UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
Commission File Number 0-11353
CIRCUIT RESEARCH LABS, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0344671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2522 West Geneva Drive, Tempe, Arizona 85282
(Address of Principal executive office) (Zip Code)
Registrant's telephone number,
including area code
(602) 438-0888
172743 20 5
(CUSIP Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by
this report.
Outstanding at
Class June 30, 1999
Common stock, $.10 par value 410,182
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 1999 (Unaudited) and
December 31, 1998 2
Consolidated Condensed Statements of
Operations - Six months ended
June 30, 1999 and 1998 (Unaudited) 4
Consolidated Condensed Statements of Cash
Flows - Six months ended June 30, 1999
and 1998 (Unaudited) 5
Notes to Consolidated Condensed Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. OTHER INFORMATION:
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 527,216 $ 128,691
Securities available-for-sale 434,036 486,961
Accounts receivable, less allowance for
doubtful accounts of $9,715 at
June 30, 1999 and $6,520 at December
31, 1998 23,937 87,942
Inventories:
Raw materials and supplies 28,845 28,844
Work in process 14,540 25,090
Finished goods 51,382 330,433
Total inventories, net of obsolescence
reserve of $682,751 at June
30, 1999 and $696,751 at
December 31 1998 94,767 384,367
Prepaid expenses and other 6,760 9,566
Total current assets 1,086,716 1,097,527
PROPERTY, PLANT AND EQUIPMENT:
Land 130,869 130,869
Building and improvements 503,000 503,000
Furniture and fixtures 305,072 305,072
Machinery and equipment 532,353 555,878
Total 1,471,294 1,494,819
Less accumulated depreciation 1,058,486 1,061,082
Property, plant and equipment - net 412,808 433,737
OTHER ASSETS - NET 1,310
TOTAL $1,499,524 $1,532,574
(continued)
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,303 $ 44,748
Accrued salaries and benefits 17,887 36,703
Accrued professional fees 4,303 27,986
Customer deposits 1,772 17,355
Other accrued expenses and liabilities 18,511 12,215
Deposit for purchase of Company's
common stock 300,000
Long-term debt - current portion 21,000
Total current liabilities 353,776 160,007
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value - authorized
500,000 shares, none issued
Common stock, $.10 par value - authorized
20,000,000 shares, 597,682 shares issued 59,768 59,768
Additional paid-in capital 1,247,240 1,247,240
Retained earnings 20,380 247,199
1,327,388 1,554,207
Less, common stock in treasury
- at cost, 187,500 shares (181,640) (181,640)
Total stockholders' equity 1,145,748 1,372,567
TOTAL $1,499,524 $1,532,574
See accompanying notes to consolidated condensed financial statements.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
NET SALES $274,683 $324,665 $648,976 $841,875
COST OF GOODS SOLD 210,652 149,830 454,319 370,735
Gross profit 64,031 174,835 194,657 471,140
OPERATING EXPENSES:
Selling, general and
administrative 70,714 303,460 356,124 525,337
Research and development 56,231 57,350 85,579 113,339
Total operating expenses 126,945 360,810 441,703 638,676
LOSS FROM OPERATIONS (62,914) (185,975) (247,046) (167,536)
OTHER INCOME (EXPENSE):
Proceeds from officer's
life insurance in
excess of cash surrender
value 1,000,681
Interest and other income 6,619 7,240 20,227 10,069
Interest expense (19,156)
Total other income 6,619 7,240 20,227 991,594
(LOSS) INCOME BEFORE
INCOME TAXES (56,295) (178,735) (226,819) 824,058
INCOME TAX(BENEFIT)PROVISION
NET (LOSS) INCOME $(56,295)$(178,735) $(226,819) $824,058
(LOSS) INCOME PER COMMON SHARE -
Basic $(.14) $(.38) $(.55) $ 1.54
Diluted $(.14) $(.38) $(.55) $ 1.53
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING -
Basic 410,182 472,682 410,182 535,182
Diluted 410,182 472,682 410,182 537,815
See accompanying notes to consolidated condensed financial statements.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 31,
1999 1998
OPERATING ACTIVITIES:
NET (LOSS) INCOME $(226,819) $824,058
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization 15,535 30,749
Loss on sale of assets 5,394
Proceeds from officer's life insurance
in excess of
cash surrender value (1,000,681)
Changes in assets and liabilities:
Accounts receivable 64,005 4,683
Inventories 289,600 (72,834)
Prepaid expenses and other assets 4,116 (3,531)
Accounts payable, accrued expenses
and customer deposits (85,231) 61,839
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 66,600 (155,717)
INVESTING ACTIVITIES:
Proceeds from officer's life insurance 1,033,051
Purchase of securities (243,003) (948,156)
Proceeds from sale or maturity of
securities 295,928 534,680
Capital expenditures (13,137)
NET CASH PROVIDED BY INVESTING ACTIVITIES 52,925 606,438
FINANCING ACTIVITIES:
Principal payments on long-term debt (21,000) (101,176)
Deposit on purchase of Company's common
stock 300,000
Purchase of treasury share (181,640)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 279,000 (282,816)
NET INCREASE IN CASH AND CASH EQUIVALENTS 398,525 167,905
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 128,691 119,851
CASH AND CASH EQUIVALENTS AT END OF PERIOD $527,216 $ 287,756
SUPPLEMENTAL CASH FLOW INFORMATION
Non cash investing activities - unrealized
appreciation of securities available-
for -sale $ 9,074
Cash paid for interest $19,156
See accompanying notes to consolidated condensed financial statements.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. The Consolidated Condensed Financial Statements included
herein have been prepared by Circuit Research Labs, Inc. ("CRL" or
the "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission. The Consolidated Condensed
Balance Sheet as of June 30, 1999 and the Consolidated Condensed
Statements of Operations for the three and six months ended June
30, 1999 and 1998 and the Consolidated Condensed Statements of
Cash Flows for the six months ended June 30, 1999 and 1998 have
been prepared without audit.
Certain information and note disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the
consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
In the opinion of management, the Consolidated Condensed Financial
Statements for the unaudited interim periods presented herein
include all adjustments, consisting only of normal recurring
adjustments, necessary to present a fair statement of the results
of operations for such interim periods. Net operating results for
any interim period may not be comparable to the same interim
period in previous years, nor necessarily indicative of the
results that may be expected for the full year.
2. In calculating earnings per share for the six months ended June
30, 1998, the effects of 14,062 total shares related to options to
purchase common stock were not used for computing diluted earnings
per share because the results would be antidulitive. All options
expired unexcersied in May 1999.
3. At the Annual Meeting of Shareholders of the Company held on
May 11, 1999, the shareholders passed a proposal to dissolve the
Company. The dissolution may be revoked by the Board of Directors
at any time up to 120 days after its effective date without
stockholder action relating to such revocation.
On June 28, 1999, the Company and Mr. Gary Clarkson (Chairman of
the Board, President and CEO of the Company) entered into an
agreement to sell to Mr. Charles Jayson Brentlinger the
controlling interest in CRL. The transaction is subject to
customary conditions and is expected to close on or before
September 30, 1999.
Of the Company's 597,682 shares of issued common stock, 288,870
are held by the public, 121,312 are held by Mr. Gary Clarkson, and
187,500 are held as treasury stock. All previously issued options
to purchase shares of the Company's common stock have expired.
Mr. Brentlinger has agreed to purchase 187,500 shares of the
Company's authorized, but unissued Common stock at $3.05 per
share, for a total of $571,875. Mr. Brentlinger has paid a
$300,000 cash deposit towards the purchase of the shares which is
included in current liabilities. The balance is to be paid on
closing, on or before September 30, 1999. Within one year of
closing Mr. Brentlinger has agreed to purchase an additional
171,250 shares of the Company's common stock at $2.50 per share
cash for a total of $428,125. Mr. Brentlinger will have a 5 year
option to purchase an additional 500,000 shares of the Company's
common stock for $2.50 per share cash for a total of $1,250,000.
At the closing, Mr.Brentlinger has agreed to purchase all of
Mr.Clarkson's stock, 121,312 shares, at $3.05 per share, with
$250,000 to be paid at closing and the balance to be paid as
determined between the parties.
As a result of the aforementioned transactions, at closing Mr.
Brentlinger will own 308,812 shares of the Company's common stock
which is 51.67% of the 597,682 outstanding shares.
Mr. Clarkson has resigned as President and Chief Executive
Officer of the Company and has been replaced by Mr. Brentlinger.
Mr. Clarkson will remain with the Company as an Advanced Product
Engineer, under a 3 year employment contract, and will remain as
Chairman of the Board. After closing, Mr. Brentlinger shall be
appointed to the Board of Directors of the Company, to serve a
term to expire at the next meeting of shareholders duly called to
elect a Board of Directors.
Mr. Brentlinger resumed production of the Company 's current
product lines. Upon closing of this Agreement with Mr. Brentlinger
, the Board of Directors, pursuant to its authority under Arizona
Law , will vote not to dissolve the Company, but to continue in
business, as set forth above.
Item. 2
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had net working capital of approximately
$733,000 and the ratio of current assets to current liabilities
was 3.07 to 1 at June 30, 1999. At December 31, 1998, the Company
had net working capital of approximately $938,000 and a current
ratio of 6.86 to 1.
Securities decreased $52,000 from $487,000 at December 31,
1998 to $434,000 at June 30, 1999. The decrease was the result of
T-Bills maturing and the funds converted to cash.
Accounts receivable were $24,000 at June 30, 1999 compared
to $88,000 at December 31, 1998. The decrease of $64,000 was the
result of both lower sales and an increase in prepaid sales.
Total inventories were $95,000 at June 30, 1999 compared to
total inventories of $384,000 at December 31, 1998. The decrease
is the result of the Company suspending production of new
equipment and selling finished goods from current inventory.
Current liabilities increased $194,000 to $354,000 at June
30, 1999 from $160,000 at December 31, 1998. The increase was the
result of a $106,000 decrease in accounts payable, accrued
expenses and current portion of long term debt in anticipation of
dissolving the Company, offset by a $300,000 deposit for the
purchase of the Company's stock received from Charles Brentlinger.
The Company believes its future liquidity needs will be met
by a combination of cash generated from operating activities, the
reduction of investments, the sale of treasury stock and existing
cash balances. The Company does not have any available credit
facilities. The Company presently does not have any commitments
for capital expenditures.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the three months ended June 30, 1999 totaled
$275,000 compared to $325,000 for the three months ended June 30,
1998. For the six months ended June 30, 1999 net sales were
$649,000 compared to $842,000 for the six months ended June 30,
1998. The Company continues to experience slower demand across its
product lines, in both domestic and international markets.
Discounts were increased to move inventory.
Cost of goods sold were 77% of net sales for the three
months ended June 30, 1999 compared to 46% for the same period in
1998. For the six months ended June 30, 1999 cost of goods sold
were 70% compared to 44% for the six months ended June 30, 1998.
The increase in cost of goods sold was a result of the decrease in
net sales, increase in discounts, and increase in production
salaries as the result of severance expenses relating to the
potential dissolution of the Company.
Selling, general and administrative expenses were $356,000
for the six months ended June 30, 1999 compared to $525,000 for
the same period of 1998. The decrease in selling, general and
administrative expenses in 1999 was the result of a decrease in
personnel and cutbacks in both domestic and international sales
and marketing.
Research and development expense for the six months ended
June 30, 1999 totaled $86,000, compared to the same period in 1998
of $113,000. The decrease is the result of a decrease in the staff
in engineering.
Interest and other income totaled $20,000 for the six months
ended June 30, 1999 compared to $10,000 for the six months ended
June 30, 1998. The increase was due to miscellaneous income
received on the cancellation of a life insurance policy.
In March 1998, the Company paid off the balance, plus
accrued interest and early payment premium, on the mortgage note
collateralized by the Company's operating facility, and therefore
the Company incurred no interest expense during the six months
ended June 30, 1999. Interest expense of $19,000 for the same
period in 1998 consists of the interest cost on this mortgage.
The loss for the six months ended June 30, 1999 was $227,000
compared to net income of $824,000 for the six months ended June
30, 1998. The significant change was due to the proceeds from
officer's life insurance in excess of cash surrender value of
approximately $1,000,000 recognized by the Company during the six
months ended June 30, 1998
Year 2000 Readiness Disclosure
Many computer systems in use today were designed and developed
using two digits, rather than four, to specify the year. As a
result, such systems will recognize the year 2000 as "00." This
could cause many computer applications to fail completely or to
create erroneous results unless corrective measures are taken.
This is referred to as the "Y2K" problem.
In February 1998, the Company's board of directors passed a plan
(the "Year 2000 Plan") that the Company developed to achieve Year
2000 readiness. The Year 2000 Plan is intended to remediate the
Year 2000 issue in all categories of systems in use by CRL so that
CRL may continue its operations without interruptions or with
minimal disruptions. The Year 2000 Plan, which also allocated
financial resources to assure Y2K compliance, is outlined below.
State of Readiness
Computer hardware - CRL uses Personal Computers ("PC") linked
together in a network. These PCs are upgraded periodically to
increase efficiency and to stay current with new technology. Any
hardware that is not currently Y2K compliant will be upgraded
October 31 ,1999. It is not anticipated that there will be any
substantial additional expenses incurred in these upgrades.
Accounting software - CRL is under contract with a software
company for CRL's accounting software. It is anticipated that this
software will be Y2K compliant by year-end 1999. Since CRL is
under contract with this software company, this compliance is
handled as a normal upgrade of software.
Internal developmental and operational software - CRL is currently
evaluating all internal software used in development of products
and in internal Company operations. It is anticipated that no
substantial cost will be incurred in bringing all internal
developmental and operational software to compliance. These
programs are off- the-shelf products, which will either be
upgraded or replaced by an alternative product that is compliant.
Suppliers - CRL has a significant inventory of raw materials. It
is estimated that the Company could continue to manufacture
products for 3 months with current supplies of raw materials. This
quantity of raw materials is expected to be the same at year-end
1999. If a supplier were unable to deliver after this three-month
period due to Y2K non-compliance, CRL would look for an
alternative supplier, or redesign the product to use an
alternative, available part. CRL feels that either one of these
alternatives could be realized without significant additional
expense or loss of revenue. CRL is currently requesting Y2K
compliance documentation from its major suppliers.
Shipping and freight companies - CRL uses several methods and
companies to ship products to customers. The Company feels that
due to the abundance of alternatives available there should not be
a problem distributing products. CRL has no method of assuring
compliance from public transportation and shipping, Postal
Service, FAA etc., which could adversely affect the Company's
ability to deliver products.
CRL's products - Three of CRL's products contain embedded chips,
which need to be Y2K compliant. The Company has identified all
products that were shipped with non-Y2K compliant chips and is
notifying these customers that a free software upgrade is
available to make these chips Y2K compliant. The number of
products shipped with non-Y2K compliant chips is small and the
cost to supply the Y2K compliant software is insignificant to
the Company. All products that are currently in inventory and
that are currently being manufactured contain embedded chips,
which are Y2K compliant
CRL's dealers - CRL is currently requesting Y2K compliance
documentation from major dealers who purchase the Company's
products on credit to insure that there will be no delay of
payment of invoices.
Cost
The Board of Directors of CRL has allocated $10,000 for the
Company's estimated cost of Y2K compliance. The estimated cost of
new hardware, software and manpower to become Y2K compliant was
used to determine this estimated cost.
Risk
CRL believes that its internal operations will be Y2K compliant,
and there will be no material interruption in operations. However,
due to the general uncertainty inherent in the Y2K problem,
resulting from the uncertainty of the Y2K readiness of third-party
supplies and customers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material
impact on the Company's result of operations, liquidity or
financial condition. CRL believes that, with the implementation of
the Y2K plan initiated by the board of directors, that the
possibility of significant interruptions in normal operations
should be reduced.
Contingency Plans
Internal Y2K compliance will be completed prior to October 31,
1999. Any unexpected problems associated with internal compliance
will be remedied with alternative available hardware or software.
Contingency plans with external companies will be accomplished by
having alternative supplies and shippers. This should minimize the
potential risk of interruptions to operations.
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
Part II. OTHER INFORMATION
Item 5. Other Information
The Company's common shares are no longer listed on the NASDAQ
Small Cap market, but as of April 1, 1998, the shares have been
listed on the OTC Bulletin Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herein: none
(b) Reports on Form 8-K - 8-K filed on January 25, 1999
8-K filed on March 8, 1999
8-K filed on June 29, 1999
CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Registrant
CIRCUIT RESEARCH LABS, INC.
DATE: August 12, 1999
BY /s/Charles Jayson Brentlinger
Charles Jayson Brentlinger
President (Authorized
Officer for signature)
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