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, 1998 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 1998 were $ 1,516,613.
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on February 26, 1999, based on the
closing sales price for such stock in the Over-the-Counter market as
reported by NASDAQ on such date was $433,305.
At February 26, 1999, 410,182 shares of the registrant's common stock
were issued and outstanding.
The registrant's December 31, 1998 Annual Report to Stockholders is
incorporated by reference in Parts I, II and III.
Exhibit Index located on page Ten.
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 3
Item 3 Legal Proceedings 3
Item 4 Submission of Matters to a Vote of
Security Holders 3
PART II
Item 5 Market for Common Equity and Related
Stockholder Matters 4
Item 6 Management's Discussion and Analysis or
Plan of Operations 4
Item 7 Financial Statements 4
Item 8 Changes in and Disagreements with
Accountants on Accountingand Financial
Disclosure 4
PART III
Item 9 Directors, Executive Officers, Promoters
and Control Persons: Compliance with
Section 16(a) of the Exchange Act 5
Item 10 Executive Compensation 7
Item 11 Security Ownership of Certain Beneficial Owners
and Management 9
Item 12 Certain Relationships and Related Transactions 10
Item 13 Exhibits and Reports on Form 8-K 10
Page 2<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
General
Circuit Research Labs, Inc. (the "Company") had been involved in the
business of manufacturing and selling audio processing equipment to radio
and television stations. The high cost of marketing the Company's
products resulted in operating losses for five of the last six years,
including 1998. The Company's Board of Directors has proposed
dissolution of the Company, subject to the approval of the shareholders,
pursuant to Arizona law. A meeting of the shareholders has been
scheduled for May 11, 1999, to vote on the dissolution proposal.
ITEM 2 - DESCRIPTION OF PROPERTY
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 was subject to a mortgage collateralizing the
property referred to in Note 6 to the Company's 1998 Consolidated Financial
Statements. This mortgage was fully paid off in 1998.
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.
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 3<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 22 of the 1998 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 3 through 8 of the 1998 Report.
ITEM 7 - FINANCIAL STATEMENTS
This information is incorporated by reference to the Consolidated
Financial Statements on pages 10 through 23 of the 1998 Report.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 4<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 46 Chief Executive Officer,
President and a Director
Erle M. Constable 80 Assistant Treasurer and
Director
Carl E. Matthusen 55 Director
Dennis L. Drew 53 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.
Page 5<PAGE>
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.
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.
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 6<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, 1998.
Summary Compensation Table
Name and Other
Principal Position Year Salary Bonus Compensation
Gary D. Clarkson
President and
Chairman of the Board 1998 $69,982 -0- $2,321(2)
Ronald R. Jones(1)
Former President and
Chairman of the Board 1998 $ 4,194 $3,571(2)
1997 72,696 -0- -0-
1996 72,696 -0- 2,022(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, 1998, 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
Page 7<PAGE>
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, 1998.
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 1998, one employee participated in
this plan.
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. No options were granted to any officer or
director in 1998.
Page 8<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. Security Ownership of Certain Beneficial Owners
As of February 26, 1999, 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
Title of Class Beneficial Owner Beneficial Owner of Class(1)
$.10 par value
common Gary D. Clarkson 121,312 30%
of
Circuit Research Labs, Inc.
2522 West Geneva Drive
Tempe, Arizona 85282
(1) On the basis of 410,182 shares outstanding on February 26, 1999.
B. Security Ownership of Management
The stock ownership by directors and officers of the Company as of
February 26, 1999 is set forth below. Each person named exercises sole
voting power over all shares beneficially owned.
Amount and
Name and Nature of
Address of Beneficial Percent
Title of Class Beneficial Owner Owner of Class(4)
$.10 par value
common Gary D. Clarkson 121,312 29.0%
$.10 par value
common Erle M. Constable 2,500(1) *
$.10 par value
common Carl E. Matthusen 1,250(2) *
$.10 par value
common Dennis L. Drew 5,000(3) *
All of
Circuit Research Labs, Inc.
2522 West Geneva Drive
Tempe, Arizona 85282
Officer and directors as a group (4 persons) 130,062(5) 31.1%
(1) 938 shares owned; 1,562 shares under exercisable options. Held as
community property with Eugenia Constable.
(2) No shares owned; 1,250 shares under exercisable options.
(3) No shares owned; 5,000 shares under exercisable options.
(4) Percentage is calculated on the basis that all director and officer
shares under options presently excersable are deemed outstanding, a
total of 417,994.
* Less than 1%.
Page 9<PAGE>
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 18 and 19 of the 1998 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, 1998 and are
incorporated by reference in Item 7:
Consolidated balance sheets - December 31, 1998 and 1997.
Consolidated statements of operations - Years ended December
31, 1998 and 1997.
Consolidated statements of stockholders' equity - Years
ended December 31, 1998 and 1997.
Consolidated statements of cash flows - Years ended December
31, 1998 and 1997.
Notes to consolidated financial statements - Years ended
December 31, 1998 and 1997.
Exhibit Index
(a) Exhibit No.
23 Consent of Deloitte & Touche LLP - see page 11.
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 1998 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.
21 Subsidiaries of the Registrant - CRL International, Inc. the
Company's wholly-owned Foreign Sales Corporation was incorporated in Guam
in January 1991.
Page 10<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1998.
Page 11<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, 1999 incorporated by reference in this Annual Report on
Form 10-KSB of Circuit Research Labs, Inc. for the year ended December
31, 1998.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 30, 1999
Page 12<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, 1999 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, 1999 By /s/ Gary D. Clarkson
Gary D. Clarkson, Chief
Executive Officer and
Director (Principal Executive
Officer)
Date: March 29, 1999 By /s/ Erle M. Constable
Erle M. Constable, Director
Date: March 29, 1999 By /s/ Carl E. Matthusen
Carl E. Matthusen, Director
Date: March 29, 1999 By /s/ Dennis L. Drew
Dennis L. Drew,
Secretary/Treasurer Vice
President Operations,
Controller,
Page 13<PAGE>
CIRCUIT RESEARCH LABS, INC.
CORPORATE PROFILE
Circuit Research Labs, Inc. (the "Company") had been involved in the business of
manufacturing and selling audio processing equipment to radio and television
stations. The high cost of marketing the Company's products resulted in
operating losses for five of the last six years, including 1998. The Company
has discontinued production and is selling its inventory. The Company's Board
of Directors has proposed dissolution of the Company, subject to the approval of
the shareholders, pursuant to Arizona law. A meeting of the shareholders has
been scheduled for May 11, 1999, to vote on the dissolution proposal.
SELECTED FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
Operating Highlights
Net sales $1,516,613 $1,953,521 $2,524,870 $1,884,402 $2,074,716
Other income 1,033,940 11,184 16,860 26,524 29,596
Total revenues 2,550,553 1,964,705 2,541,730 1,910,926 2,104,312
Net income (loss) 9,011 (262,296) 123,160 (306,720) (92,427)
Net income (loss) per
Common share - basic
and diluted $ .02 (.44) .21 (.51) (.15)
Weighted average number of
common shares
outstanding 474,394 597,682 597,682 597,682 597,682
Balance Sheet Highlights
Current assets $1,097,527 $1,263,249 $1,431,175 $1,389,754 $1,466,831
Current liabilities 160,007 195,746 239,811 321,974 133,355
Total assets 1,532,574 1,846,598 2,169,590 2,149,670 2,236,761
Long-term obligations 0 105,656 122,287 138,458 112,354
Total liabilities 160,007 301,402 362,098 460,432 245,709
Stockholders'
equity 1,372,567 1,545,196 1,807,492 1,689,238 1,991,052
No cash dividends have been declared.
Key Statistics
Current ratio 6.86 6.45 5.97 4.32 11.00
Working capital $937,520 $1,067,503 $1,191,364 $1,067,780 $1,333,476
Order backlog $53,785 $138,570 $228,350 $566,720 $103,000
Employees 22 24 35 25 20
Circuit Research Labs, Inc.
2522 W. Geneva Dr Tempe, AZ USA 85282
Fax 1(602)438-8227 Tel 1(602)438-0888
To CRL Shareholders,
CRL announced the company was being offered for sale on January 26, 1999.
Many of you either saw it in the business section of your paper or heard from
other sources. This decision was made after many hours of study by the Board of
Directors and officers.
Financially, the company is on sound footing having received a major input
of funds in 1998 from life insurance the company carried on Ronald R. Jones,
former Chairman of the Board, President and CEO as well as co-founder of the
company. Unfortunately, operations in 1998 produced a negative cash flow and
therefore used a considerable portion of the insurance funds.
Looking closely at CRL's product line, we realized we were not being
completely competitive and up-to-date in our technology for the US marketplace.
We have neither the manpower nor the cash reserves to completely redesign the
major product line and put on an aggressive sale campaign. Internationally, our
products were quite adequate for the market but supporting a major foreign
marketing campaign for our low volume of sales is one of the reasons for losses
in several of the recent years.
Our market is a narrow one - radio and TV stations. With the merger mania
in the US where stations are bought for high prices - no budget remains for new
equipment. Abroad, our representatives in Asia and Latin America find that
obtaining dollars is almost impossible.
To date, efforts to sell the company have been unsuccessful. No credible
offers have been received to buy the company. Therefore, we are closing down
completely and turning our assets into cash. Subject to your approval requested
in the proxy statement, the company will dissolve and distribute to its
shareholders its remaining cash in an amount to be determined by the final cash
balance, after paying all obligations, divided by the number of shares.
We are aware that closing the operation and dissolving leaves a possible
risk of unknown liabilities. But with annual audits by a major accounting firm
since 1983 and no litigation in the history of the Company, we believe the risk
is minimal.
Very Truly Yours,
Gary Clarkson
President
CIRCUIT RESEARCH LABS, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS YEARS ENDED
DECEMBER 31, 1998 AND 1997
RESULTS OF OPERATIONS
The following tables set forth financial information for each of the four
quarters of the year ended December 31, 1998 and for the years ended December
31, 1998 and 1997.
1998 Quarters
Ended
March 31 June 30 September 30 December 31
Net sales $ 517,210 $ 324,665 $ 421,598 $253,140
Other income 1,003,510 7,240 14,785 8,405
Total revenues $1,520,720 $ 331,905 $ 436,383 $261,545
Gross profit on net sales $ 296,305 $ 174,835 $ 230,440 $(454,052)
Gross profit percent 57% 54% 55% (179%)
Net income (loss) $1,002,793 $(178,735) $ (26,594) $(788,453)
Net income (loss) percent of
net sales 194% (55%) (6%) (311%)
Income (loss) per share -
basic and diluted $1.68 $(.38) $(.06) $(1.92)
Years Ended December 31
1998 1997
Net sales $ 1,516,613 $1,953,521
Other income 1,033,940 11,184
Total revenues $ 2,550,553 $1,964,705
Gross profit on net sales $ 247,528 $962,895
Gross profit percent 16% 49%
Net income (loss) $ 9,011 $ (262,296)
Net income (loss) percent of net sales .1% (13%)
Income (loss) per share - basic and diluted $ .02 $ (.44)
The primary factors affecting the results of the Company's 1998 operations
compared to 1997 are a continued decrease in sales. Net sales in 1998 decreased
22.4% to $1,517,000 compared to $1,954,000 for 1997. 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 1998 was 84% of net sales compared to 51% in 1997. The
increase was due to the $552,000 increase in the obsolescence reserve for
inventory. The decision to cease production in anticipation of the proposed
dissolution of the Company resulted in the reduction of net realizable value of
the inventory.
Selling, general and administrative expense in 1998 of $900,000 was lower than
selling, general and administrative expense in 1997 of $996,000 due primarily
to a decrease in personnel and international travel.
Research and development expense for the year ended December 31, 1998 was
$255,000, an increase of $36,000 compared to $219,000 for the same period of
1997. The increase was the result of higher salaries and developmental cost.
Other income (expense) for the year ended December 31, 1998 of $916,000 includes
$1,001,000 excess of officers life insurance proceeds received over the policy's
cash surrender value from an insurance policy payable upon the death of Ronald
R. Jones. Interest and other income and expense consists of $33,000 of interest
income from investments, $20,000 of interest expense and $98,000 paid to Royce
T. Jones as a settlement of any and all claims that Royce T. Jones or the Estate
of Ronald R. Jones, may have had against the Company.
FINANCIAL POSITION
At December 31, 1998, the Company had net working capital of $938,000 and a
current ratio of 6.86 to 1. In 1998, net cash used in operating activities
increased to $325,000 from $42,000 in 1997, primarily as the result of the
Company's operating losses.
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 repurchased all of Ronald
R. Jones' 187,500 shares from the estate of Ronald R. Jones for the price of
$181,640.
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.
On July 16, 1998, the Company paid Royce T. Jones $98,000 as a settlement of
any and all claims that Royce T. Jones or the Estate of Ronald R. Jones, may
have had against the Company.
Receivables at December 31, 1998 of $88,000 were $24,000 lower than the December
31, 1997 balance of $112,000. The decrease was due to the decrease in sales in
1998. 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 were $385,000 at December 31, 1998 compared to $883,000 at December
31, 1997. The decision to cease production in anticipation of the proposed
dissolution of the Company resulted in the reduction of net realizable value of
the inventory.
The decrease was due to the $552,000 increase in the obsolescence reserve for
inventory. The proposed dissolution of the Company resulted in the net
realizable value of the inventory being re-evaluated assuming dissolution of the
Company in 1999.
There were no major capital expenditures in 1998, and none are anticipated for
1999.
The document 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.
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
March 31 June 30 September 30 December 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. 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 repurchased all of Ronald
R. Jones' 187,500 shares from the estate of Ronald R. Jones for the price of
$181,640. The Company also paid off the balance of the mortgage note
collateralized by the Company's operating facility. The balance of the funds
were 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. 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.
These documents include "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.
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, 1998 and 1997, 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, 1998 and 1997, 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 2 to the financial statements, on January 25, 1999, the
Company announced that it was being offered for sale. Subsequently, on March 9,
1999, the Company announced that it was curtailing production of its products
effective immediately; but would continue to sell its products from inventory.
The Company's Board of Directors has proposed dissolution of the Company subject
to a vote of the shareholders.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 22, 1999
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ 128,691 $119,851
Securities available-for-sale (Note 3) 486,961 89,607
Accounts receivable, less allowance for
doubtful accounts of $6,520 in 1998 and 1997 87,942 112,320
Inventories (Note 4) 384,367 883,125
Prepaid expenses and other 9,566 58,346
Total current assets 1,097,527 1,263,249
PROPERTY, PLANT AND EQUIPMENT - Net (Notes
5 and 6) 433,737 531,555
OTHER ASSETS - Net 1,310 51,794
TOTAL $1,532,574 $1,846,598
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 44,748 $ 53,382
Accrued salaries and benefits 36,703 63,086
Accrued professional fees 27,986 29,302
Customer deposits 17,355 26,180
Other accrued expenses and liabilities 12,215 7,315
Current portion of long-term debt (Note 6) 21,000 16,481
Total current liabilities 160,007 195,746
LONG-TERM DEBT - Net of current portion (Note 6) 0 105,656
Total liabilities 160,007 301,402
COMMITMENTS AND CONTINGENCIES (Notes 1, 2,and 10)
STOCKHOLDERS' EQUITY (Notes 2 and 7):
Preferred stock, $100 par value - authorized,
500,000 shares, None issued
Common stock, $.10 par value - authorized,
20,000,000 shares 579,682 shares issued 59,768 59,768
Additional paid-in capital 1,247,240 1,247,240
Retained earnings 247,199 238,188
Less treasury stock at cost 187,500 shares (181,640) 0
Total stockholders' equity 1,372,567 1,545,196
TOTAL $1,532,574 $1,846,598
See notes to consolidated financial statements.
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
NET SALES (Note 10) $ 1,516,613 $1,953,521
COST OF GOODS SOLD 1,269,085 990,626
Gross profit 247,528 962,895
OPERATING EXPENSES (Note 11):
Selling, general and administrative 899,535 995,550
Research and development 254,717 219,090
Total operating expenses 1,154,252 1,214,640
LOSS FROM OPERATIONS (906,724) (251,745)
OTHER INCOME (EXPENSE):
Life insurance proceeds (Note 1) 1,000,681
Interest and other income 33,259 11,184
Interest and other expense (net) (Note 1) (118,205) (18,685)
Total other income (expense) 915,735 (7,501)
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 9,011 (259,246)
INCOME TAX PROVISION (Note 9): 0 3,050
NET INCOME (LOSS) $ 9,011 $(262,296)
INCOME (LOSS) PER COMMON SHARE - BASIC AND
DILUTED (Note 8) $.02 $(.44)
See notes to consolidated financial statements.
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
BALANCE,
JANUARY 1, 1997 $ 59,768 $ 1,247,240 $ 500,484 $ 1,807,492
Net loss 0 0 (262,296) 0 (262,296)
BALANCE,
DECEMBER 31, 1997 59,768 1,247,240 238,188 1,545,196
Purchase of Treasury
stock ($181,640) (181,640)
Net income 0 0 9,011 9,011
BALANCE,
DECEMBER 31, 1998 $ 59,768 $ 1,247,240 $ 247,199 ($181,640) $ 1,372,567
See notes to consolidated financial statements.
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
OPERATING ACTIVITIES:
Net income (loss) $ 9,011 $(262,296)
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 126,215 103,866
Proceeds from officer's life insurance in
excess of cash surrender value (1,000,681) 0
Loss on disposal of assets 10,382
Increase in inventory reserves 552,328 44,000
Changes in assets and liabilities:
Accounts receivable 24,378 77,296
Inventories (53,570) 28,797
Prepaid expenses and other 57,746 1,038
Accounts payable and other accrued expenses (40,258) (45,318)
Net cash used in operating activities (324,831) (42,235)
INVESTING ACTIVITIES:
Capital expenditures (19,249) (36,101)
Proceeds on sale of fixed assets 3,000
Purchase of securities (1,829,918) (208,437)
Proceeds from sale or maturity of securities 1,432,564 289,764
Proceeds from officer's life insurance 1,033,051 0
Net cash provided by investing
activities 616,448 48,226
FINANCING ACTIVITIES:
Principal payments on long-term debt (101,137) (15,378)
Redemption of life insurance cash surrender value 81,190
Purchase of Treasury shares (181,640) 0
Net cash (used in) provided by financing
activities (282,777) 65,812
NET INCREASE IN CASH 8,840 71,803
CASH, BEGINNING OF YEAR 119,851 48,048
CASH, END OF YEAR $ 128,691 $119,851
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 19,156 $ 18,685
Cash paid for income taxes $ 3,050
See notes to consolidated financial statements.
CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company developed, manufactured and marketed audio processing and
transmission encoding equipment for the broadcast and professional entertainment
industries. In addition, the Company had become a value-added reseller of
equipment to build RDS/RBDS paging systems. CRL configured the system to the
customer's requirements and for an additional fee, could oversee the
installation of the system. The Company also acted 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.
(See note 2).
Significant to the Company's 1998 operations is the death of Ronald R. Jones,
who was the President and a Director and Chief Executive Officer of the Company,
who 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 $1,033,0051 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 repurchased all of
Ronald R. Jones' 187,500 shares from the estate of Ronald R. Jones for the price
of $181,640 and additionally paid $98,000 as a settlement of any and all claims
the estate may have had against the Company. The repurchase took place on May 5,
1998.
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.
Significant acounting policies are as follows:
a. 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.
b. Inventories are stated at the lower of cost (first-in, first-out method) or
net realizable value.
c. 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.
d. Other assets consist principally of cash surrender values on officers' life
insurance and patents at December 31, 1997 which are stated at cost less
amortization computed on the straight-line method over the underlying asset's
estimated useful life.
e. 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.
f. Revenue is recognized on sales of products at the time of shipment.
g. Research and development costs are charged to expense as incurred.
h. 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.
i. 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 judgement 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.
j. 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. 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.
k. 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 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 statements have no effect on the Company's financial position or results of
operations. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, which will be effective for the Company's financial statements
as of January 1, 2000, requires that entities record all derivatives as assets
or liabilities, measured at fair value, with the change in fair value
recognized in earnings or in comprehensive income, depending on the use of the
derivative and whether it qualifies for hedge accounting. The Company is
evaluating the impact, if any, that will result from the adoption of this
standard.
l. 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.
m. Reclassification - Certain reclassifications have been made to the 1997
financial statements to conform to the classifications used in 1998.
2. PROPOSED DISSOLUTION
On January 25, 1999, the Company announced that it was being offered for
sale. Subsequently, on March 9, 1999, the Company announced that it was
curtailing the production of its products effective immediately; however it
will continue to sell its products from inventory. The Company's Board of
Directors has proposed dissolution of the Company subject to a vote of the
shareholders, expected to take place during the second quarter of 1999.
Because shareholder approval is needed to proceed with the Company's proposed
dissolution, the Company's financial statements as of December 31, 1998, and
for the year then ended are presented under the going concern basis. Had the
proposed dissolution been approved by the shareholders, the Company's
financial statements as of December 31, 1998, and for the year then ended
would have been presented on a liquidation basis, where assets are valued at
their estimated net realizable value and liabilities include the estimated
costs of carrying out the dissolution. Under such presentation, the net
assets available at liquidation would have been approximately $1,100,000,
compared to $1,372,567 as presented under the going concern basis. Taking
into account the projected operating losses of $350,000 through June 1999,
including severance costs and professional fees, the Company estimates that
net assets available for liquidation at an assumed June 30, 1999 dissolution
date will be approximately $750,000. Estimates of net assets available at
liquidation assume that the Company can sell its assets for an aggregate net
cash price that is equal to book value at December 31, 1998, and that there
will be no unusual or unanticipated costs which are not considered in the
amounts above. There can be no assurance that these assumptions or the
amount of projected operating losses or costs of dissolution will prove to be
accurate.
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.
A summary of the Company's securities is as follows at December 31:
1998 1997
Amortized cost and estimated fair value:
United States Government Securities $486,961 $89,607
At December 31, 1998, the United States Government Securities mature in 1999.
4. INVENTORIES
Inventories consist of the following
at December 31: 1998 1997
Raw materials and supplies $280,563 $320,862
Work in process 250,909 289,690
Finished goods 549,646 416,996
Total 1,081,118 1,027,548
Less obsolescence reserve (696,751) (144,423)
Inventories, net $ 384,367 $ 883,125
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
1998 1997
Land $ 130,869 $ 130,869
Building and improvements 503,000 497,004
Furniture and fixtures 305,072 300,628
Machinery and equipment 555,878 599,864
Total 1,494,819 1,528,365
Less accumulated depreciation 1,061,082 996,810
Property, plant and equipment - net $ 433,737 $ 531,555
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31: 1998 1997
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
Noninterest-bearing note issued in connection with acquisition
of Desert Assemblies, requiring annual payments of $11,000
through January 2000 $21,000 30,000
Less unamortized discount based on imputed interest rate of 10% (3,029)
Total 21,000 122,137
Less current portion 21,000 (16,481)
Long-term debt, net of current portion $0 $105,656
On March 1998, the Company paid off the balance, plus accrued interest and early
payment premium of $13,600 on the mortgage note collateralized by the Company's
operating facility.
The remaining debt payable is expected to be paid in full in 1999 and is
therefore classified as current.
7. STOCKHOLDER'S EQUITY
Until March 31, 1998, the Company was listed on the NASDAQ Small Cap market. In
1998, NASDAQ raised its requirements for continued listing requiring among other
criteria, a public float of 500,000 shares, compared to the Company's public
float of approximately 295,000 shares. NASDAQ also requires a minimum market
value of the public float of $1,000,000, compared to the Company's public float
at March 31, 1998 of approximately $590,000. In addition, the Company did not
meet other new monetary tests. While the Company's common shares are no longer
listed on the NASDAQ Small Cap market, as of April 1, 1998, the shares have been
listed on the OTC Bulletin Board.
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
cancelled 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, 1997 10,312 $1.25
Granted 5,000 $2.00
Outstanding at December 31, 1997, and 1998 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, 1998 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 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
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,
1998 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, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Income available to common
stockholders $9,011 474,394 $.02
Effect of dilutive stock options 4,319 .00
Diluted $9,011 $478,713 $.02
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 income (loss)
before income tax provision for the years ended December 31, are as follows:
1998 1997
Federal tax at statutory rates $3,100 $(88,000)
State tax at statutory rates 500 (15,600)
Preferred foreign income 22,700
Officers life insurance proceeds (400,000)
Officers' life insurance 3,000 5,900
Increase in valuation allowance 393,400 83,700
Other 0 (5,600)
Total $ 0 $ 3,100
At December 31, deferred taxes represent the tax effect of temporary differences
related to:
1998 1997
Current deferred taxes:
Inventory capitalization $33,000 $ 20,600
Prepaid expenses (3,800) (22,900)
Inventory obsolescence reserve 278,700 57,800
Allowance for doubtful accounts 2,600 2,600
Deferred tax valuation allowance (310,500) (58,100)
Total $ 0 $ 0
Non-current deferred taxes:
Depreciation and amortization $(16,400) $(33,200)
Operating loss carryforward 267,000 144,600
Federal general business credit carryforward 65,400 85,000
Other 21,400
Deferred tax valuation allowance (337,400) (196,400)
Total $ 0 $ 0
At December 31, 1998, a valuation allowance totaling $ 647,900 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 $727,000
which expire through 2018 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, 1998 were conducted
primarily through wholesale distributors and dealers. Two wholesale distributors
accounted for 10% and 7% of net sales for the year ended December 31, 1998 and
13% and 14%, respectively, for the year ended December 31, 1997.
International sales in 1998 and 1997 totalled approximately $820,000 and
$1,140,400, 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, 1998 or 1997.
The Company's export sales by region are as follows:
Export Sales
Region 1998 % 1997 %
Europe $ 92,500 11% $ 186,100 16%
Pacific Rim 331,200 40 507,500 44
Latin and South America 83,000 10 77,200 7
Canada and Mexico 135,000 17 214,000 19
Other 178,300 22 155,200 14
Total $820,000 100% $1,140,000 100%
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 $16,307
and $22,132 in 1998 and 1997, respectively.
Circuit Research Labs, Inc.
The Company's common stock is publicly traded on the OTC Bulletin Board (NASDAQ
symbol: CRLI) and commenced trading on November 4, 1983. As of February 27,
1999, there were 410,182 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).
1998 - Quarters Ended
March 31 June 30 September 30 December 31
Bid Quotation Range
High $2.25 $3.00 $4.50 $1.63
Low $.94 $1.30 $1.90 $1.63
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
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Until March 31, 1998, Circuit Research Labs, Inc. was listed on the NASDAQ
Small Cap market. NASDAQ has raised its requirements for continued listing. It
now requires 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 also requires a minimum
market value of the public float to be $1,000,000. The bid price on March 31,
1998 for the Company's common stock was $2.00. The highest bid price in 1997 was
$2.19. The market value of the Company's public float at March 31, 1998 was
approximately $590,000. In addition, the Company did not meet other new monetary
tests. While the Company's common shares are no longer listed on the NASDAQ
Small Cap market, as of April 1, 1998, the shares have been listed on the OTC
Bulletin Board.
DIVIDENDS
The Company has not paid any dividends on its common stock for the two most
recent fiscal years.
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
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
New York City, New York 10022 E160
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.
<TABLE> <S> <C>
<ARTICLE> 5
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