-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXdGH0L7GBU1QSmRTuI2i91H2EbZcX+f96NK80hE37wtQ+0byM2JqBQtXv3w4DVW c04iS/hxlB4DV5TK1k6ASA== 0000725897-04-000013.txt : 20041118 0000725897-04-000013.hdr.sgml : 20041118 20041118172202 ACCESSION NUMBER: 0000725897-04-000013 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041118 DATE AS OF CHANGE: 20041118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRCUIT RESEARCH LABS INC CENTRAL INDEX KEY: 0000725897 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 860344671 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11353 FILM NUMBER: 041155706 BUSINESS ADDRESS: STREET 1: 1302 W DRIVERS WAY CITY: TEMPE STATE: AZ ZIP: 85284 BUSINESS PHONE: 6024380888 MAIL ADDRESS: STREET 1: 1302 W DRIVERS WAY CITY: TEMPE STATE: AZ ZIP: 85284 10QSB/A 1 fm10qsba1_111804.txt FORM 10QSB/A AMENDMENT NO. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A AMENDMENT NO. 1 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ________________ Commission File No.: 0-11353 CIRCUIT RESEARCH LABS, INC. (Exact name of small business issuer as specified in its charter) ARIZONA 86-0344671 (State or other jurisdiction (I.R.S. Employer of Identification No.) incorporation or organization) 1302 W. DRIVERS WAY, TEMPE, ARIZONA 85284 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (480) 403-8300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No The number of shares outstanding of each class of our common equity as of November 15, 2004 is as follows: Class of Common Equity Number of Shares Common ---------------------- ----------------------- Stock, par value $.10 4,332,533 1 EXPLANATORY NOTE This Amendment No. 1 to Form 10-QSB for the quarter ended September 30, 2004 sets forth an amendment in Part I, Item 2 (MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS) to the Risk Factor captioned "OUR PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD EXCERCISES SIGNIFICANT CONTROL OVER US." The amendment reflects that an option to purchase 1,365,005 shares held by our president terminated by passage of time on September 30, 2004. Part one Item 2 of the 10QSB for the quarter ended Spetember 30, 2004 is hereby in its entirety amended to read as follow: 2 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes included elsewhere in this report. This discussion contains statements about future events, expectations, risks and uncertainties that constitute forward- looking statements, as do discussions elsewhere in this report. Forward-looking statements are based on management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. The words "believe," "may," "will," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "strive" or similar words, or the negative of these words, identify forward-looking statements. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those described below under this Item 2, "Management's Discussion and Analysis or Plan of Operation - Risk Factors." We qualify any forward-looking statements entirely by these cautionary factors. RECENT DEVELOPMENTS Harman Debt On October 12, 2004, the Company announced it had reached an agreement with Harman pertaining to the restructure of the Company's indebtedness owed to Harman International Industries. The Company paid Harman $1,000,000 in cash in repayment of debt as a condition for the restructure. The funds for this payment came from two sources: (i) $300,000 came from cash generated from Company operations and (ii) $700,000 came from a short term loan from a related party lender who is a family member of the Company's President and CEO. The loan bears interest at 11.5% per annum and requires monthly interest-only payments. The Company is currently negotiating with the lender about the terms of repayment and the possibility of the lender converting the note into preferred or common stock of the Company. No agreement about the terms and conditions of the payment or conversion has yet been completed. Prior to the restructure transaction, the interest rate on the debt owed Harman was 12.0% per annum. As part of the debt restructure, Harman will waive all interest accrued after April 1, 2003 in excess of 6% per annum. On September 30, 2004, the accumulated accrued interest before the restructure was $1,012,910, of which $763,380 will be waived. The remaining $249,530 of accrued interest will be added to the total outstanding principal balance of the Company's indebtedness to Harman. After giving effect to the $1,000,000 principal payment, the principal amount due Harman by the Company was $7,482,000 (before giving effect to the waiver of unpaid interest and the addition of remaining accrued interest to the loan principal balance). Adding the remaining unpaid interest of $249,530 to principal resulted in a total unpaid principal loan balance of $7,731,530 as of September 30, 2004. Harman also agreed to exchange $2,104,000 of the debt for 2,104,000 shares of the Company's common stock, and then sold all such shares to a nominee of Jay Brentlinger, the Company's President and Chief Executive Officer. The nominee agreed to purchase all such shares for $1,000,000. Payment was made by delivery of a promissory note due and payable on September 30, 2007. Harman's recourse for non-payment under the note is limited to a security interest in the shares purchased. 3 Harman has agreed to exchange an additional $2,400,000 of indebtedness for additional shares of Company common stock such that Harman will own approximately 1,500,000 shares resulting in ownership of 19% of the then outstanding shares on a fully diluted basis after giving effect to the transactions described above. Should the related-party lender elect to convert his $700,000 note into shares of the Company's common stock, the Company will issue as many additional shares to Harman as necessary to cause Harman to maintain a 19% ownership after the entire transaction is completed. Harman agreed that the remaining $3,227,530 of indebtedness owed to it by the Company after giving effect to the transactions described above will be evidenced by a new note that 1) renews and extends (but does not extinguish) the Company's indebtedness owing to Harman and 2) reduces the interest rate to 6% per annum, with interest payable monthly in arrears. The Company's indebtedness to Harman shall continue to be secured by a security interest covering all of the Company's assets. Mandatory principal payments by the Company shall be made as follows: Amount September 30, 2005 $400,000 September 30, 2006 $450,000 September 30, 2007 $450,000 September 30, 2008 $500,000 September 30, 2009 Balance Dialog4 As discussed above more fully in Note 5 of the Notes to the Consolidated Condensed Financial Statements, we owe Dialog4 approximately $597,000 in principal under a not we issued. In connection with our purchase of the Dialog4 assets and we need to register the 1,250,000 shares issued to Dialog4 in partial payment of the purchase price of the assets. The Company has not been making payments to Dialog4 since August 2002 due to disputes with Solectron and other companies that have claims against Dialog4 that pre-date our acquisition of Dialgo4's assets, but for which we may have liability under German law. On April 29, 2003, Dialog4 filed a demand for arbitration in Germany. Then on October 8, 2004 the Company learned the Arbiter had awarded Dialog4 approximated $1.0 million. The Company filed a request for correction of the arbitral award with the arbiter on November 8, 2004, and the Company anticipates that it will receive a response within 30 days. The correction relates to an aggregate amount of less than $50,000. The Company has increased its liability from $712,000, which represents the principal and interest under the Company's note payable to Dialog4 (see Note 4) to $1,024,000. This increase represents the amount awarded by the arbiter for Dialog4's cost and fees incurred in connection with the arbitration and the amount of a liability to a third party vendor to Dialog4. 4 Dialog4 had previously accelerated the maturity date of the debt under our promissory note. The acceleration of indebtedness by Dialog4 constitutes a default under agreements between the Company and Harman International, Inc. and will most likely continue to constitute a default even when the restructuring (discussed below in Item 2) of the $8.5 million dollar Harman debt is completed. The Company has not identified the sources from which the payment of the approximately $1.0 million award to Dialog4 can be made. Upon domestication of the award in the United States, Dialog4 will be able to seize any unencumbered assets of the Company (there are none; all of the Company's assets are pledged as security for the Harman debt) and could potentially disrupt transactions of the Company. The Company is also required to register the shares owned by Dialog4, which is an expensive and time-consuming process. The existence of the award and the requirement for registration of the shares may adversely impact any prospective financing which the Company may wish to undertake. The Harman debt restructure and the award in the Dialog4 arbitration occurred after our third quarter ended on September 30, 2004, and are therefore not reflected in our results to that date. 5 OVERVIEW The events of September 11, 2001, had a significant impact on the market for audio processing equipment. We experienced a reduction in orders for new audio equipment from many radio and television stations. We believe the reduction was due in part to the decrease in advertising revenue realized by these stations. The market for audio processing equipment has been slowly showing increased demand throughout 2003 and 2004, effectively beginning to reverse the trend caused by September 11, 2001. We have reduced our net loss from $2,135,039 in 2002 to $384,877 in 2003. Despite this encouraging trend, our previous financial results have strained our liquidity. However, the restructure of our debt owed to Harman, we believe we can improve our financial condition allowing the Company to focus more on operations and growth. In our efforts to reduce costs and increase sales, we continue to seek sources of long-term financing. However, the inclusion of a going concern emphasis paragraph by our independent accountants generally makes it significantly more difficult to obtain trade credit or additional capital through public or private debt or equity financings. We cannot offer any assurances that we will be able to attract additional capital or that additional financing, if obtained, will be sufficient to meet our current obligations. If we cannot meet our current obligations, our ability to continue as a going concern will be jeopardized. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain summary operating results:
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Revenues: ---------- ---------- ---------- ---------- Net sales $3,481,313 $3,240,224 $9,900,540 $9,406,216 Total revenues $3,481,313 $3,240,224 $9,900,540 $9,406,216 ========== ========== ========== ========== Gross profit on net sales $1,952,633 $1,820,080 $5,689,618 $5,287,361 Gross profit margin 56% 56% 57% 56% Net cash provided by operating activities $524,387 $220,515 $806,147 $670,562 Net cash used in investing activities ($42,796) ($60,053) ($163,753) ($72,261) Net cash used in financing activities ($83,721) ($128,632) ($300,333) ($490,990) Net income (loss) ($216,768) $86,004 ($517,828) ($80,974) Net income (loss) as a percent of net sales -6% 3% -5% -1% Income (loss) per share - basic and diluted ($0.05) $0.02 ($0.12) ($0.02)
6 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 Net Sales. Net sales during the three and nine months ended September 30, 2004 were $3.5 million and $9.9 million, respectively, compared to $3.2 million and $9.4 million during the comparable periods in 2003, reflecting increases of 9% and 5%, respectively. The 9% increase for the three months ended September 30, 2004 compared to the same period in 2003 was primarily attributable to an increased demand for CRL's television line products. The 5% increase in net sales for the nine month period ended was primarily attributable to an increase in overall demand for our products. Our Orban division reported net sales for the three and nine months ended September 30, 2004 of $2.9 million and $8.6 million, respectively, compared to $2.9 million and $8.5 million for the same periods in 2003 representing an increase of 0% and 1% respectively. Our CRL division reported net sales for the three and nine months ended September 30, 2004 of $295,000 and $521,000, respectively, compared to $108,000 and $369,000 for the same periods in 2003, representing an increase of 173% and 41%, respectively. This overall increase was in part the result of increased demand for the television line of products from one single customer. Net sales for Orban Europe during the three and nine months ended September 30, 2004 were $289,000 and $760,000, respectively, as compared to $226,000 and $488,000 for the same periods in 2003, reflecting increases of 27% and 55%. The change was primarily a result from our inability to ship product from our German location during the three and nine months ended September 30, 2003 due to the change in suppliers for its Codec products, which was reflected by the corresponding periods in 2004. Gross Profit. Gross profit for the three and nine months ended September 30, 2004 was 56%, and 57%, respectively, compared to 56% and 56% for the same periods in 2003. The increase of 0% and 1% respectively in gross profit is primarily due to the variable components of production costs associated with production runs in the San Leandro facility effectively increasing and reducing the indirect costs associated with set up and labor. Selling, General and Administrative. Selling, general and administrative expenses ("SG&A") for the three and nine months ended September 30, 2004 were $1,186,000 and $3,875,000, respectively, representing increases of 10% and 18%, respectively, as compared to $1,080,000 and $3,271,000 reported the same periods during 2003. As a percentage of net revenue, SG&A increased from 33% for the three months ended September 30, 2003 to 34% for the same period in 2004. SG&A as a percentage of net revenue increased from 35% for the nine months ended September 30, 2003 to 39% for the period in 2004. The increase in SG&A expense is due in part to the variable component of SG&A relating to our domestic and international sales and marketing expenses coupled with an increase in attorney's fees associated with the Dialog4 arbitration. The Company has increased its marketing staff as compared to the prior year. Research and Development. Research and development expense during the three and nine months ended September 30, 2004 were $339,000 and $1,041,000 respectively, compared to $309,000 and $1,023,000 during the comparable periods for 2003, reflecting increases of 9% and of 2%. The overall increase is due to costs associated with the development of our new Opticodec PC line of products along with costs associated with the introduction of our two newest audio processors Optimod 8300 and Optimod 2300. Other Expense. Other expense, net for the three and nine months ended September 30, 2004 was $606,000 and $1,183,000, respectively, of which $254,000 and $762,000, respectively, represents interest 7 to Harman accrued in connection with the seller (Harman) carry-back loan that financed a portion of our purchase of the Orban assets in 2000. $312,000 was recorded in the 3 month period ended September 30, 2004 as a result of the arbitration between Dialog4 and the Company ( see Note 4 ). Other expense, net for the three and nine months ended September 30, 2003 was $314,000 and $897,000, respectively, of which $254,000 and $761,000, respectively, represented interest accrued in connection with the loan to us from Harman. Interest expense during the three and nine months ended September 30, 2004 was $280,000 and $838,000, respectively, compared to $282,000 and $861,000 for the same periods in 2003, reflecting decreases of 1% and 3%, respectively. The decrease for the three and nine months ended is due to the reduction short- term loans to the Company. Net Income (Loss). The Company reported a net loss of $217,000 and $518,000 for the three and nine months ended September 30, 2004, respectively, compared to net income of $86,000 and net loss of $81,000 for the same periods in 2003. 8 LIQUIDITY AND CAPITAL RESOURCES We had negative net working capital of approximately $9.3 million at September 30, 2004, and the ratio of current assets to current liabilities was ..26 to 1. At September 30, 2003, we had net negative working capital of approximately $9.0 million and a current ratio of .29 to 1. The decrease in working capital is principally due to an increase in accrued interest. The negative working capital primarily resulted from the conversion in 2001 to demand notes of the $3.5 million short-term note and the $5 million long-term notes payable to Harman. The restructure of our debt to Harman described above in this Item 2 under the aption "Recent Developments" will effectively reduce approximately $8.5 million in principal and $1.0 million in accrued but unpaid interest to a new note approximating $3.3. In addition Harman will own 19% of the outstanding capital stock of the Company. It is anticipated that our working capital will increase by $7.5 million once the restructure is completed. We believe we could generate a least $1.0 million in cash flow the first year after the Harman debt restructure principally due to savings we anticipate we will realize in interest expense. The following table shows the pro forma affect of the restructure of our debt owed to Harman as if the transaction had occurred on September 30, 2004. The documentation evidencing the transaction has not yet been finalized, but we do not expect that the final terms of the transaction will differ materially from the results we anticipated. Balance Sheet Data (in thousands) (unaudited) December 31, September 30, As Adjusted 2003 2004 After the Actual Restructure September 30, 2004 (unaudited) (unaudited) Working Capital (Deficit) (9,293) (9,566) (1,055) Property and Equipment, net 569 559 559 Total Assets 11,767 12,418 12,418 Total Liabilities 12,634 13,741 7,474 Total Shareholders' Equity (Deficit) (866) (1,323) 4,944 9 Our substantial remaining obligation to Harman after the restructuring transaction may have important consequences for us, including the following: * A significant portion of our cash flow from operations will be dedicated to servicing our debt obligations, including interest payments, and will not be available for other business purposes; * The terms and conditions of our indebtedness limit our flexibility in planning for and reacting to changes in our business, and in making strategic acquisitions; * Our ability to obtain additional financing in the future for working capital, capital expenditures and other purposes may be substantially impaired; and * Our substantial leverage may make us more vulnerable to economic downturns and competitive pressures. Our ability to meet our debt service obligations and repay our total indebtedness to Harman, Dialog4 and other creditors depends in part on our future operating performance. Our future operating performance will depend on our ability to expand our business operations by growing our core audio processing business, expanding our product offerings and penetrating new and emerging markets, which we anticipate will require additional financing. In addition, our future operating performance will depend on economic, competitive, regulatory and other factors affecting our business that are largely beyond our control. If we are unable to expand our business operations as planned, we may not be able to service our outstanding indebtedness to Harman and Dialog4. The Company has not identified the sources from which the payment of the approximately $1.0 million award to Dialog4 can be made. Upon domestication of the award in the United States, Dialog4 will be able to seize any unencumbered assets of the Company (there are none; all of the Company's assets are pledged as security for the Harman debt) and could potentially disrupt transactions of the Company. The Company is also required to register the shares owned by Dialog4, which is an expensive and time-consuming process. The existence of the award and the requirement for registration of the shares may adversely impact any prospective financing which the Company may wish to undertake. Accounts receivable were $778,000 at September 30, 2004, compared to $866,000 at December 31, 2003, a net decrease of $88,000 or 10%. The decrease is primarily due to an increase in customers paying cash in advance to take advantage of sales discounts for the quarter ended September 30, 2004 compared to the quarter ended December 31, 2003. Total inventories were $2,422,000 at September 30, 2004 compared to total inventories of $2,113,000 at December 31, 2003. The increase of $309,000, or 15%, is due in part to our increased stores of raw materials and work in process to meet the increased demand for our Optimod products. For the remainder year ending December 31, 2004 and 2005, our principal working capital requirements will be the payment of normal recurring operating costs. Management believes that these requirements can be met from the operating cash flows. 10 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this report in evaluating us and our business. You should also keep these risk factors in mind when you read and consider the forward-looking statements in this report and other reports we file with the SEC. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem less material, also may become important factors that affect us. EVEN AFTER GIVING EFFECT TO THE RECENT RESTRUCTURE OF OUR INDEBTEDNESS, WE HAVE SIGNIFICANT ONGOING DEBT SERVICE REQUIREMENTS WHICH MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING FLEXIBILITY. After giving effect to the reduction of our indebtedness as part of the restructure, our substantial leverage may have important consequences for us, including the following: * a significant portion of our cash flow from operations will be dedicated to servicing our debt obligations and will not be available for other business purposes; * the terms and conditions of our indebtedness limit our flexibility in planning for and reacting to changes in our business, and in making strategic acquisitions; * our ability to obtain additional financing in the future for working capital, capital expenditures, and other purposes may be substantially impaired; and * our substantial leverage may make us more vulnerable to economic downturns and competitive pressures. Our ability to meet our debt service obligations and reduce our total indebtedness depends in part on our future operating performance. Our future operating performance will depend on our ability to expand our business operations by growing our core audio processing business, expanding our product offerings and penetrating new and emerging markets, which we anticipate will require additional financing. In addition, our future operating performance will depend on economic, competitive, regulatory and other factors affecting our business that are beyond our control. If we are unable to expand our business operations as planned, we may not be able to service our outstanding indebtedness. THE EXISTENCE OF THE ARBITRAL AWARD AGAINST THE COMPANY IN FAVOR OF DIALOG4 MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING FLEXIBILITY. The Company has not identified the sources from which the payment of the approximately $1.0 million award to Dialog4 can be made. Upon domestication of the award in the United States, Dialog4 will be able to seize any unencumbered assets of the Company (there are none; all of the Company's assets are pledged as security for the Harman debt) and could potentially disrupt transactions of the Company. The Company is also required to register the shares owned by Dialog4, which is an expensive and time-consuming process. The existence of the award and the requirement for registration of the shares may adversely impact any prospective financing which the Company may wish to undertake. 11 THE EXISTENCE OF AN AUDIT OPINION CONTAINING A GOING CONCERN EMPHASIS PARAGRAPH MAY MAKE IT MORE DIFFICULT FOR US TO OBTAIN CREDIT OR ADDITIONAL CAPITAL AND MAY JEOPARDIZE OUR RELATIONSHIP WITH EXISTING AND NEW CUSTOMERS. Including our difficulties in meeting our financing needs and our negative working capital position have resulted in our independent public accountants adding a going concern emphasis paragraph in their report by including a statement that such factors raise substantial doubt about our ability to continue as a going concern. The inclusion of a going concern emphasis paragraph generally makes it more difficult to obtain trade credit, insurance or additional capital through public or private debt or equity financings. We may also find it more difficult to maintain existing customer relationships and to initiate new customer relationships. OUR ABILITY TO OBTAIN AN OUTSIDE LINE OF CREDIT IS SUBJECT TO THE APPROVAL OF OUR CURRENT CREDITORS AND, IF SUCH APPROVAL IS WITHHELD, OUR ABILITY TO COMPETE EFFECTIVELY IN OUR INDUSTRY COULD BE JEOPARDIZED. Pursuant to our agreements with Harman, we are bound by certain covenants that prevent us from obtaining additional credit facilities without the prior written approval of Harman. This limitation on our ability to obtain additional outside lines of credit may curtail our ability to make strategic acquisitions and to conduct research and development. This in turn could jeopardize our competitive position within our industry. FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. On January 18, 2002, we acquired the assets of Dialog4 System Engineering GmbH. Our acquisition of this new product line has led to the establishment of our new Orban Europe offices in Ludwigsburg, Germany. Transactions and expenses of our Orban Europe operations are conducted in Euros which will expose us to market risks related to foreign currency exchange rate fluctuations that could adversely affect our operating results. For instance, a strengthening of the U.S. dollar against the Euro could reduce the amount of cash and income we receive and recognize from Orban Europe. Furthermore, it is likely that for accounting purposes we will recognize foreign currency gains or losses arising from our operations in Europe on weighted average rates of exchange in the period incurred and translate assets and liabilities of these operations into U.S. dollars based on year- end foreign currency exchange rates, both of which are subject to currency fluctuations between the U.S. dollar and the Euro. As foreign exchange rates vary, our results from operations and profitability may be adversely affected. We expect to derive approximately 7% of our 2004 total revenues from our Orban Europe operations. This percentage may increase in future years as we further develop and expand our operations in Europe. We cannot predict the effects of exchange rate fluctuations on our operating results. We do not currently intend to engage in foreign currency exchange hedging transactions to manage our foreign currency exposure. If and when we do engage in foreign currency exchange hedging transactions, we cannot assure you that our strategies will adequately protect our operating results from the effects of exchange rate fluctuations. 12 WE SERVE A MARKET IN WHICH THERE ARE A LIMITED NUMBER OF CUSTOMERS AND OUR FINANCIAL WELL-BEING IS DIRECTLY TIED TO THE FINANCIAL HEALTH OF THESE CUSTOMERS. In recent years, the radio and television industry in the United States has experienced a great deal of consolidation of ownership. As a result, several corporations each now own a substantial number of radio and television stations. These corporations are the largest purchasers of our audio processing and post-production equipment. Moreover, a significant amount of our revenue is derived from audio processing replacement orders that come from these customers. Our financial stability and well- being is thus directly tied to the financial health of these customers. If these customers experience financial difficulty, regardless of the cause, they may delay, reduce or cancel orders for new audio processing or post-production equipment. If this occurs, our results of operations could decline and we could experience difficulty in servicing our debt obligations. WE MUST ADAPT TO RAPID TECHNOLOGICAL CHANGE AND INCREASED COMPETITION IF WE ARE GOING TO BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY. While audio processing has been and will continue to be our core business, we are using our existing technologies to enter the emerging markets of digital audio broadcasting, cable television and Internet-related audio delivery. These markets are characterized by rapid technological change and require a significant commitment of capital and human resources. We intend to engage continually in research and development activities so that we can improve our current products and develop new products. However, our significant debt obligations may limit the amount of resources, both capital and human, that we can commit to research and development. This could jeopardize the success and reception of our products in these emerging markets. In addition, because of the rapid pace of change and the intense competition that characterizes these markets, our products may become unmarketable or obsolete by a competitor's more rapid introduction to the marketplace. WE MAY NOT BE ABLE TO RETAIN OUR EXISTING PERSONNEL OR HIRE AND RETAIN THE ADDITIONAL PERSONNEL THAT WE NEED TO SUSTAIN AND GROW OUR BUSINESS. Our future success will depend on our ability to attract, retain and motivate employees with the necessary skills and expertise required by our business. Competition for employees who possess the technical expertise to develop and manufacture our products is intense. A shortage in available skilled labor could require us to increase our wages and benefits to attract and retain enough employees. An increase in our labor costs, or our inability to attract, retain and motivate employees, would likely harm our growth plans and may adversely affect our business and results of operations. WE DEPEND ON A NUMBER OF VENDORS TO SUPPLY US WITH COMPONENT PARTS THAT ARE NECESSARY TO THE PRODUCTION OF OUR AUDIO PROCESSING AND POST-PRODUCTION EQUIPMENT. We rely on certain vendors to provide component parts for use in the manufacturing of our audio processing and post- production equipment. As technology improves, some of these parts have become obsolete and vendors have discontinued their production of such parts. When this occurs, we must either obtain these necessary parts from alternative sources, or design around these parts so that we are able to continue producing our audio processing and post-production equipment. If any of the component parts that we require become unavailable and we are not able to design around these parts, we may not be able to offer some of our products and our sales revenues may decline. 13 OUR PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD EXERCISES SIGNIFICANT CONTROL OVER US. Charles Jayson Brentlinger Family Limited Partnership, which is controlled by Charles Jayson Brentlinger, our President, Chief Executive Officer and Chairman of the Board, currently owns 788,694 shares of our common stock. Based on a total of 4,332,533 shares of our common stock issued and outstanding as of September 30, 2004, Mr. Brentlinger owns of record and beneficially approximately 19 % of our issued and outstanding shares. This means that Mr. Brentlinger exercises, and will continue to exercise, significant control over the business and affairs of our Company. Mr. Brentlinger's exercise of this control may, in certain circumstances, deter or delay a merger, tender offers, other possible takeover attempts or changes in our management which may be favored by some or all of our minority shareholders. WE DEPEND ON A FEW KEY MANAGEMENT PERSONS. We are substantially dependent on the personal efforts and abilities of Charles Jayson Brentlinger, our Chairman, President and Chief Executive Officer, and Robert Orban, our Vice President and Chief Engineer. The loss of either of these officers or our other key management persons could harm our business and prospects for growth. As a result, we have obtained key man life insurance policies on the lives of each of these officers. We also have employment agreements with each of these officers which are more fully described elsewhere in this report. THE LOCATION OF OUR ORBAN DIVISION SUBJECTS US TO A NUMBER OF RISKS THAT ARE BEYOND OUR CONTROL WHICH COULD RESULT IN PRODUCTION INTERRUPTIONS. Our business depends on the efficient and uninterrupted production of our audio processing equipment and other products. Our Orban division is currently located in San Leandro, California, and we expect to maintain our operations at this facility for the foreseeable future. While we have taken precautions against production interruptions, interruptions could nevertheless result from natural disasters such as earthquakes, fires or floods. In addition, the power shortages which occur in California from time to time have resulted in planned and unplanned power outages and increased energy costs which we may not be able to pass on to our customers. Power outages, which last beyond our backup and alternative power arrangements, could harm our customers and our business. Finally, our location in the Silicon Valley corridor of California subjects us to increased operating costs and labor shortages which could adversely affect our production capabilities and result in reduced revenues. THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND THE VALUE OF YOUR INVESTMENT MAY DECLINE. The volatility of the market price of our common stock may cause wide fluctuations in the price of our common stock on the OTC Bulletin Board. The market price of our common stock is likely to be affected by: * changes in general conditions in the economy or the financial markets; * variations in our quarterly operating results; * changes in financial estimates by securities analysts; * other developments affecting us, our industry, customers or competitors; * the operating and stock price performance of companies that investors deem comparable to us; and * the number of shares available for resale in the public markets under applicable securities laws. 14 THE LIQUIDITY OF OUR COMMON STOCK COULD BE RESTRICTED BECAUSE OUR COMMON STOCK FALLS WITHIN THE DEFINITION OF A PENNY STOCK. Under the rules and regulations of the Securities and Exchange Commission (SEC), as long as the trading price of our common stock on the OTC Bulletin Board is less than $5 per share, our common stock will come within the definition of a "penny stock." On September 30, 2004, the last sale price of our common stock on the OTC Bulletin Board was $0.75 per share. Generally speaking, the definition of a "penny stock" does not include stock that is traded on Nasdaq or on a national securities exchange. Since our common stock is traded on the OTC Bulletin Board, rather than on Nasdaq or a national securities exchange, our common stock falls within the definition of a "penny stock" while it is trading below $5 per share. As a result, the trading of our common stock is subject to certain "penny stock" rules and regulations. The SEC rules and regulations require that broker-dealers, prior to effecting any transaction in a penny stock, satisfy certain disclosure and procedural requirements with respect to the prospective customer. These requirements include delivery to the customer of an SEC-prepared risk disclosure schedule explaining the nature and risks of the penny stock market, disclosure to the customer of the commissions payable to both the broker-dealer and any other salesperson in connection with the transaction, and disclosure to the customer of the current quotations for the stock to be purchased. In addition, if the broker-dealer is the sole market maker, it must disclose this fact and the broker-dealer's presumed control over the market. Finally, prior to effecting any penny stock transaction, broker- dealers must make individualized written suitability determinations and obtain a written agreement from customers verifying the terms of the transaction. Subsequent to any sale of penny stock, broker-dealers must send monthly statements disclosing recent price information for the penny stock held in the customer's account and certain other information relating to the limited market in penny stocks. These rules, regulations and procedural requirements may restrict the ability of broker- dealers to sell our common stock or discourage them from doing so. As a result, purchasers may find it more difficult to dispose of, or to obtain accurate quotations for, our common stock. BECAUSE OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY, INFRINGEMENT ON OUR PROPRIETARY RIGHTS COULD LEAD TO COSTLY LITIGATION AND DECREASED REVENUES. Our copyrights, patents, trademarks, trade secrets and similar intellectual property are critical to our success. To establish and protect our proprietary rights, we rely on a combination of copyright, trademark, patent and trade secret laws, confidentiality and non-disclosure agreements and contractual provisions with employees and third parties, and license agreements with consultants, vendors and customers. Despite such protections, there can be no assurance that these steps will be adequate, that we will be able to secure trademark registrations for all of our marks in the United States or other countries or that third parties will not infringe upon or misappropriate our copyrights, patents, trademarks and similar proprietary rights. In addition, effective copyright, patent and trademark protection may be unenforceable or limited in certain countries. In the future, litigation may be necessary to enforce and protect our trade secrets, copyrights, patents and other intellectual property rights. We may also be subject to litigation to defend against claims of infringement of the rights of others or to determine the scope and validity of the intellectual property rights of others. Any such litigation could cause us to incur substantial expenses and would adversely affect our financial condition. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(Filed herewith) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(Filed herewith) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CIRCUIT RESEARCH LABS, INC. Dated: November 18, 2004 By: /s/ Robert W. McMartin ----------------------------- Robert W. McMartin Vice President, Treasurer and Chief Financial Officer 17 EXHIBIT INDEX Exhibit Number Description 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 18 EX-31 2 ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, C. Jayson Brentlinger, certify that: 1. I have reviewed this Report on Form 10-QSB/A of Circuit Research Labs, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 18, 2004 /s/ C. Jayson Brentlinger - ------------------------- C. Jayson Brentlinger Chief Executive Officer, President and Chairman of the Board EX-31 3 ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Robert W. McMartin, certify that: 1. I have reviewed this Report on Form 10-QSB/A of Circuit Research Labs, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 18, 2004 /s/ Robert W. McMartin - ------------------------- Robert W. McMartin Vice President, Treasurer and Chief Financial Officer EX-32 4 ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Circuit Research Labs, Inc. (the "Company") on Form 10-QSB/A for the period ending September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. Jayson Brentlinger, Chief Executive Officer and President of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented. /s/ C. Jayson Brentlinger ------------------------- C. Jayson Brentlinger Chief Executive Officer and President Circuit Research Labs, Inc. November 18, 2004 A signed original of this written statement required by Section 906 has been provided to Circuit Research Labs, Inc. and will be retained by the corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 ex32_2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Circuit Research Labs, Inc. (the "Company") on Form 10-QSB/A for the period ending September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert W. McMartin, Vice President, Treasurer and Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented. /s/ Robert W. McMartin ------------------------- Robert W. McMartin Vice President, Treasurer and Chief Financial Officer Circuit Research Labs, Inc. November 18, 2004 A signed original of this written statement required by Section 906 has been provided to Circuit Research Labs, Inc. and will be retained by the corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----