10KSB/A 1 body.txt U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A Amendment No.1 to the Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 December 31, 2000 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 Check whether the issuer: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (ii) has been subject to such filing requirements for the past 90 days. YES X NO Check if disclosure of delinquent filers in response to Item 405 of Regulation 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. [X] The registrant's revenues for fiscal 2000 were $7,259,910. The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on March 30, 2001, based on the closing sales price for such stock in the Over-the-Counter market as reported by NASDAQ on such date was $4,694,723. At March 30, 2001, 2,296,022 shares of the registrant's common stock were issued and outstanding. Exhibit Index located on page Three. 1 CIRCUIT RESEARCH LABS, INC. Explanatory Statement By this amendment, the registrant is revising and refiling Exhibit 13 to the registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000. The said Exhibit 13 is the registrant's "2000 Annual Report to Security Holders," which includes the registrant's 2000 consolidated financial statements. As discussed in Note 10 to the consolidated financial statements included in Exhibit 13 included in this amendment, the accompanying 2000 consolidated financial statements have been restated. Portions of the registrant's December 31, 2000 Annual Report to Security Holders is incorporated by reference in Item 1 of Part I, Items 5, 6 and 7 of Part II, and Item 13 of Part III and are hereby amended. 2 CIRCUIT RESEARCH LABS, INC. 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, 2000 Exhibit 13 hereto and are incorporated by reference from Item 7: Consolidated balance sheets - December 31, 2000 (restated) and 1999. Consolidated statements of operations - Years ended December 31, 2000 (restated) and 1999. Consolidated statements of stockholders' equity - Years ended December 31, 2000 (restated) and 1999. Consolidated statements of cash flows - Years ended December 31, 2000 (restated) and 1999. Notes to consolidated financial statements - Years ended December 31, 2000 and 1999. Exhibit Index (a) Exhibit No. 3 Articles of Incorporation as Amended and Bylaws previously filed and incorporated herein by reference (1). 4.1 Warrant to Orban, Inc., dated May 31, 2000, previously filed on Form 8-K/A on October 12, 2000 and incorporated herein by reference. 4.2 Form of Stock Purchase Warrant dated May 30, 2000 (2). 10.1 Stock Option Plan previously filed and incorporated herein by reference (1). 10.2 1994 Stock Option Plan previously filed on Form S-8 on July 26, 1994 and incorporated herein by reference. 10.3 Asset Purchase Agreement between CRL Systems, Inc., a wholly-owned subsidiary of the Company and Orban, Inc., a wholly-owned subsidiary of Harman International Industries Inc. previously filed on Form 8-K/A on October 12, 2000 and incorporated herein by reference. 10.4 Employment Agreement dated June 23, 1999 between Gary D. Clarkson and the Company (2). 3 10.5 Employment Agreement dated May 31, 2000 between Robert A. Orban and the Company (2). 10.6 Employment Agreement dated March 9, 2001 between Charles Jayson Brentlinger and the Company (2). 10.7 Employment Agreement dated March 9, 2001 between James Seemiller, ATB Broadcasting Corporation and the Company (2). 13 2000 Annual Report to Security Holders (filed with this amendment No.1) 21 Subsidiaries of the Registrant (2). 23 Consent of Deloitte & Touche LLP - (filed with this amendment No. 1). (1) Incorporated by reference from the Company's Registration Statement on Form S-18 which was effective October 14, 1983, and subsequent filings in a timely manner. (2) Previously filed with the Registrant's Form 10-KSB for the fiscal year ended December 31, 2000 (b) Reports on Form 8-K (a) Exhibits included herein: none (b) Reports on Form 8-K Form 8-K filed on January 7, 2000 Form 8-K filed on June 15, 2000 Form 8-K filed on August 14, 2000 Form 8-K/A filed on October 12, 2000 Form 8-K/A filed on November 21, 2000 4 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: May 21, 2001 By /s/ Charles Jayson Brentlinger Charles Jayson Brentlinger, 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: May 21, 2001 By /s/ Charles Jayson Brentlinger Charles Jayson Brentlinger, Chief Executive Officer and Chairman of the Board Date: May 21, 2001 By /s/ Gary D. Clarkson Gary D. Clarkson, Secretary and Treasurer, Vice President and General Manager Date: May 21, 2001 By /s/ Carl E. Matthusen Carl E. Matthusen, Director Date: May 21, 2001 By /s/ Robert A. Orban Robert A. Orban, Director and Chief Engineer Date: May 21, 2001 By Phillip T. Zeni, Director Date: May 21, 2001 By /s/ James Seemiller James Seemiller, Chief Financial Officer, Vice President of Sales, Marketing and New Business Development Date: May 21, 2001 By /s/ Robert McMartin Robert McMartin, Controller 5 Exhibit 13 2000 Annual Report to Security Holders CIRCUIT RESEARCH LABS, INC. CORPORATE PROFILE Circuit Research Labs, Inc. (the "Company" or "CRL") is an electronics company developing, manufacturing and marketing high quality audio processing and transmission encoding equipment for the radio, television and professional audio markets worldwide. The Company's main product lines control the audio quality and range of radio and television audio reception including generators that allow radio and television stations to broadcast in stereo. Professional sound reinforcement and digital audio test equipment is also produced creating a wide range of applications. SELECTED FINANCIAL INFORMATION Years Ended December 31 2000 [A] 1999 1998 1997 1996 (restated) Operating Highlights Net sales $7,259,910 $1,016,807 $1,516,613 $1,953,521 $2,524,870 Other income 18,170 38,078 1,033,940 11,184 16,860 --------- --------- --------- --------- --------- Total revenues 7,278,080 1,054,885 2,550,553 1,964,705 2,541,730 Net (loss) income (2,258,121) (260,229) 9,011 (262,296) 123,160 Net (loss) income per Common share - basic and diluted ($1.28) ($0.28) $0.01 ($0.22) $0.10 Weighted average number of common shares outstanding-basic and diluted 1,770,625 916,940 948,788 1,195,364 1,195,364 Balance Sheet Highlights Current assets $4,435,549 $1,095,588 $1,098,837 $1,263,249 $1,431,175 Current liabilities 2,287,083 150,479 160,007 195,746 239,811 Total assets 13,058,888 1,834,691 1,532,574 1,846,598 2,169,590 Long-term obligations 8,738,466 0 0 105,656 122,287 Total liabilities 11,025,549 150,479 160,007 301,402 362,098 Stockholders' equity 2,033,339 1,684,212 1,372,567 1,545,196 1,807,492 No cash dividends have been declared. Key Statistics Current ratio 1.94 7.28 6.87 6.45 5.97 Working capital $2,148,466 $945,109 $938,830 $1,067,503 $1,191,364 Order backlog $1,869,408 $20,200 $53,785 $138,570 $228,350 Employees 88 17 22 24 35 [A] See note 10 to the consolidated financial statements 1 Circuit Research Labs, Inc. 2522 W.Geneva Drive Tempe, Arizona 85282 Dear Shareholders, The past year was one of the most exciting in Circuit Research Labs history, with the purchase on May 31, 2000 of Orban from Harman International Industries. For the past 25 years Orban has been the market leader in Audio Processing for Radio, Television, and now for the Internet. Combining the two companies while challenging has been rewarding. Both companies share very similar backgrounds having been competitors for many years. With the combined strengths of both companies we enter into this new millennium as the dominant leader and producer of Audio Processing for the Broadcast Industry. We have very conservatively estimated our market share as 70% worldwide and almost 80% in the United States, thanks to the Orban Optimod product line. In the 26 years since it's introduction the name OPTIMOD FM has stood for quality and instant recognition from Radio and Television professionals worldwide. Our goal over the next year is to grow our combined company, with many new models targeted to additional new markets. Orban / CRL will introduce our Opticodec line of Digital Encoders and Decoders later this month at the National Association of Broadcasters Convention in Las Vegas. This new product line gives Orban / CRL our first Digital Transmission System for the use over the Internet as well as ISDN, ATM and Frame Relay phone lines with it's TCP/IP address ability. The combined operation of Orban / CRL provides many new products and product lines. The efficiencies of scale and management will reduce operational expenses of both companies. With the addition of Bob Orban, co-founder of Orban, to our Board of Directors, and our superstar management team additions of Jim Seemiller Vice President / CFO overseeing Sales and Marketing, Greg Ogonowski, Vice President of Product Development, Bill Devitt, Vice President of Manufacturing and Production, Robert McMartin as Company Controller and Henk Mensinga as Director of Sales, we now have the team to grow, operate efficiently and make it all work. Our working relationship with Harman International made the Orban purchase possible, and has allowed Orban / CRL the ability to extend the credit terms beyond the original contractual obligations. Our current understanding with Harman will result in a restructuring of both short and long-term debt. This will be possible after holders of the private placement shares exercise their options, which total over $6.0 million, if all the warrants are exercised. The majority of these funds would be used to reduce the Harman debt along with providing Orban / CRL with additional cash reserves. 2 Harman International Industries, Inc. also holds warrants for shares in CRLI, which may be used to reduce both the short and long-term debt. Possible marketing opportunities for Orban / CRL are being explored with Harman's Studer Division for marketing in North America. Product development is moving forward with many new models and products being introduced and older products getting updated and redesigned. Orban has introduced it's Optimod 8200 Signature Series to celebrate 10 years of being the first and most successful Digital Audio Processor. The introduction of this model was so well received by the market, production for the next six months sold out in one day. Sales of both Orban and CRL models are at all time record highs. Optimod 8400 sales have been higher since it's introduction than any previous model in Orban's history, topping over $ 4.0 million since it's shipments began in September 2000. CRL has begun worldwide marketing of it's Amigo Series of audio processing for Radio and Television stations with great results. CRL is also introducing its New Upgraded Millennium Series of Digital Audio Processors in Las Vegas later this month. Orban and CRL have always been well respected for innovative and quality broadcast equipment solutions. With even more models being introduced in the next few months. As for our future, I believe we are embarking on the greatest period of growth in our history. Our future in broadcast equipment manufacturing is the brightest it's ever been. Our company wide mission is to expand into additional broadcast product markets, while not losing track of our core business, Audio Processing. Sincerely, /s/ Charles Jayson Brentlinger Charles Jayson Brentlinger President, CEO, Chairman Circuit Research Labs, Inc. CRL Systems, Inc. Nevada dba: Orban CRL International, Inc. 3 Corporate Overview Founded in 1974 as broadcast industry consultants, CRL built upon its understanding of the broadcast industry's needs by expanding into product development and manufacturing. In 1978, the Company was incorporated and, in late 1983, became registered as a public company on the NASDAQ stock exchange. Until March 31, 1998, Circuit Research Labs, Inc. was listed on the NASDAQ Small Cap market. 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 and audio analyzers. These products are labeled "CRL Systems". 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. 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. An example is the development of a digital audio analyzer. CRL's production capabilities are being improved and new marketing concepts are being developed to provide increased market share. Trusting in 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. Corporate Strategy On May 31, 2000, CRL Systems acquired the net assets of Orban, Inc., a wholly-owned subsidiary of Harman International Industries, Inc. (NYSE: HAR). Including the $500,000 previously paid to Orban in 1999, the total stated purchase price was $10.5 million, $2 million of which was paid in cash, the balance a combination of short-term and long-term seller financing. In order to raise the cash necessary for the purchase, the Company sold approximately $1,171,000 in common stock through a private placement, the Company's majority shareholder, Charles Jayson Brentlinger, advanced $150,000 to the Company, and the Company's Tempe, Arizona office building was mortgaged for $335,000. The seller financing consists of a $5 million long-term (Tranche A) and a $3.5 million short- term (Tranche B) note to Orban, Inc. The Asset Sale Agreement between CRL Systems and Orban, Inc. ("the Asset Sale Agreement") contains a provision to allow Orban to rescind the transaction if, as of November 30, 2000, CRL Systems has not paid in full the $3.5 million short-term note. If Orban exercises its option to rescind the agreement, it is to return $9,250,000 of the cash purchase price to CRL Systems, with the difference due to Orban as liquidating damages. The note has since been extended to April 30, 2002 with Orban retaining the option to rescind the agreement. 4 The Company has received several extensions on the Tranche A and B notes. First, in exchange for $150,000 cash and an increase in the interest rates to 12 percent per annum for both the Tranche A and Tranche B notes, Harman extended the maturity date of the Tranche B note to November 30, 2000. The maturity date of the Tranche B note has subsequently been extended several times without fees or other significant changes to the original terms of the note and is now due in full on April 30, 2002. Also, the first principal payment on the Tranche A note of $250,000, originally due March 31, 2001, has been extended to September 30, 2001 with the quarterly principal payments deferred until April 30, 2002. Interest only payments are payable monthly for both notes. In addition to the stated purchase price, CRL issued to Orban, Inc. warrants to purchase 1,000,000 shares of its common stock, immediately exercisable for $2.25 per share. The warrants have a 3-year term, and can be exercised either in cash or by reducing the unpaid principal amount of the $5 million long-term note, or in any combination thereof. The Company obtained an independent valuation of the warrants in November 2000, which valued the warrants at $1,050,000. When combined with the cash purchase price, this results in a total purchase price of Orban's assets of $11,550,000. As part of the acquisition, CRL Systems purchased the rights to the name "Orban" and currently operates a portion of its business under the trade name "Orban". Based in San Leandro, California, Orban is a leading manufacturer of audio processing for radio and TV stations worldwide. Orban has approximately 77 employees and net sales of approximately $6.5 million for the seven months ended December 31, 2000. CRL will retain the Orban brand and employees, including founder and chief engineer Bob Orban. The management of the Company believes this business combination is highly complementary and synergistic, since roughly 80% of Orban's products are digital and approximately 80% of CRL's products are analog. The acquisition positions the Company to offer a full range of digital and analog audio processing solutions at many price points. The Broadcast Industry and CRL 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 holds several patents on component designs for CRL products within the broadcast industry. 5 Circuit Research Labs, Inc.'s Principal Products Audio Processing Products Audio processing equipment produced by our company is used by radio and television stations, Internet webcasters, entertainers and recording studios. Audio processing is a complex technology, but put in simple terms, our audio processing products control what an audio broadcast sounds like to the listener. For example, audio processing controls the amount of bass and treble heard by the listener. Another important feature of audio processing is controlling the volume, or loudness of the broadcast. Most audio programming constantly varies in volume. Our audio processing equipment removes these loudness variations so radio listeners and TV viewers do not have to constantly adjust the volume of their radio and TV sets. Most governments throughout the world require radio and television broadcast stations to control their signal's modulation level and occupied bandwidth. Radio and television stations utilize some type of audio processing to comply with these governmental regulations. 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, we estimate that the average useful life of audio processing equipment is less than five years. Other products are appropriate for the audio processing needs of the Internet, recording and performing industries. Our Orban division manufactures audio processing equipment, primarily using digital technology, under the Orban, Optimod, Audicy and OptiCodec brands. Our CRL division also manufactures audio processing equipment, primarily using analog technology, under the CRL, Millennium, TVS and Amigo brand names. The combined product line can be separated into four different series or product families, FM Series, AM Series, TV Series and Other. FM SERIES Optimod-FM 8400 is the Company's "flagship" digital audio processor introduced in the summer of 2000. It is based on DSP (Digital Signal Processing) technology that is five times more powerful than its predecessor, the Optimod-FM 8200. Optimod-FM 2200 is based on technology in Orban's Optimod-FM 8200 and offers the benefits of digital processing to stations with a modest budget. Optimod-FM 8200 Signature Series is an upgraded version of the Optimod-FM 8200, Orban's widely used digital processor, which was first introduced in 1991. Other Optimod-FM Products include the 8218, a digital FM stereo encoder, and the 8200ST studio chassis. CRL Amigo-FM is a complete "one box" audio processing solution for small to mid-size radio stations on a tight budget. 6 Other CRL FM Products include the Millennium, a complete digital audio processor, the SG-800A Stereo Generator and the SCA-300B Subcarrier Generator. AM SERIES Optimod-AM 9200 is our top of the line digital audio processor for monaural AM radio stations throughout the world. Optimod-HF 9200 is a complete digital audio processor designed for the demanding requirements of short-wave broadcasting and "all-talk" AM radio stations that are experiencing nighttime interference problems. Optimod-AM 9100B2 is a complete audio processor for stereo AM radio stations. CRL Amigo-AM is complete audio processing solution for small to mid-size radio stations on a tight budget. Other CRL AM Products include the AM-4 Monaural audio processing system and the MBL-100. TELEVISION SERIES Optimod-TV 6200 is our top of the line digital audio processor for 2- channel (left and right audio channels) digital television transmissions (DTV). It is compatible with all digital television applications, including conventional land-based, cable or satellite distribution of mono, two-channel or Dolby Surround Sound programs. Optimod-TV 8282 is a digital audio processor designed for television audio, whether mono, stereo or dual-language, and is compatible with all monaural and stereo broadcast systems. Other Optimod-TV Products include the Optimod-TV 8182A, an analog audio processor for both stereo and monaural television, the Optimod-TV 8185A, a television stereo generator, the Optimod-TV 8182A SAP Generator (Secondary Audio Program, primarily designed for public second language usage), the Optimod-TV 8185A PRO Generator (PROfessional channel for non- public use) and the 275A Automatic Stereo Synthesizer which improves the sound of mono programs when heard on stereo or surround TV systems. CRL TVS Processors include the TVS-3001, a top of the line stereo television processor, the TVS-3003, a stereo TV generator, the TVS-3004, a Professional Channel (PRO) subcarrier generator and the TVS-3005, a secondary audio program (SAP) channel generator. CRL Amigo-TV is a complete audio processing solution for a variety of monaural television applications. 7 OTHER PRODUCTS Optimod 6200S is our top of the line digital audio processor for Internet Webcasters. Optimod-DAB 6200 is the first audio processor designed specifically for digital radio broadcasting (DAB). Audicy brand. Orban manufactures and sells digital audio production and video post-production workstations under the AUDICY brand. The workstations feature a very easy to learn set of controls and features to reduce our customer's training costs. OptiCodec brand. We announced the introduction of a new line of codecs in October 2000, which are being sold under the OptiCodec brand. Codec is a word coined from the verbs "enCOde" and DECode" and stands for a technology utilized in the transfer of digital data. The OptiCodecs will allow our customers to send high quality digital audio over the Internet, computer networks and special ISDN telephone lines (ISDN stands for Integrated Services Digital Network). Other CRL and Orban Products include stereo and mono gain controllers, stereo spatial enhancers, test and analysis tools, studio chassis, and other products related to the audio processing equipment. 8 CIRCUIT RESEARCH LABS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS YEARS ENDED DECEMBER 31, 2000 AND 1999 RESULTS OF OPERATIONS The following tables set forth financial information for each of the four quarters of the year ended December 31, 2000 and for the years ended December 31, 2000 and 1999. 2000 Quarters Ended March 31 June 30 September 30 December 31 Net sales $208,068 $1,039,679 $3,111,152 $2,901,011 Other income 16,211 736 234 989 ------ --- --- --- Total revenues $224,279 $1,040,415 $3,111,386 $2,902,000 ======= ========= ========= ========= Gross profit on net sales $117,081 $483,604 $1,474,229 $842,346 Gross profit percent 56% 47% 47% 29% Net loss ($206,848) ($455,233) ($500,110) ($1,095,930) Net loss percent of net sales 99% 44% 16% 38% Loss per share - basic and diluted ($0.17) ($0.29) ($0.24) ($0.50) Years Ended December 31 2000 1999 Net sales $7,259,910 $1,016,807 Other income 18,170 38,078 ------ ------ Total revenues $7,278,080 $1,054,885 ========= ========= Gross profit on net sales $2,917,260 $775,511 Gross profit percent 40% 76% EBITDA (1) (615,573) (264,446) Net loss ($2,258,121) ($260,229) Net loss percent of net sales 31% 26% Loss income per share - basic and diluted ($1.28) ($0.28) (1) EBITDA is defined as operating loss before depreciation and amortization. On May 31, 2000 the Company acquired the net assets of Orban, Inc., which were $5,134,000 at December 31, 1999. The net assets of the Company at December 31, 1999 were $1,684,000. The revenues for Orban for the year ended December 31, 1999 as reported in the 8-K/A filed November 21, 2000 were $12.4 million compared to revenues for the Company for the same period of $1.0 million. Accordingly, due to the consolidation of Orban's operations into the Company's beginning May 31, 2000, period to period comparisons of results of operations may not be meaningful. 9 Subsequent to the issuance of the Company's 2000 financial statements and the filing of the Company's annual report on Form 10-KSB, the Company's management determined that sales totalling $275,060 that was recorded in 2000 should have been reversed due to their subsequent return by the customer in the first quarter of 2001. As a result, the 2000 financial statements have been restated from the amounts previously reported to reflect the reversal of this sale (see note 10 to the financial statements). The following discussion and analysis has been modified to reflect the changes resulting from the restatement. Net sales in 2000 were $7.3 million compared to $1.0 million for 1999. Included in the net sales for 2000 are $6.5 million in revenues for the sale of Orban products for the seven months ended December 31, 2000. Sales under the CRL division decreased by 30% due to a slow down in demand for the division's audio processing equipment, in both the domestic and international markets. Cost of goods sold in 2000 was $4.3 million compared to $241,000 in 1999 and gross profit in 2000 was $2.9 million compared to $776,000 in 1999. Each of these increases was attributable to the Company's acquisition of the Orban assets on May 31, 2000. Gross profit as a percentage of revenues decreased to 40% in 2000 as compared to 76% in 1999. The decrease is a result of valuation reserves placed on inventory held at the CRL division in 1998. In the fourth quarter of 1999, $303,000 in valuation reserves were reversed once the Company resumed production and certain inventory items reserved for at December 31, 1998 were sold. This led to an unusually high margin in 1999 compared to previous years. In addition, ninety percent of the current year sales were attributable to Orban products, which have historically had lower gross profit percentages than products from the CRL division. Selling, general and administrative expense ("SG&A") in 2000 was $2,480,000, an increase of 204% over the $817,000 reported in 1999. As a percentage of net revenue, SG&A decreased from 80% in 1999 to 34% in 2000. The increase in SG&A expense is due in part to the variable component of SG&A (commissions and other domestic and international sales and marketing expenses) associated with the increase in revenues following our acquisition of the Orban assets. The fixed component of SG&A has also increased due to the additional personnel in sales and marketing and administration and cost related to operating the Orban business following the May 31, 2000 acquisition. Research and development expense was $1,052,000 in 2000, an increase of 372% over $223,000 in 1999. The increase resulted from both an increase in the number of engineering staff at CRL and research and development activities at Orban, which we continued at pre-acquisition levels. Other expense for the year ended December 31, 2000 was $759,000, of which $638,000 represents interest and fees paid to Harman in connection with the seller carry-back loan that financed a portion of our purchase of the Orban assets. In 1999, CRL did not incur any interest expense. Operationally, the Company is reporting a $616,000 loss before interest, taxes, depreciation and amortization (EBITDA) that represents 27% of the net loss of $2,258,000 in 2000 as compared to 1999 where the negative EBITDA of $264,000 represented 102% of the $260,000 net loss. This is primarily due to the amortization of goodwill and the interest expense incurred by acquisition of Orban. 10 FINANCIAL POSITION Net cash provided from operating activities in 2000 was $346,000 as compared to a use of cash by operating activities of $673,000 during 1999. The difference is primarily accounted for as a result of the increase in non-cash expense items of depreciation and amortization and the Company's increase in payables. Net cash used in investing activities of ($2,235,000) primarily reflects cash used for the acquisition of Orban in 2000. In 1999, the net cash used primarily reflects capital expenditures and equity investments. Net cash provided by financing activities was $2,099,000 in 2000 and included proceeds from the issuance of common stock related to the private placement and proceeds from debt. WORKING CAPITAL Working capital at December 31, 2000 was $2.1 million compared to $945,000 at December 31, 1999. During the fiscal year ending December 31, 2001, the Company's principal working capital requirements are to pay normal recurring operating costs. Management believes that these requirements can be met from the operating cash flows. In addition the Company has $483,000 of debt payments due by December 31, 2001. The Company's President, Mr. Charles Jayson Brentlinger, has committed to exercise his options if necessary to satisfy the Company's debt payment requirements, if operating cash flows are inadequate. 11 CIRCUIT RESEARCH LABS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS YEARS ENDED DECEMBER 31, 1999 AND 1998 RESULTS OF OPERATIONS The following tables set forth financial information for each of the four quarters of the year ended December 31, 1999 and for the years ended December 31, 1999 and 1998. 1999 Quarters Ended March 31 June 30 September 30 December 31 Net sales $374,293 $274,683 $196,000 $171,831 Other income 13,608 6,619 7,795 10,056 ------ ----- ----- ------ Total revenues $387,901 $281,302 $203,795 $181,887 ======= ======= ======= ======= Gross profit on net sales $130,626 $ 64,031 $ 88,486 $492,368 Gross profit percent 35% 23% 45% 287% Net (loss) income $(170,524) $(56,295) $(134,273) $100,863 Net (loss) income percent of net sales (46%) (20%) (69%) 59% (Loss) income per share - basic and diluted $(.21) $(.07) $(.16) $.08 Years Ended December 31 1999 1998 Net sales $1,016,807 $1,516,613 Other income 38,078 1,033,940 ------ --------- Total revenues $ 1,054,885 $2,550,553 ========= ========= Gross profit on net sales $775,511 $247,528 Gross profit percent 76% 16% EBITDA (1) $(264,446) $(780,509) Net (loss) income $(260,229) $9,011 Net (loss) income percent of net sales (26%) .1% (Loss) income per share - basic and diluted $(.28) $ .01 (1) EBITDA is defined as operating income (loss) before depreciation and amortization. 12 The primary factor affecting the results of the Company's 1999 operations compared to 1998 was the Board of Directors' proposed dissolution of the Company. Production was stopped and personnel were terminated in anticipation of the dissolution. Following the sale of stock on September 30, 1999 to Charles Jayson Brentlinger, the Board of Directors voted not to dissolve the corporation, production was resumed and new personnel were hired. The decrease in sales was a direct result of customers not buying the Company's products due to the proposed dissolution. Net sales in 1999 decreased 33% to $1,017,000 as compared to $1,517,000 for 1998. Cost of goods sold in 1999 was 24% of net sales compared to 84% in 1998. The improvement was due to the change in inventory obsolescence reserves. The inventory obsolescence reserve expensed in 1998 was $552,000. The decision to cease production in early 1999 in anticipation of the proposed dissolution of the Company resulted in the reduction of net realizable value of the inventory at December 31, 1998. In the fourth quarter of 1999, $303,000 of this reserve was reversed since the Company resumed production and certain inventory items reserved for at December 31, 1998 were sold in the current year. Selling, general and administrative expense in 1999 of $850,000 was lower than selling, general and administrative expense in 1998 of $900,000 due primarily to a decrease in personnel and a decrease in international travel. Research and development expense for the year ended December 31, 1999 was $223,000, a decrease of $32,000 compared to $255,000 for the same period of 1998. The decrease was a result of a decrease in engineering personnel. Other income (expense) for the year ended December 31, 1999 was $38,000 consisting of interest income from investments. Other income (expense) for the year ended December 31, 1998 of $916,000 included $1,001,000 of officer's life insurance proceeds received in excess of the policy's cash surrender value from an insurance policy payable upon the death of Ronald R. Jones, $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. This 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. 13 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 (the "Company") as of December 31, 2000 and 1999, 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 10, the accompanying 2000 financial statements have been restated. DELOITTE & TOUCHE LLP Phoenix, Arizona April 16, 2001 (May 17, 2001 as to Notes 4 and 10) 14 CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 ASSETS (Note 4) 2000 1999 (As Restated, see Note 10) CURRENT ASSETS: Cash $272,203 $62,597 Securities available-for-sale 0 383,905 Accounts receivable, less allowance for doubtful accounts of $15,000 in 2000 and $9,700 in 1999 727,001 47,662 Inventories (Note 2) 3,258,683 561,205 Prepaid expenses and other 156,008 40,219 Advances to shareholders 21,654 0 --------- --------- Total current assets 4,435,549 1,095,588 PROPERTY, PLANT AND EQUIPMENT - Net (Note 3) 1,809,355 440,888 DEFERRED ACQUISITION COSTS 0 298,215 OTHER ASSETS 39,000 GOODWILL (Net of Amortization of $615,908) 6,774,984 0 --------- --------- TOTAL $13,058,888 $1,834,691 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $836,965 $70,732 Accrued salaries and benefits 283,226 34,684 Accrued professional fees 100,198 30,933 Customer deposits 275,502 3,623 Other accrued expenses and liabilities 282,912 10,507 Due to shareholders 25,000 0 Current portion of long-term debt (Note 4) 483,280 0 ------- ------- Total current liabilities 2,287,083 150,479 --------- ------- LONG-TERM DEBT, LESS CURRENT PORTION (Note 4) 8,738,466 0 --------- ------- Total liabilities 11,025,549 150,479 ---------- ------- 15 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 - continued 2000 1999 (As Restated, see Note 10) STOCKHOLDERS' EQUITY (Notes 4, 5 and 6): Preferred stock, $100 par value - authorized, 500,000 shares, None issued Common stock, $.10 par value - authorized, 20,000,000 shares; issued 2,269,522 in 2000 and 1,195,364 in 1999 226,952 59,768 Additional paid-in capital 4,077,538 1,637,474 Accumulated deficit (2,271,151) (13,030) --------- --------- Total stockholders' equity 2,033,339 1,684,212 --------- --------- TOTAL $13,058,888 $1,834,691 ========== ========= See notes to consolidated financial statements. 16 CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 (As Restated, see Note 10) NET SALES (Note 8) $7,259,910 $1,016,807 COST OF GOODS SOLD 4,342,650 241,296 --------- ------- Gross profit 2,917,260 775,511 --------- ------- OPERATING EXPENSES Selling, general and administrative 2,480,337 816,516 Research and development 1,052,496 223,441 Depreciation 267,581 33,861 Amortization 615,908 ------- ------- Total operating expenses 4,416,322 1,073,818 --------- --------- LOSS FROM OPERATIONS (1,499,062) (298,307) --------- ------- OTHER (INCOME) EXPENSE: Interest and other income (18,170) (38,078) Interest and other expense 777,229 0 ------- ------- Total other (income) expense 759,059 (38,078) ------- ------- LOSS BEFORE INCOME TAX (2,258,121) (260,229) INCOME TAX (Note 7): 0 0 --------- ------- NET LOSS ($2,258,121) ($260,229) NET LOSS PER COMMON SHARE - BASIC AND DILUTED ($1.28) ($0.28) See notes to consolidated financial statements. 17 CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000 AND 1999 Retained Common Stock Additional Earnings Paid-in (Accumulated Treasury Shares Amount Capital Deficit) Stock Total BALANCE, January 1, 1999 1,195,364 $119,536 $1,187,472 $247,199 ($181,640) $1,372,567 Sale of treasury stock 390,234 181,640 571,874 Net loss (260,229) (260,229) ------ ------ ------- ------- ------ ------- BALANCE, December 31, 1999 1,195,364 119,536 1,577,706 (13,030) 0 1,684,212 Issuance of common shares 1,074,158 107,416 1,449,832 1,557,248 Issuance of Warrants 1,050,000 1,050,000 Net loss (as restated, see Note 10) (2,258,121) (2,258,121) --------- ------- --------- ------- ------ --------- BALANCE, December 31, 2000 (as restated, see Note 10) 2,269,522 $226,952 $4,077,538 ($2,271,151) $0 $2,033,339 ========= ======= ========= ========= ====== ========= See notes to consolidated financial statements. 18 CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 (As restated, See Note 10) OPERATING ACTIVITIES: Net loss ($2,258,121) ($260,229) Adjustments to reconcile (net loss) to net cash provided by (used in) operating activities: Depreciation and amortization 883,489 33,861 Loss on disposal of assets 5,930 Decrease in inventory reserves (56,258) (317,122) Changes in assets and liabilities: Accounts receivable 385,173 40,280 Inventories 136,513 140,284 Prepaid expenses and other 256,974 29,343 Deferred acquisition costs 298,215 Accounts payable and other accrued expenses 997,594 11,472 ------- ------- Net cash provided by (used in) operating activities 345,904 (673,082) INVESTING ACTIVITIES: Capital expenditures (32,316) (51,942) Purchase of securities (870,198) Proceeds from sale or maturity of securities 383,905 973,254 Purchase of net assets of Orban, Inc. (2,586,881) 0 --------- ------- Net cash (used in) provided by investing activities (2,235,292) 51,114 FINANCING ACTIVITIES: Proceeds from debt 430,341 Principal payments on long-term debt (11,095) (16,000) Proceeds from shareholder advances and debt 122,500 Proceeds from sale of common stock 1,557,248 Sale of treasury stock 0 571,874 --------- ------- Net cash provided by financing activities 2,098,994 555,874 --------- ------- NET INCREASE (DECREASE) IN CASH 209,606 (66,094) CASH, BEGINNING OF YEAR 62,597 128,691 ------- ------- CASH, END OF YEAR $272,203 $62,597 ======= ====== SUPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $774,829 $0 ======= ====== Sale of assets in exchange for balance on notes payable $0 $5,000 == ===== 19 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 2000 1999 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchase of net assets of Orban, Inc.: Fair value of net assets acquired, including goodwill $12,640,096 Debt issued to seller (8,500,000) Fair values of warrants issued to seller (1,050,000) Debt issued to stockholder (205,000) Costs paid in 1999 (298,215) ------- Cash paid $2,586,881 ========= See notes to consolidated financial statements. 20 CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000 (Restated) AND 1999 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Circuit Research Labs, Inc. (the "Company" or "CRL") is an electronics company developing, manufacturing and marketing high quality audio processing and transmission encoding equipment for the radio, television and professional audio markets worldwide. Principles of Consolidation - The consolidated financial statements include the accounts of Circuit Research Labs, Inc. and its wholly owned subsidiaries: CRL Systems, Inc. ("CRL Systems") and CRL International, Inc. (collectively, the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation. On May 31, 2000, CRL Systems acquired the net assets of Orban, Inc. ("Orban"), a wholly owned subsidiary of Harman International Industries, Inc. Including the $500,000 non-refundable deposit previously paid to Orban, the total stated purchase price was $10.5 million, $2 million of which was paid in cash, the balance was financed through a combination of short-term and long-term seller financing. In addition to the stated purchase price, CRL issued to Orban, Inc. warrants to purchase 1,000,000 shares of its common stock, immediately exercisable for $2.25 per share. The warrants were valued at $1,050,000 at the time of the purchase to be part of the total purchase price of $11,550,000. The Asset Sale Agreement between CRL Systems and Orban contains a provision to allow Orban to rescind the transaction if, as of November 30, 2000, CRL Systems has not paid in full the $3.5 million short-term note. If Orban exercises its option to rescind the agreement, it is to return $9,250,000 of the purchase price to CRL Systems, with the difference due to Orban as liquidating damages. The note has since been extended to April 30, 2002 with Orban retaining the option to rescind the agreement. As part of the acquisition, CRL Systems purchased the rights to the name "Orban" and operates a portion of its business under the "Orban" trade name. The acquisition has been accounted for as a purchase and accordingly the net assets and results of operations of Orban have been included in the consolidated financial statements commencing May 31, 2000. The excess of the total acquisition costs over the fair value of the assets acquired of approximately $7.1 million is being amortized over 7 years. After the acquisition, the majority of the Company's revenues are derived from the sale of Orban products, totalled $6,500,000 during the seven months ended December 31, 2000. The following unaudited pro-forma summary combines the consolidated results of operations of the Company and Orban as if the acquisition had occurred on January 1 of that period after giving effect to certain adjustments including amortization of the purchase price in excess of net assets acquired, corporate general and administrative expenses, and income taxes. This pro-forma summary is not necessarily indicative of the results of operations that would have occurred if the Company and Orban had been combined during such periods. Moreover, the pro-forma summary is not intended to be indicative of the results of operations to be attained in the future. 21 Twelve Months Ended December 31 2000 1999 Net revenues $12,255,000 $13,385,000 Net loss (1,647,000) (1,799,000) Net loss per common share (.93) (1.05) Significant accounting 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. The fair value of the Company's securities is estimated based on quoted market prices for those or similar instruments. b. Inventories are stated at the lower of cost (first-in, first-out method) or market. 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. Deferred acquisition costs as of December 31, 1999, are the total costs deferred relating to the Orban acquisition totalling $298,215, including a $250,000 non-refundable deposit. There are no costs deferred as of December 31, 2000. e. Long-lived assets - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company reviews the carrying value of its long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. For assets to be disposed of, the Company reports long- lived assets and certain identifiable intangibles at the lower of carrying amount or fair value less cost to sell. f. Revenue is recognized on sales of products when the risks and rewards of ownership transfer to customers, which is generally at the time of shipment. No significant obligations remain after the product is shipped. Sales returns are generally not accepted unless under a warranty claim. 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, "Accounting for Income Taxes". Under the liability method, deferred tax assets and liabilities are determined based upon the differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and are measured at the tax rates that will be in effect when these differences reverse. 22 i. Financial instruments - SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires disclosures of the estimated fair value of certain financial instruments. The Company has estimated the fair value of its financial instruments using available market data. However, considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different market assumptions or methodologies may have a material effect on the estimates of fair value. The carrying values of cash, 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 - SFAS No. 128. "Earnings Per Share", requires the dual presentation of basic and diluted earnings per share on the face of the income statement and the disclosure of the reconciliation between numerators and denominators of basic and diluted earnings per share calculations. Loss per share amounts for the years ended December 31, 2000 and 1999 are calculated using only weighted average outstanding shares of 1,770,265 and 916,940 respectively. Options and warrants to purchase 1,026,500 and 1,708,158 shares respectively, of common stock for the year ended December 31, 2000 were not used in computing diluted earnings per share because the result would be anti-dilutive. Options to purchase 1,342,500 shares of common stock for the year ended December 31, 1999 were not used in computing diluted earnings per share because the result would be anti-dilutive. k. New accounting pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 and its related amendments and interpretations, which will be effective for the Company's financial statements as of January 1, 2001, 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 adoption of this standard will not have a significant impact on the Company's consolidated results of operations, financial position or cash flows. 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 reported period. Actual results could differ from these estimates. m. Reclassifications - Certain reclassifications have been made to the 1999 financial statements to conform to the classifications used in 2000. 23 2. INVENTORIES Inventories consist of the following at December 31: 2000 1999 Raw materials and supplies $2,062,311 $344,116 Work in process 1,262,536 214,933 Finished goods 774,836 382,156 ------- ------- Total 4,099,683 941,205 Less obsolescence reserve 841,000 380,000 ------- ------- Inventories, net $3,258,683 $561,205 ========= ======= 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at December 31: 2000 1999 Land $130,869 $130,869 Building and improvements 874,697 503,000 Furniture and fixtures 927,227 285,167 Machinery and equipment 1,135,395 518,272 --------- ------- 3,068,188 1,437,308 Less accumulated depreciation 1,258,833 996,420 --------- ------- Property, plant and equipment - net $1,809,355 $440,888 ========= ======= 4. LONG-TERM DEBT Long term-debt at December 31, 2000 consisted of the following: Orban, Inc. Tranche A Note $5,000,000 Orban, Inc. Tranche B Note 3,500,000 Note to shareholder 193,859 Note to shareholder 97,500 Mortgage note 362,000 Employee note 68,387 ------ Total long-term debt $9,221,746 Less current portion 483,280 ------- Total long-term debt, less current portion $8,738,466 ========= 24 In conjunction with the Asset Sale Agreement between Orban, Inc. and CRL Systems, Inc., CRL Systems and Orban entered into a Credit Agreement to establish the terms and conditions of the $8,500,0000 loan from Orban to CRL Systems. The loan is evidenced by two promissory notes, the Senior Subordinated Tranche A Note (the "Tranche A Note") and the Senior Subordinated Tranche B Note (the "Tranche B Note"). The Tranche A Note, in the amount of $5,000,000, originally bore interest at 8 percent per annum and required quarterly principal payments beginning March 31, 2001, with a balloon payment of $3,000,000 due on March 31, 2003. The Tranche B Note, in the amount of $3,500,000, bore interest at 8 percent per annum for the period from June 1, 2000 to July 31, 2000 and 10 percent per annum from August 1, 2000 up to its September 30, 2000 maturity date. The notes are collateralized by, among other things, all receivables, inventory and equipment, investment property, including CRL's capital stock in CRL Systems, and intellectual property of CRL and CRL Systems, as defined in the "Guarantee and Collateral Agreement". In addition all proceeds of debt or equity or sales of assets are to be first applied to the remaining balance due in the notes. The Company has received several payment extensions on the Tranche A and B notes. First, in exchange for $150,000 cash and an increase in the interest rates to 12 percent per annum for both the Tranche A and Tranche B notes, Orban, Inc. extended the maturity date of the Tranche B note to November 30, 2000. The maturity date of the Tranche B note has subsequently been extended several times without fees or other significant changes to the original terms of the note and is now due in full on April 30, 2002. Also, the first principal payment on the Tranche A note of $250,000, originally due March 31, 2001, has been extended to September 30, 2001 with the remaining quarterly principal payments deferred until April 30, 2002. Interest only payments are payable monthly for both notes. In consideration for arranging the purchase financing of Orban, the Company incurred fees of $97,500 to a shareholder, the total of which is included in the current portion of long-term debt at December 31, 2000. The note is due May 14, 2001 and accrues interest of 7.5 percent per annum starting at the original date of the note of June 21, 2000, which is payable at maturity. The note has subsequently been extended to August 14, 2001. The Company issued $205,000 in long-term debt to a shareholder in consideration for his role in the acquisition of the assets of Orban, Inc. The note bears interest at 7.5 per cent per annum, with principal and interest due monthly beginning August 1, 2000 for four years. During the second quarter of 2000, the Company's president, Charles Jayson Brentlinger, loaned the Company $195,000 in a short-term non- interest bearing advance. On November 30, 2000, Mr. Brentlinger converted his loan to the Company to purchase 156,000 shares of the Company's common stock for $1.25 per share under the 1999 stock purchase agreement between him and the Company. On May 30, 2000, the Company mortgaged its office building and manufacturing facility in Tempe, Arizona for $335,000. The mortgage note bears interest at 15.25 percent per annum, payable monthly, and the full principal balance was to be paid on November 30, 2000. Prior to the December 2000 extended maturity date, the Company refinanced the unpaid balance into two new mortgage agreements for $300,000 and $62,000. The notes bear interest at 11.75 percent per annum and 14.75 percent per annum respectively. Principal and interest payments are payable monthly for both notes commencing in February 2001 using a 12-year amortization period and requiring a balloon payment at the end of the five-year term. 25 On June 12, 2000, the Company entered into a promissory note for $68,387 from an employee. The note bears interest at 12 percent per annum. All principal and interest was due September 12, 2000; however, the maturity date has been extended to June 30, 2001. The note is unsecured. The following represents the principal maturities for the five years subsequent to December 31, 2000: 2001 $483,280 2002 5,316,566 2003 3,072,546 2004 54,958 2005 22,764 Thereafter 271,632 ------- Total $9,221,746 ========= The Company leases certain facilities under a noncancellable operating lease which renews in 2001. The total minimum rental commitment at December 31, 2000 is $473,000 through the November 30, 2001 expiration date. A portion of these facilities is sublet out on a month-to-month basis. Net rental expense for the year ended December 31, 2000 was $194,000. 5. STOCKHOLDERS' EQUITY On July 7, 2000, the Board of Directors declared a 100 percent stock dividend of one share of common stock for each share held, payable on August 15, 2000 to all shareholders of record as of the close of business on July 31, 2000. All share and per share amounts included in the accompanying financial statements have been retroactively adjusted to give effect to the stock dividend. During the second and third quarters of 2000, the Company sold in a private placement, for $1.50 per share, 708,158 units of common stock and warrants under a subscription agreement (the "Subscription Agreement") with accredited investors. Under the agreement, each unit consists of one share of the Company's common stock and one warrant (the "Class A Warrants") to purchase at an exercise price of $1.75 per share one share of the Company's common stock and one Class B Warrant (as defined). The Class A Warrant may be exercised for a sixty-day period following the registration of the shares issuable upon exercise of the Class A Warrants. The holder of a Class A Warrant shall not have the right to obtain a Class B Warrant if the Class A Warrant is not timely exercised. Each Class B Warrant, if and when issued, will be a warrant to purchase at an exercise price of $2.00 per share one share of Company's common stock and one Class C Warrant. The holder of a Class B Warrant shall not have the right to obtain a Class C Warrant if the Class B Warrant is not timely exercised, as defined in the subscription agreement. Each Class C Warrant, if and when issued, will be a warrant to purchase at an exercise price of $2.25 per share one share of Company's common stock and one Class D Warrant. The holder of a Class C Warrant shall not have the right to obtain a Class D Warrant if the Class C Warrant is not timely exercised, as defined in the subscription agreement. Each Class D Warrant, if and when issued, will be a warrant to purchase at an exercise price of $2.50 per share one share of Company's common stock. As of December 31,2000, none of the warrants have been exercised. 26 6. STOCK OPTIONS In May 1994, the Company's stockholders approved the Company's 1994 Stock Option Plan, which set aside an aggregate of 120,000 shares of common stock for which options may be granted to employees, officers, directors, and consultants. Options are typically exercisable upon the grant date for up to 3 years at a price equal to 100% of the fair market value at the date of grant. There are no options outstanding under this plan at December 31, 2000. In September 1999, the Company entered into two stock agreements with its president Charles Jayson Brentlinger. The first, pursuant to the terms of a stock purchase agreement, required the President to purchase 342,500 shares of the Company's common stock at $1.25 per share within 1 year. Prior to such date, he purchased 160,000 shares under the agreement. On October 20, 2000, the purchase date was extended to December 31, 2000. As of December 31, 2000 he remained obligated to purchase 26,500 shares on or before December 31, 2000 for a total price of $33,125. In consideration of the cash advances received from the president to the Company, the Board of Directors issued a resolution extending the terms of the stock purchase agreement to February 8, 2001 at which time Mr. Brentlinger fulfilled his remaining obligation. The second was a grant of stock options, which vested immediately, for options to purchase 1,000,000 shares over the next 5 years for $1.25 per share. No options have been exercised under this grant. Mr Brentlinger has committed to exercise his options, if necessary, in order to satisfy the Company's debt payments, if operating cash flows are inadequate. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for these stock options. Accordingly, no compensation cost has been recognized for the stock options. Had compensation cost for the Company's stock options 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 and net loss per share for the year ended December 31, 1999 would have been increased to the pro forma amounts indicated below: Net loss - as reported $ (260,229) Net loss - pro forma (730,863) Loss per share - as reported (.28) Loss per share - pro forma (.79) 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 85%, risk-free interest rate of 6.25%, and expected lives of two years. There would have been no compensation expense under SFAS No. 123 in the year ended December 31, 2000. 27 7. INCOME TAXES The principal reasons for the difference between the income tax benefit provision and the amounts computed by applying the statutory income tax rates to the loss for the years ended December 31, are as follows: 2000 1999 Federal tax at statutory rates ($767,800) ($88,500) State tax at statutory rates (135,500) (15,600) Officer's life insurance proceeds 0 (13,200) Officer's life insurance 0 1,600 Increase in valuation allowance 903,300 115,700 ------- ------- Total $0 $0 ======= ======= At December 31, deferred taxes represent the tax effect of temporary differences related to: 2000 1999 Current deferred taxes: Inventory capitalization $138,400 $89,200 Prepaid expenses (4,800) (13,100) Inventory obsolescence reserve 336,200 151,900 Allowance for doubtful accounts 6,100 3,800 Warranty and other accruals 99,300 0 Deferred tax valuation allowance (575,200) (231,800) ------- ------- Total $0 $0 ======= ======= 2000 1999 Non-current deferred taxes: Goodwill amortization $131,400 $0 Depreciation and amortization (61,200) (25,900) Operating loss carry forward 956,000 446,300 Other 0 46,000 Federal general business credit carry forward 65,400 65,400 Deferred tax valuation allowance (1,091,700) (531,800) --------- ------- Total $0 $0 ========= ======= At December 31, 2000, a valuation allowance totalling $1,666,900 was recorded which relates to, among other items, federal and state net operating losses and federal general business credit carry forwards for which the utilization is not reasonably assured. Net operating loss carryforwards of approximately $2,391,000, which expire through 2020, are available for federal income tax purposes. 28 8. SEGMENT REPORTING, SALES TO MAJOR CUSTOMERS AND EXPORT SALES The Company manufactures and distributes audio processing and Radio and TV studio equipment. The Company's primary end user market is Radio and TV stations and also the Internet market. The chief operating decision makers are provided information about revenues generated by product line, with all products having similar production processes, customers and distribution channels. The Company's long-lived assets are all located in the United States. Sales during the years ended December 31, 2000 and 1999 were conducted primarily through wholesale distributors and dealers. In 2000, approximately 33% of the net sales where generated from one wholesale distributor while in 1999 there were no wholesale distributors that accounted for 10% or more of net sales. International sales in 2000 and 1999 totalled approximately $3,148,000 and $501,000, respectively. International sales are made through the Company's wholly-owned foreign sales corporation CRL International, Inc. The Company requires that all export sales be paid in U.S. currency. Accordingly, there are no foreign currency gains or losses for the years ended December 31, 2000 or 1999. The Company's export sales by region as determined by customer location are as follows: Region 2000 % 1999 % Europe $1,679,659 53% $42,000 8% Pacific Rim 731,994 23 253,000 50 Latin and South America 527,618 17 23,000 5 Canada and Mexico 179,339 6 94,000 19 Other 27,408 1 89,000 18 ------ --- ------ --- Total $3,148,017 100% $501,000 100% ========= === ======= === 9. 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 $35,063 and $16,480 in 2000 and 1999, respectively. 29 10. RESTATEMENT Subsequent to the issuance of the Company's 2000 financial statements, the Company's management determined that sales totalling $275,060 that were recorded in 2000 should have been reversed due to their subsequent return by the customer. As a result, the 2000 financial statements have been restated from the amounts previously reported to reflect the reversal of this sale as follows: As Previously Reported As Restated At December 31, 2000: Accounts receivable $1,002,061 $727,001 Accumulated deficit (1,996,091) (2,271,151) Total stockholders' equity 2,308,399 2,033,339 For the year ended December 31, 2000: Sales 7,534,970 7,259,910 Net loss (1,983,061) (2,258,121) Loss per share - basic and diluted (1.12) (1.28) Because the inventory that was involved in the sale had been determined to be unsaleable inventory in a prior year and had no carrying value, the sales return did not affect either inventory or cost of sales. 30 Circuit Research Labs, Inc. STOCK MARKET INFORMATION 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 March 30, 2001, there were 2,296,022 shares of common stock issued and outstanding, with an estimated 450 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). The high and low closing bid prices have been adjusted to reflect a 100% stock dividend that was effective on August 15, 2000. 2000 - Quarters Ended March 31 June 30 September 30 December 31 Bid Quotation Range High $7.50 $7.00 $10.75 $9.88 Low $1.00 $2.50 $4.25 $4.50 1999 - Quarters Ended March 31 June 30 September 30 December 31 Bid Quotation Range High $1.16 $1.25 $1.25 $1.44 Low $.72 $.75 $.75 $.56 Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. DIVIDENDS The Company has not paid any dividends on its common stock for the two most recent fiscal years. 31 Circuit Research Labs, Inc. CORPORATE DIRECTORY Charles Jayson Brentlinger Chief Executive Officer, President and Chairman Gary D. Clarkson Secretary, Treasurer, Vice President and General Manager Robert A. Orban Director and Chief Engineer Carl E. Matthusen Director Phillip T. Zeni Director James Seemiller Chief Financial Officer and Vice President of Sales, Marketing and New Business Development Greg J. Ogonowski Vice President of New Product Development William R. Devitt Vice President of Manufacturing and Production CORPORATE INFORMATION Corporate Headquarters: Circuit Research Labs, Inc. 2522 West Geneva Drive Tempe, Arizona 85282 Transfer Agent and Registrar: Independent Auditors: Computershare Investor Services Deloitte & Touche LLP 2 North LaSalle Street 2901 North Central Avenue Chicago, Illinois 60602 Suite 1200 Phoenix, Arizona 85012 Corporate Counsel: John L. Hay, Esquire Gust Rosenfeld P.L.C. 201 N. Central Ave., Suite 330 Phoenix, AZ 85073-3300 Additional Information: A copy of Circuit Research Labs, Inc.'s current Form 10-KSB/A 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. 32 Exhibit 23 Consent of Deloitte & Touche LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-82176 and 333-50920 of Circuit Research Labs, Inc. on Forms S-8 of our report dated April 16, 2001, May 17, 2001 as to Notes 4 and 10, (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 10) incorporated by reference in this Amendment No. 1 to Annual Report on Form 10-KSB of Circuit Research Labs, Inc. for the year ended December 31, 2000. DELOITTE & TOUCHE LLP Phoenix, Arizona May 17, 2001