890.
The estimated fair value of options granted during 1997 was
$.51 per share. The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation
cost for the Company's stock option plan been determined
Page 45<PAGE>
based on the fair value at the grant dates for awards
consistent with the method of SFAS No.123, the Company's net
loss per share for the year ended December 31, 1997 would have
been increased to the pro forma amounts indicated below:
Net loss - as reported $(262,296)
Net loss - pro forma (264,846)
Loss per share - as reported (0.44)
Loss per share - pro forma (0.44)
The fair market value of each option grant is estimated on the
date of grant using the Black-Scholes options pricing model
with the following weighted-average assumptions used for
grants: no dividend yield, expected volatility of 35%,
risk-free interest rate of 7%, and expected lives of two
years.
8. INCOME (LOSS) PER SHARE
As discussed in Note 1, the following is a reconciliation of
the numerator and denominator of the basic and diluted income
per share computations for the year ended December 31, 1996 as
required by SFAS No. 128. Loss per share amounts for the year
ended December 31, 1997 are calculated using only the weighted
average outstanding shares of 597,682. Options to purchase
10,312 and 5,000 shares of common stock at $1.25 and $2.00 per
share, respectively, were outstanding during the year ended
December 31, 1997 but were not included in the computation of
diluted EPS because their effect would be anti-dilutive.
For the Year Ended December 31, 1996
Income Shares Per Share
(Numerator)(Denominator) Amount
Basic
Income available to
common stockholders $ 123,160 597,682 $ 0.21
Effect of dilutive stock
options 2,222
Diluted
Income available to common
stockholders and assumed
conversions $ 123,160 599,904 $ 0.21
Page 46<PAGE>
9. INCOME TAXES
The principal reasons for the difference between the income tax
provision and the amounts computed by applying the statutory income tax
rates to (loss) income before income tax provision for the years
ended December 31, are as follows:
1997 1996
Federal tax at statutory rates $(88,000)$ 31,000
State tax at statutory rates (15,600) 11,000
Preferred foreign income 22,700
Officers' life insurance 5,900 4,300
Use of net operating loss (47,450)
Increase in valuation allowance 83,700
Other ( 5,650) 1,200
Total $ 3,050 $ 50
At December 31, deferred taxes represent the tax effect of temporary
differences related to:
1997 1996
Current deferred taxes:
Inventory capitalization $ 20,600 $ 22,300
Prepaid expenses (22,900) (24,900)
Inventory obsolescence reserve 57,800 40,100
Allowance for doubtful accounts 2,600 2,600
Other 500
Deferred tax valuation allowance (58,100) (40,600)
Total $ 0 $ 0
Non-current deferred taxes:
Depreciation and amortization $(33,200) $(28,000)
Operating loss carryforward 144,600 70,500
Federal general business credit
carryforward 85,000 85,000
Other 2,700
Deferred tax valuation allowance (196,400) (130,200)
Total $ 0 $ 0
At December 31, 1997, a valuation allowance totaling $ 254,500
was recorded which relates to, among other items, federal and
state net operating losses and federal general business credit
carryforwards for which the utilization is not reasonably
assured. Net operating loss carryforwards of approximately
$362,000 which expire through 2012 are available for federal
income tax purposes.
10.SALES TO MAJOR CUSTOMERS AND EXPORT SALES
Sales during each of the two years ended December 31, 1997 were
conducted primarily through wholesale distributors and dealers. Two
Page 47<PAGE>
wholesale distributors accounted for 13% and 14% of net sales for the
year ended December 31, 1997 and 7% and 9%, respectively, for the year
ended December 31, 1996.
International sales in 1997 and 1996 totaled approximately $1,140,000
and $1,549,400, respectively. Foreign sales are made through the
Company's wholly-owned foreign sales corporation. The Company requires
that all sales be paid in U.S. currency. Accordingly, there are no
foreign currency gains or losses for the years ended December 31, 1997
or 1996. The Company's export sales by region are as follows:
Export Sales
Region 1997 % 1996 %
Europe $ 186,100 16% $ 378,800 24%
Pacific Rim 507,500 44 716,100 46
Latin and South America 77,200 7 139,000 9
Canada and Mexico 214,000 19 151,300 10
Other 155,200 14 164,200 11
Total $1,140,000 100% $1,549,400 100%
11.EMPLOYEE BENEFIT PLAN
As of January 1, 1991, the Company adopted a 401(k) profit sharing plan
(the "Plan") for the benefit of all employees who meet certain
eligibility requirements. The Company will match 50% of employee
contributions up to a maximum contribution by the Company of 3% of a
participant's annual compensation. Total annual contributions to a
participant's account may not exceed 25% of compensation. Company
contributions made to the Plan were $22,132 and $13,189 in 1997 and
1996, respectively.
12. SUBSEQUENT EVENTS
Ronald R. Jones, who was the President and a Director and Chief
Executive Officer of the Company, died on January 1, 1998. At a special
meeting of the Board of Directors of the Company on January 2, 1998,
Gary D. Clarkson was appointed President and Chief Executive Officer.
Mr. Clarkson had been the Secretary/Treasurer and a Director of the
Company, and was co-founder of the Company with Ronald Jones in 1974.
On February 6, 1998, the Company received $1,033,000 as proceeds of an
insurance policy payable upon the death of Ronald Jones. Pursuant to an
agreement between the Company and Ronald Jones, the Company will
repurchase all of Ronald Jones' 187,500 shares from the estate of Ronald
Jones for the price of approximately $181,640. The repurchase will take
place on or before May 5, 1998.
Page 48<PAGE>
Circuit Research Labs, Inc. is currently listed on the NASDAQ Small Cap
market. NASDAQ is raising its requirements for continued listing. It
will require among other criteria, a public float of 500,000 shares, and
the Company's public float is approximately 295,000 shares. "Public
float" is defined as shares that are not held directly or indirectly by
any officer or director of the issuer and by any other person who is the
beneficial owner of more than 10% of the total shares outstanding.
NASDAQ will require a minimum market value of the public float to be
$1,000,000. The bid price on March 20, 1998 for the Company's common
stock was $2.00. The highest bid price in 1997 was $2.19. The present
market value of the Company's public float is approximately $590,000. In
addition, the Company may not meet other new monetary tests.
Based on present information, the Company will not be able to meet
these new NASDAQ requirements. The Company's shares will be offered the
services of another quotation service - the OTC Bulletin Board. It is
anticipated that the shares will be listed on the OTC Bulletin Board after
April 1, 1998.
Page 49<PAGE>
STOCK MARKET INFORMATION
CIRCUIT RESEARCH LABS, INC.
The Company's common stock is publicly traded in the over-the-counter market
(NASDAQ symbol: CRLI) and commenced trading on November 4, 1983. As of
February 28, 1997, there were 597,682 shares of common stock issued and
outstanding, with an estimated 324 stockholders of record. The following
table sets forth the high and low closing bid prices as reported by the
National Association of Securities Dealers Automated Quotations (NASDAQ).
1997 - Quarters Ended
March 31 June 30 September 30 December 31
Bid Quotation Range
High $2.19 $1.94 $1.63 $1.44
Low $1.75 $1.50 $1.00 $ .94
1996 - Quarters Ended
March 31 June 30 September 30 December 31
Bid Quotation Range
High $1.63 $1.75 $1.63 $1.94
Low $1.25 $1.50 $1.50 $1.63
Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
Circuit Research Labs, Inc. is currently listed on the NASDAQ Small Cap
market. NASDAQ is raising its requirements for continued listing. It will
require among other criteria, a public float of 500,000 shares, and the
Company's public float is approximately 295,000 shares. "Public float" is
defined as shares that are not held directly or indirectly by any officer or
director of the issuer and by any other person who is the beneficial owner
of more than 10% of the total shares outstanding.
NASDAQ will require a minimum market value of the public float to be
$1,000,000. The bid price on March 20, 1998 for the Company's common stock was
$2.00. The highest bid price in 1997 was $2.19. The present market value of
the Company's public float is approximately $590,000. In addition, the
Company may not meet other new tests.
Based on present information, the Company will not be able to meet these
new NASDAQ requirements. The Company's shares will be offered the services of
another quotation service - the OTC Bulletin Board. It is anticipated
that the shares will be listed on the OTC Bulletin Board after April 1,
1998.
Page 50<PAGE>
DIVIDENDS
The Company has not paid any dividends on its common stock for the two most
recent fiscal years and intends to retain its earnings for use in the
development of its business. Therefore, the Company does not expect to pay
cash dividends at any time in the foreseeable future. No contractual
restrictions or limitations exist on the Company's present or future ability
to pay dividends.
Page 51<PAGE>
CIRCUIT RESEARCH LABS, INC.
CORPORATE DIRECTORY
OFFICERS AND DIRECTORS:
Gary D. Clarkson
Chairman of the Board of Directors,
President, Chief Executive Officer and
Chief Operating Officer
Erle M. Constable
Assistant Treasurer and Director
Carl E. Matthusen
Director
General Manager KJZZ/Sun Sounds
Gary M. Hamker
Director
Royce Jones
Director
Dennis L. Drew
Secretary/Treasurer and Vice
President Operations
CORPORATE INFORMATION
Corporate Headquarters:
Circuit Research Labs, Inc.
2522 West Geneva Drive
Tempe, Arizona 85282
Transfer Agent and Registrar: Independent Auditors:
Harris Trust and Savings Bank Deloitte & Touche LLP
311 W. Monroe , 11th Floor 2901 North Central Avenue
Chicago, Illinois 60690 Suite 1200
Phoenix, Arizona 85012
Financial Public Relations Counsel: Corporate Counsel:
The Equity Group Inc. James S. Freedman, Esquire
919 Third Avenue 4455 East Camelback Rd., Suite E160
New York City, New York 10022 Phoenix, Arizona 85018
Additional Information:
A copy of Circuit Research Labs, Inc.'s current Form 10-KSB has been filed
with the Securities and Exchange Commission and is available on request
without charge by writing to the Company's corporate headquarters and
marked: Attention: Investor Relations.
Page 52<PAGE>
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