<PAGE>
SECURITIES AND EXCHANGE COMMISSION [PRIVATE]
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended September 30, 1996
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 number 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer as specified in its charter)
North Carolina 56-1362926
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4900 Prospectus Drive, Suite 1000
Research Triangle Park, North Carolina 27709-4068
(Address of principal executive offices)
(919) 361-2155
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock: 2,674,075 shares outstanding
as of October 31, 1996
Transitional Small Business Disclosure Format (check one);
Yes No X
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Financial Statements
Item Page
Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
2
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DIGITAL RECORDERS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1996 December 31,
Assets (unaudited) 1995
--------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 143,094 1,175,775
Investments 1,998,903 2,113,030
Trade accounts receivable 2,400,128 1,828,726
Other receivables 188,787 118,173
Inventories 1,190,197 1,087,503
Prepaids and other current assets 214,448 78,151
--------------- ----------------
Total current assets 6,135,557 6,401,358
Property and equipment, net 470,414 311,120
Goodwill, net 1,707,188 1,666,944
Intangible assets, net 350,341 252,227
Other assets 7,099 6,901
--------------- ----------------
$ 8,670,599 8,638,550
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 327,361 340,778
Accrued expenses 266,464 135,282
Accrued commissions 201,536 97,340
Accrued warranty reserve 115,048 111,462
Current portion of long-term debt - 709,000
Dividends payable 95,400 54,900
--------------- ----------------
Total current liabilities 1,005,809 1,448,762
--------------- ----------------
Total liabilities 1,005,809 1,448,762
--------------- ----------------
Stockholders' equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value 20,000
shares authorized; 354 shares issued and outstanding at
September 30, 1996 and December 31, 1995 35 35
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding
at September 30, 1996 and December 31, 1995 267,407 267,407
Additional paid-in capital 12,552,708 12,552,708
Property held for resale (550,000) (550,000)
Translation adjustment 2,548 -
Accumulated deficit (4,607,908) (5,080,362)
--------------- ----------------
Net stockholders' equity 7,664,790 7,189,788
--------------- ----------------
$ 8,670,599 8,638,550
=============== ================
</TABLE>
See accompanying notes to financial statements.
3
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DIGITAL RECORDERS, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C>
Net sales $ 3,062,101 1,686,440 6,986,117 3,997,957
Cost of sales 1,431,026 873,977 3,227,498 2,028,100
----------- ----------- ----------- -----------
Gross profit 1,631,075 812,463 3,758,619 1,969,857
Selling, general and administrative expenses 1,139,121 723,565 2,791,699 2,006,371
Research and development expenses 210,753 108,204 460,841 285,603
----------- ----------- ----------- -----------
Operating profit (loss) 281,201 (19,306) 506,079 (322,117)
Other income (expense):
Interest income 25,020 88,769 109,593 253,967
Interest expense - (36,259) (3,743) (84,916)
----------- ----------- ----------- -----------
Total other income 25,020 52,510 105,850 169,051
Income (loss) before income taxes 306,221 33,204 611,929 (153,066)
Income tax expense - - 20,000 -
----------- ----------- ----------- -----------
Net income (loss) $ 306,221 33,204 591,929 (153,066)
=========== =========== =========== ===========
Net income (loss) per common and common equivalent share $ 0.10 0.00 0.18 (0.09)
=========== =========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,660,773 2,674,075 2,648,155
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the financial statements
4
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows (unaudited)
For the nine month periods ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 591,929 (153,066)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of
property and equipment 84,862 44,000
Amortization of goodwill and intangible assets 153,759 100,232
Changes in operating assets and liabilities:
Increase in trade accounts receivable (571,402) (145,217)
Increase in other receivables (68,878) (256,535)
Increase in inventories (102,694) (488,048)
Decrease (increase) in prepaids and other current assets (136,297) 121,384
Increase in intangible assets (148,682) -
Increase in other assets (198) (56,952)
Decrease in accounts payable (17,374) (86,167)
Increase (decrease) in accrued expenses 238,964 (43,964)
Increase in other liabilities - 20,843
------------ -----------
Net cash provided (used) by operating activities 23,989 (943,490)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (233,633) (228,943)
Purchases of short-term investments (85,873) -
Sales of short-term investments 200,000 956,758
Payment for business acquired, net of cash received (34,560) (1,171,000)
----------- ------------
Net cash used by investing activities (154,066) (443,185)
------------ -----------
Cash flows from financing activities:
Principal payments on long-term debt (709,000) (58,658)
Proceeds from short-term bank borrowings 250,000 -
Principal payments on short-term bank borrowings (367,177) -
Principal payments on capital lease obligations - (7,910)
Payment of additional public offering expenses - (30,283)
Payment of dividends on preferred stock (78,975) (78,975)
Proceeds from exercise of warrants - Series AAA - 179,116
------------ -----------
Net cash provided (used) by financing activities (905,152) 3,290
------------ -----------
------------ -----------
Effect of exchange rate changes 2,548 -
------------ -----------
Net decrease in cash and cash equivalents (1,032,681) (1,383,385)
Cash and cash equivalents at beginning of period 1,175,775 1,589,997
------------ -----------
Cash and cash equivalents at end of period $ 143,094 206,612
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 3,743 84,916
============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (unaudited)
For the nine month periods ended September 30, 1996 and 1995
Supplemental disclosures of noncash financing and investing activities:
During the nine months ended September 30, 1996 and 1995, the Company declared
dividends on Series AAA Preferred Stock in the amount of $119,475 and $105,975,
respectively. The Company paid $78,975 in cash dividends in each of the nine
month periods ended September 30, 1996 and 1995.
During 1996, the Company acquired Transit-Media GmbH ("Transit-Media"). The
Company paid $35,000 for all of Transit-Media's stock at closing. The Company
recorded cash (valued at $440), other receivables (valued at $1,736), fixed
assets (valued at $10,523), accounts payable (valued at $3,957), short-term bank
borrowings (valued at $117,177), and certain intangible assets (valued at
$143,435). Upon completing the acquisition, the Company invested $350,000 in
Transit-Media to pay off an existing bank credit line and provide working
capital.
During 1995, the Company acquired certain assets, net of liabilities of Digital
Audio Corporation, Inc. The Company acquired inventory (valued at $100,000),
fixed assets (valued at $10,000) and certain intangible assets (valued at
$1,990,000) in exchange for cash of $1,171,000, a note payable for $709,000, and
common stock of $220,000.
6
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (unaudited)
September 30, 1996 and 1995
(1) Basis of Presentation and Disclosure
The unaudited interim condensed financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. However, in the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) considered
necessary to present fairly the results for the interim periods presented.
The accompanying condensed financial statements and related notes should be
read in conjunction with the Company's 1995 audited financial statements
included in its Annual Report on Form 10-KSB dated March 28, 1996. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full calendar
year.
(2) Per Share Amounts
Net income (loss) per common and common equivalent share is based upon the
weighted average number of common and common equivalent shares outstanding
from convertible preferred stock and the exercise of stock options and
warrants. Stock, options and warrants issued in the twelve month period
preceding the initial filing of the Registration Statement for the Company's
initial public offering have been treated as outstanding for all reported
periods. A treasury stock approach has been used in determining the
incremental shares outstanding. For 1996 and 1995, the common stock
equivalent shares had no impact on the per share amounts. Cash dividends
declared on the preferred stock during the period are deducted from net
income or added to net loss to determine the net income (loss) per share.
Cash dividends declared were $119,475 and $105,975 for the nine months ended
September 30, 1996 and 1995, respectively.
(3) Acquisition of Transit-Media GmbH
On April 30, 1996, the Company acquired Transit-Media GmbH ("Transit-Media")
in a transaction accounted for using the purchase method of accounting and
accordingly, the assets and liabilities of the acquired entity were recorded
at their fair market value at the date of acquisition. Transit-Media
assembles and markets proprietary on-board, electronic destination signs for
mass-transit systems in Europe. The Company paid $35,000 for all of
Transit-Media's stock at closing. The Company recorded cash (valued at $440),
other receivables (valued at $1,736), fixed assets (valued at $10,523),
accounts payable (valued at $3,957), short-term bank borrowings (valued at
$117,177), and certain intangible assets (valued at $143,435). Upon
completing the acquisition, the Company invested $350,000 in Transit-Media to
pay off an existing bank credit line and provide working capital. In
addition, the Company's results of operations for the nine months ended
September 30, 1996 include the operations of Transit-Media from May 1, 1996
to September 30, 1996.
7
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Financial Statements, (Continued)
(3) Acquisition of Transit-Media GmbH, continued
The following unaudited proforma results of operations assume the transaction
described above occurred as of January 1, 1996 after giving the effect of
certain adjustments, including the amortization of goodwill.
Nine Months Ended
September 30,1996
Net sales $ 6,986,117
Net income (loss) 519,119
Net income (loss) per common and
common equivalent share $ 0.15
(4) Acquisition of Digital Audio Corporation
On February 28, 1995, the Company purchased certain assets and liabilities of
Digital Audio Corporation ("Digital Audio") in a transaction accounted for
using the purchase method of accounting and accordingly, the assets and
liabilities of the acquired entity were recorded at their fair market value
at the date of acquisition. Digital Audio designs, manufactures and markets
digital signal processing equipment to commercial and governmental
organizations. The purchase price was $2,100,000 with an earnout payment to
be made over two years if certain performance criteria are met. The Company
paid $1,171,000 at closing, recorded an unsecured note payable to the seller
of $709,000 and distributed 33,846 shares of the Company's Common Stock to
the seller in exchange for inventory (valued at $100,000), fixed assets
(valued at $10,000) and goodwill and intangible assets (valued at
$1,900,000). In addition, the Company's results of operations for the nine
months ended September 30, 1995 include the operations of Digital Audio from
March 1, 1995 to September 30, 1995.
The following unaudited proforma results of operations assume the transaction
described above occurred as of January 1, 1995 after giving the effect of
certain adjustments, including the amortization of the excess cost over the
fair value of the net assets acquired.
Nine Months Ended
September 30,1995
Net sales $ 4,272,278
Net income (loss) (64,555)
Net income (loss) per common and
common equivalent share $ (0.02)
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company designs, manufactures and sells information technology for
use in various applications in individual vehicle transportation and the public
transit industry. Formed in 1983, the Company's activities through 1986
consisted primarily of organizational and development activities. Since 1987,
when the Company generated net sales of $348,000, net sales have increased each
year, reaching $6.362 million in 1995. The Company achieved its first year of
profitability in 1995 during which it earned a profit after income taxes of
$145,000. For the three months and nine months ended September 30, 1996, net
sales were $3.062 million and $6.986 million, respectively. For the three months
and nine months ended September 30, 1996, the Company recorded net income after
taxes of approximately $306,000 and $592,000 respectively.
The Company attributes its growth in sales to the introduction of
new products, increased market penetration, growing markets for its products and
the acquisition of Digital Audio in 1995. Sales to governmental and
quasi-governmental entities have exceeded 50% of total net sales during each
year since 1991, and such sales accounted for 65% of net sales during 1995.
Through the six months ended June 30, 1996, sales to governmental entities were
substantially lower due to a change in sales mix. Sales to governmental entities
increased to 70% of net sales during the three months ended September 30, 1996
which increased the percentage of net sales to such entities to 47% for the nine
months ended September 30, 1996. A significant portion of the Company's sales
have historically been attributable to a small number of customers. During 1995,
sales to three customers accounted for 35% of net sales, during 1994, sales to
three customers accounted for 44% of net sales, and during 1993, sales to three
customers accounted for 43% of net sales. A single customer, the New Jersey
Turnpike Authority, accounted for 11% of net sales made in 1995, 1994 and 1993
on a combined basis. During the three months and nine months ended September 30,
1996, sales to three customers accounted for 53% and 39%, respectively, of net
sales.
The Company typically recognizes revenue from sales upon shipment of
products to customers. Because the Company's operations are characterized by
research and development expenses preceding a product introduction, net sales
and their related expenses may not be recorded in the same period, thereby
producing fluctuations in operating results. The Company's dependence on a small
number of relatively large customers or projects may increase the magnitude of
fluctuations in operating results.
The Company's financial statements contain a provision for income tax
expense for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 due to alternative minimum tax. However, as a result of the
accumulated losses incurred in past years, the Company utilized approximately
$564,000 of its net operating loss carryover and had a net operating loss
carryover as of December 31, 1995 of approximately $4.087 million which
management expects will be available to offset federal taxable income, if any,
through 2009. Also as of December 31, 1995, the Company had a net economic loss
carryforward for state income tax purposes of approximately $1.915 million,
which is expected to be available to offset future state income taxes, if any,
through 1999. Following utilization of the existing state and federal tax
losses, the Company's future operations, if profitable, will be subject to
income tax expense.
On April 30, 1996, the Company acquired Transit-Media, GmbH
(Transit-Media), a company headquartered in Ettlingen, Germany, which assembles
and markets proprietary on-board, electronic destination signs for mass-transit
systems in Europe. Pursuant to the Agreement between the Company and
Transit-Media, the Company purchased all of the issued and outstanding stock of
Transit-Media for $35,000 cash. In connection with the acquisition, a finder's
fee was paid to a consulting firm controlled by David L. Turney. Mr. Turney,
currently a director, was a director nominee at the time of the acquisition.
Upon completing the acquisition, the Company invested $350,000 in Transit-Media
to pay off an existing bank credit line and provide working capital.
9
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales ....................................................... 100% 100% 100% 100%
Cost of sales ................................................... 47 52 46 51
Gross profit .................................................... 53 48 54 49
Operating expenses :
Selling, general and administrative ....................... 37 43 40 50
Research and development .................................. 7 6 7 7
Total operating expenses ........................................ 44 49 47 57
Operating profit (loss) ......................................... 9 (1) 7 (8)
Other income (expense), net ..................................... 1 3 2 4
Income (loss) before income taxes ............................... 10 2 9 (4)
Income tax expense .............................................. 0 0 (1) 0
Net income (loss) ............................................... 10 2 8 (4)
</TABLE>
Comparison of Three and Nine Months Ended September 30, 1996 and 1995.
Net sales for the three months ended September 30, 1996 were $3.062
million, an increase of $1.376 million, or 82%, compared to $1.686 million for
the comparable three months in 1995. Net sales for the nine months ended
September 30, 1996 were $6.986 million, an increase of $2.988 million, or 75%,
compared to $3.998 million for the comparable nine months in 1995.
During the three months ended September 30, 1996, HAR sales
decreased by $420,000 to $125,000 or by 77% from the corresponding three months
in the prior year of $545,000. During the nine months ended September 30, 1996,
HAR sales decreased by $590,000 to $1.025 million or by 37% from the
corresponding nine months in the prior year of $1.615 million. The decrease in
HAR sales is primarily attributable to reduced sales of the DR1025NW, a digital
recorder designed principally for the National Weather Service. The Company
believes that it has achieved a saturation level of the DR1025NW to potential
users of the product, and that the Company will therefore achieve lower sales of
this product in future periods. HAR sales in future periods will depend largely
on sales of other existing products as well as the Company's ability to design
and introduce new products, such as the new DR2000 computer controlled HAR
system.
During the three months ended September 30, 1996, TCS sales
increased by $1.145 million to $1.659 million, or by 223%, from sales during the
corresponding three months in the prior year of $514,000. During the nine months
ended September 30, 1996, TCS sales increased by $2.617 million to $3.886
million, or by 206%, from sales during the corresponding nine months in the
prior year of $1.269 million. The increase in TCS sales is primarily
attributable to the Company's success in generating large orders for the DR500C
Talking Bus(R) from transit system customers. During the three months ended
September 30, 1996, shipments to three transit system customers accounted for
$1.166 million, or 70% of TCS sales. During the nine months ended September 30,
1996, shipments to three transit system customers accounted for $2.626 million,
or 68%, of TCS sales.
10
<PAGE>
During the three months ended September 30, 1996, DAC sales increased
by $426,000 to $1.053 million, or by 68%, from sales during the corresponding
three months in the prior year of $627,000. This increase is due primarily to
one shipment for $569,000 to a customer. During the nine months ended September
30, 1996, DAC sales increased by $687,000 to $1.801 million, or by 62%, from
sales during the corresponding nine months in the prior year of $1.114 million.
Since DAC was acquired February 28, 1995, the corresponding nine months in the
prior year included only seven months of sales. During the three months and nine
months ended September 30, 1996, Transit-Media sales were $225,000 and $274,000,
respectively. Since Transit-Media was acquired April 30, 1996, comparison to
prior periods are not available.
Cost of sales increased to $1.431 million for the three months
ended September 30, 1996 from $874,000 from the comparable three months in 1995,
or an increase of 64% on a period-to-period basis. For the nine months ended
September 30, 1996, cost of sales increased to $3.227 million from $2.028
million from the comparable nine months in 1995, or an increase of 59% on a
period to period basis.
Gross profit for the three months ended September 30, 1996 was
$1.631 million, an increase of $819,000, or 101%, over gross profit of $812,000
in the three months ended September 30, 1995. As a percentage of sales, gross
profit during the three months ended September 30, 1996 was 53% of net sales, as
compared to 48% during the corresponding three months in 1995. Gross profit for
the nine months ended September 30, 1996 was $3.759 million, an increase of
$1.789 million, or 91%, over gross profit of $1.970 million in the nine months
ended September 30, 1995. As a percentage of sales, gross profit during the nine
months ended September 30, 1996 was 54% of net sales, as compared to 49% during
the corresponding nine months in 1995. The fluctuation in gross profit
percentages between the periods was caused mainly by a shift in sales mix among
the business groups. Furthermore, two large shipments totalling
approximately $1.287 million during the three months ended September
30, 1996 achieved gross profit margins of or exceeding 60% which contributed
substantially to the improved quarterly and year-to-date margins.
Selling, general and administrative expenses during the three
months ended September 30, 1996 were $1.139 million, an increase of $415,000 or
57%, as compared to expenses of $724,000 during the three months ended September
30, 1995. This increase is primarily attributable to the additional general and
administrative expenses of Transit-Media totalling $109,000 and to higher
commission expenses resulting from increased sales. Selling, general and
administrative expenses during the nine months ended September 30, 1996 were
$2.792 million, an increase of $786,000, or 39%, as compared to expenses of
$2.006 million during the nine months ended September 30, 1995. This increase is
primarily attributable to a write off of a $115,000 account receivable, to
general and administrative expenses of Transit-Media totalling $183,000, higher
commission expenses resulting from increased sales, higher depreciation and
amortization expenses of property, equipment, goodwill and intangible assets,
and to DAC, which was acquired on February 28, 1995. This increase is
attributable to the expansion of the Company's sales and marketing
activities and to the additional general and administrative expenses
associated with the DAC acquisition on February 28, 1995.
Research and development expenses for the three months ended
September 30, 1996 were $211,000, an increase of $103,000 or 95%, as compared
to expenses of $108,000 during the three months ended September 30, 1995.
Research and development expenses for the nine months ended September 30, 1996
were $461,000, an increase of $175,000 or 61%, as compared to expenses of
$286,000 during the nine months ended September 30, 1995. These increases are
primarily attributable to HAR and TCS hiring additional engineering staff and
to TCS expenses on current product enhancements and future product
developments.
11
<PAGE>
Liquidity and Capital Resources
From 1990 until the Company's public offering in November 1994, the
Company financed its operations primarily through the private issuance of debt
and equity securities. In December of 1994, the Company completed its initial
public offering of 1,265,000 Units (the "Units"), each Unit consisting of one
share of Common Stock and one warrant to purchase one share of Common Stock. The
Company realized gross proceeds of approximately $7.274 million and net proceeds
of approximately $5.562 million after deducting offering costs of approximately
$1.712 million. Since the closing of the public offering, the Company has also
received proceeds of approximately $465,000 from the exercise of warrants.
As of September 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $143,000, investments of $1.999 million
(consisting primarily of U.S. Treasury obligations) and accounts receivable of
$2.400 million. The Company's current assets less current liabilities provide a
net working capital of $5.130 million. As of September 30, 1996, the Company had
no long-term debt. On May 24, 1996, the Company closed a $2 million unsecured
credit agreement with a financial institution. The agreement is for short-term
borrowings and import letters of credit, subject to certain loan covenants, and
bears interest at a rate of LIBOR plus 2.3%, payable quarterly. At September 30,
1996, there were no advances outstanding under the credit agreement.
The Company's operating activities provided cash of $24,000 during
the nine months ended September 30, 1996 and used cash of $943,000 during the
nine months ended September 30, 1995. For the nine months ended September 30,
1996, increases in accounts receivable of $571,000, increases in other
receivables of $69,000, increases in inventories of $103,000, increases in
prepaid and other current assets of $136,000, increases in intangible assets of
$149,000, and increases in accrued expenses of $239,000 primarily offset the
cash provided from earnings and the non-cash expenses of depreciation and
amortization. For the nine months ended September 30, 1995, increases in
accounts receivable of $145,000, increases in inventories of $448,000, decreases
in prepaids and other current assets of $121,000, increases in other receivables
of $257,000, increases in other assets of $57,000, and decreases in accounts
payable of $86,000, were the primary components of changes in cash from
operating activities. Working capital requirements increased with growth in the
Company's sales, primarily due to the time gap between the time the Company must
pay its suppliers and the time the Company receives payment from its customers,
particularly its governmental customers.
Investing activities during the nine months ended September 30, 1996
included purchases of property and equipment of $234,000, the sale of short term
investments of $200,000 and the purchases of short term investments of $86,000.
Renovation and improvement of additional office and production space subleased
by the Company costing approximately $96,000 is included in purchases of
property and equipment. Investing activities for the nine months ended September
30, 1995 consisted primarily of the acquisition of Digital Audio Corporation for
$1.171 million and sales of short term investments of $957,000.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new products and enhancement of existing
products; financing anticipated growth; and the possible acquisition of products
or technologies complementary to the Company's business. The Company believes
that its existing cash, cash equivalents and marketable securities, anticipated
cash generated from operations, and the $2 million credit agreement will be
sufficient to satisfy its currently anticipated cash requirements for the 1996
fiscal year.
12
<PAGE>
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 which are subject to the safe harbors created thereby.
These forward-looking statements include the plans and objectives of management
for future operations, including plans and objectives relating to (i) the
continued expansion of the Company's operations, (ii) the development and
introduction of new products, (iii) the continued successful operation of the
Company, and (iv) the Company's ability to maintain or increase the market share
of its various products.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements were based on assumptions that the Company would
continue to develop and introduce new products on a timely basis, that
competitive conditions within the industry would not change materially or
adversely, that demand for the Company's products would remain strong, and that
there would be no material change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking information will prove to be
accurate. In the light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
Adoption of Financial Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995,
and requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company has adopted SFAS No. 121 and does not expect its
provisions to have a material effect on the Company's results of operations in
fiscal 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years
beginning after December 15, 1995, and will require that the Company either
recognize in its financial statements costs related to its employee stock-based
compensation plans, such as stock option and stock purchase plans, or make pro
forma disclosures of such costs in a footnote to the financial statements. The
Company expects to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1996, the Company will make the required pro
forma disclosures in a footnote to the financial statements. SFAS No. 123 is not
expected to have a material effect on the Company's results of operations or
financial position.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
None.
13
<PAGE>
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K/A-1, dated July 15,
1996, in order to amend the Form 8-K reporting the
acquisition of Transit-Media GmbH.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-QSB to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: November 14, 1996 By: /s/ J. PHILLIPS L. JOHNSTON
J. Phillips L. Johnston, Chairman of the Board,
Chief Executive Officer, and Acting Principal
Financial Officer
14
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