FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the Quarterly Period Ended September 30, 1997
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)
2300 Englert Drive, Suite B
Durham , North Carolina 27713
(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 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, 1997
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Consolidated 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
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1997 December 31,
Assets (Unaudited) 1996
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 184,393 1,328,944
Investments - 1,606,422
Trade accounts receivable 4,664,623 2,090,881
Other receivables 40,000 120,014
Inventories 2,814,491 1,889,906
Prepaids and other current assets 51,249 51,329
---------------- ----------------
Total current assets 7,754,756 7,087,496
---------------- ----------------
Property and equipment, net 476,847 458,011
Goodwill, net 1,553,663 1,668,807
Intangible assets, net 457,437 403,900
Other assets 6,151 7,099
---------------- ----------------
$ 10,248,854 9,625,313
================ ================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings 1,165,272 -
Accounts payable 661,953 830,883
Accrued expenses 187,253 172,892
Accrued commissions 313,558 199,485
Accrued warranty reserve 180,957 161,971
Dividends payable 17,025 -
---------------- ----------------
Total current liabilities 2,526,018 1,365,231
---------------- ----------------
Total liabilities 2,526,018 1,365,231
---------------- ----------------
Stockholders' Equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value, 20,000
shares authorized; 354 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 35 35
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding at September 30,
1997 and December 31, 1996, respectively 267,407 267,407
Additional paid-in capital 12,623,708 12,602,708
Translation adjustment 25,140 (9,791)
Accumulated deficit (5,193,454) (4,600,277)
---------------- ----------------
Total stockholders' equity 7,722,836 8,260,082
---------------- ----------------
$ 10,248,854 9,625,313
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------ ----- ----- ----
<S> <C> <C> <C> <C>
Net sales $ 3,942,788 3,062,101 9,246,770 6,986,117
Cost of sales 2,299,891 1,431,026 4,925,006 3,227,498
------------ ------------ ------------ ------------
Gross profit 1,642,897 1,631,075 4,321,765 3,758,619
Selling, general and administrative expenses 1,491,576 1,139,121 4,014,377 2,791,699
Research and development expenses 273,261 210,753 805,603 460,841
------------ ------------ ------------ ------------
Operating income (loss) (121,940) 281,201 (498,215) 506,079
Other income (expense):
Interest income 3,981 25,020 58,816 109,593
Interest expense (19,503) - (34,303) (3,743)
------------ ------------ ------------ ------------
Total other income (expense) (15,522) 25,020 24,513 105,850
Income (loss) before income taxes (137,462) 306,221 (473,702) 611,929
Income tax expense - - - 20,000
------------ ------------ ------------ ------------
Net income (loss) (137,462) 306,221 (473,702) 591,929
Preferred dividend requirements (39,825) (39,825) (119,475) (119,475)
------------ ------------ ------------ ------------
Net income (loss) applicable to common stockholders $ (177,287) 266,396 (593,177) 472,454
============ ============ ============ ============
Net income (loss) per common and common equivalent share $ (0.07) 0.10 (0.22) 0.18
============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,674,075 2,674,075 2,674,075
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the nine month periods ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (473,702) 591,929
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of
property and equipment 197,152 84,862
Amortization of goodwill and intangible assets 181,409 153,759
Other non-cash expenses 21,000 -
Changes in operating assets and liabilities:
Increase in trade accounts receivable (2,573,742) (571,402)
Decrease (increase) in other receivables 56,539 (68,878)
Increase in inventories (924,585) (102,694)
Decrease (increase) in prepaids and other current assets 80 (136,297)
Increase in intangible assets (119,802) (148,682)
Decrease in other assets 948 (198)
Decrease in accounts payable (168,930) (17,374)
Increase in accrued expenses 147,420 238,964
-------------- ----------------
Net cash provided (used) by operating activities (3,656,213) 23,989
-------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (215,988) (233,633)
Purchases of short-term investments (161,102) (85,873)
Sales and maturities of short-term investments 1,767,524 200,000
Payment for business acquired, net of cash received - (34,560)
-------------- ----------------
Net cash provided (used) by investing activities 1,390,434 (154,066)
-------------- ----------------
Cash flows from financing activities:
Principal payments on long-term debt - (709,000)
Proceeds from short-term bank borrowings 5,433,272 250,000
Principal payments on short-term bank borrowings (4,268,000) (367,177)
Payment of dividends on preferred stock (78,975) (78,975)
--------------
----------------
Net cash provided (used) by financing activities 1,086,297 (905,152)
-------------- ----------------
Effect of exchange rate changes 34,931 2,548
-------------- ----------------
Net decrease in cash and cash equivalents (1,144,551) (1,032,681)
Cash and cash equivalents at beginning of period 1,328,944 1,175,775
-------------- ----------------
Cash and cash equivalents at end of period $ 184,393 143,094
============== ================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 34,303 3,743
============== ================
Cash paid during the period for income taxes $ 70,800 -
============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the nine month periods ended September 30, 1997 and 1996
Supplemental disclosures of noncash financing activities:
The Company declared $119,475 in dividends on Series AAA Preferred Stock in each
of the nine month periods ended September 30, 1997 and 1996. The Company paid
$78,975 in cash dividends in each of the nine month periods ended September 30,
1997 and 1996. During the nine month period ended September 30, 1997, $23,475 of
the remaining declared dividends were offset against an other receivable, and
$17,025 of the remaining declared dividends were unpaid.
During the nine month period ended September 30, 1997, the Company recorded
$21,000 in expenses for services provided to the Company in a non-cash
transaction.
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 ($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).
6
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1997 and 1996
(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 audited financial statements
included in its Annual Report on Form 10-KSB for the year ended December 31,
1996. The results of operations for the nine months ended September 30, 1997
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. A treasury stock approach has been used in determining
the incremental shares outstanding. For 1997, the impact of the common stock
equivalent shares was anti-dilutive. For 1996, the common stock equivalent
shares had no impact on the per share amounts. Cash dividends declared on the
preferred stock during the period were deducted from net income or added to
net loss to determine the net income (loss) per share. Cash dividends
declared were $119,475 for each of the nine months ended September 30, 1997
and 1996, respectively.
(3) Translation of Foreign Currency
Foreign currency assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of operations are
translated using the average exchange rate prevailing throughout the period.
The effects of unrealized exchange rate fluctuations on translating foreign
currency assets and liabilities into U. S. dollars are accumulated as the
cumulative translation adjustment in stockholders' equity. Realized gains and
losses on foreign currency transactions, if any, are included in operations
for the period.
7
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued (Unaudited)
(4) 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 and the Far East. The
Company paid $35,000 for all of Transit-Media's stock at closing. The Company
recorded cash ($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. The Company's results of operations for the nine months ended
September 30, 1997 include the operations of Transit-Media.
The following unaudited pro forma results of operations assume the
transaction described above occurred as of January 1, 1996 after giving
effect to certain adjustments, including the amortization of the excess cost
over the fair value of the net assets acquired.
Nine Months Ended
September 30, 1996
------------------
Net sales $ 6,986,117
Net income $ 519,119
Net income per common and common equivalent share $ 0.15
The pro forma information given above does not purport to be indicative
of the results that actually would have been obtained if the operations were
combined during the year presented and is not intended to be a projection of
future results or trends.
(5) Debt
On July 24, 1997, the Company's $2,000,000 unsecured credit facility
from a financial institution expired and was replaced by a $2,500,000 secured
line of credit facility and a $1,000,000 secured letter of credit facility
from the same financial institution. The new credit facility provides for
short-term borrowings and import letters of credit, is subject to certain
loan covenants, is secured by all of the Company's accounts receivable,
inventory and equipment, and bears interest, payable quarterly, at the 90 day
LIBOR base rate plus 2.3% to 3.3% dependent upon the Company's rolling four
quarter earnings before interest, taxes, depreciation and amortization. As of
September 30, 1997, the Company was not in compliance with one of its
financial loan covenants. The financial institution provided a waiver to the
Company for this covenant for both the third and fourth quarters of 1997.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Digital Recorders, Inc. (the "Company") designs, manufactures or
contracts for the manufacture of, and sells information technology products
through its three business groups, consisting of Highway Information Systems
("HIS"), Transit Communication Systems ("TCS"), and Digital Audio Company
("DAC"), and its two wholly-owned subsidiaries, Transit-Media GmbH
("Transit-Media") and TwinVision Corp. of North America, Inc. ("TwinVision").
From the Company's inception in 1983 through 1986, the Company's activities
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 $9,200,269 in 1996. Net sales for the nine months ended September
30, 1997 totaled $9,246,770. The Company attributes its growth primarily to the
introduction of new products, increased market penetration, growing markets for
its products, and strategic acquisitions of companies with complementary
technologies.
The Company's products are currently marketed to the highway
information system advisory radio ("HIS") market, the mass transit market and
the law enforcement market using proprietary software applications. Customers
include municipalities, regional transportation districts, federal, state, and
local departments of transportation, turnpikes, bus manufacturers, and law
enforcement agencies or organizations. Sales to these customers are
characterized by a lengthy sales cycle which generally extends for a period of
two to twenty-four months. In addition, purchases by these customers are
dependent on federal, state and local funding which may vary from year to year.
A significant portion of the Company's sales have historically been
attributable to a small number of customers. Revenues from three major customers
accounted for approximately 34%, 35% and 44% of net sales during 1996, 1995 and
1994, respectively. The Company's most significant customer during the past
three years accounted for approximately 13% of the total combined net sales
during this three year period. During the three months ended September 30, 1997,
sales to two customers accounted for approximately 22% of net sales. During the
nine months ended September 30, 1997, there were no sales to any particular
customer that accounted for more than 10% of sales. 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 upon shipment of products to
customers. Because the Company's operations are characterized by significant
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 following discussion provides an analysis of the Company's results
of operations and liquidity and capital resources and should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto. The operating results of the periods presented were not significantly
affected by inflation.
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,
1997 1996 1997 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Net sales ........................................ 100% 100% 100% 100%
Cost of sales ................................ 58 47 53 46
--- --- --- ---
Gross profit ................................. 42 53 47 54
Operating expenses :
Selling, general and administrative .... 38 37 43 40
Research and development ............... 7 7 9 7
--- --- --- ---
Total operating expenses ..................... 45 44 52 47
--- --- --- ---
Operating income (loss) ...................... (3) 9 (5) 7
Other income (expense), net .................. - 1 - 2
---- ---- ---- ----
Income (loss) before income taxes ............ (3) 10 (5) 9
Income tax expense ........................... - - - (1)
--- --- --- ---
Net income (loss) ............................ (3) 10 (5) 8
=== === === ===
</TABLE>
Comparison of Three and Nine Months Ended September 30, 1997 and 1996.
Net sales for the three months ended September 30, 1997 were
$3,942,788, an increase of $880,687, or 29%, as compared to $3,062,101 for the
comparable three months in 1996. Net sales for the nine months ended September
30, 1997 were $9,246,770, an increase of $2,260,653, or 32%, as compared to
$6,986,117 for the comparable nine months in 1996. These increases in sales were
attributable to increases in sales in the HIS business group, the DAC business
group and the Transit-Media subsidiary and the addition of sales from
TwinVision, all of which were offset by decreases in sales from the TCS business
group.
During the three months ended September 30, 1997, HIS sales increased
$450,255, or 360%, from the corresponding three months in the prior year. During
the nine months ended September 30, 1997, HIS sales increased $891,328, or 87%,
from the corresponding nine months in the prior year. The increases in HIS sales
are due primarily to shipments on large orders from two customers, one of which
related to the new DR2000 computer-controlled product.
During the three months ended September 30, 1997, TCS sales decreased
$887,205, or 53%, from the corresponding three months in the prior year. During
the nine months ended September 30, 1997, TCS sales decreased $1,105,937, or
28%, from the corresponding nine months in the prior year. The decrease in TCS
sales relates primarily to shipments of smaller dollar orders from several
transit customers during 1997, whereas, during the corresponding periods in the
prior year, shipments were made primarily to fulfill a large order from one
transit customer. The TCS business group will continue to aggressively market
its products; however, given the current timing of placement of orders from
potential customers, the Company expects sales of TCS to continue to decline in
the fourth quarter of 1997 as compared to sales in the fourth quarter of the
prior year.
During the three months ended September 30, 1997, DAC sales decreased
$125,592, or 12%, from the corresponding three months in the prior year. During
the nine months ended September 30, 1997, DAC sales increased $105,168, or 6%,
from the corresponding nine months in the prior year. The overall increase in
DAC sales relates primarily to increased international sales.
During the three months ended September 30, 1997, Transit-Media sales
increased $420,279, or 187%, from the corresponding three months in the prior
year. During the nine months ended September 30, 1997, Transit-Media sales
increased $1,108,033, or 404%, from the corresponding nine months in the prior
year. These increases are
10
<PAGE>
primarily due to Transit-Media having nine months of sales in 1997 as compared
to five months of sales during this subsidiary's start-up phase in the prior
year. During the three months and nine months ended September 30, 1997,
TwinVision sales totaled $1,022,950, and $1,262,061, respectively. The first
sales by this subsidiary occurred in June 1997.
Gross profit for the three months ended September 30, 1997 was
$1,642,897, an increase of $11,822, or 1%, over gross profit of $1,631,075 in
the three months ended September 30, 1996. As a percentage of sales, gross
profit during the three months ended September 30, 1997 was 42% of net sales, as
compared to 53% during the corresponding three months in 1996. Gross profit for
the nine months ended September 30, 1997 was $4,321,765, an increase of
$563,146, or 15%, over gross profit of $3,758,619 in the nine months ended
September 30, 1996. As a percentage of sales, gross profit during the nine
months ended September 30, 1997 was 47% of net sales, as compared to 54% during
the corresponding nine months in 1996. These decreases in gross profit
percentages were caused primarily by increased sales by Transit-Media and
TwinVision, which sell their products at lower gross margins than the Company's
other three business groups.
Selling, general and administrative expenses during the three months
ended September 30, 1997 were $1,491,576, an increase of $352,455, or 31%, as
compared to expenses of $1,139,121 during the three months ended September 30,
1996. Selling, general and administrative expenses during the nine months ended
September 30, 1997 were $4,014,377, an increase of $1,222,678, or 44%, as
compared to expenses of $2,791,699 during the nine months ended September 30,
1996. These increases were primarily attributable to increased depreciation and
amortization expenses resulting from continued purchases of property and
equipment, increased commission payments as sales have increased and to expenses
related to the Company's two wholly-owned subsidiaries that were in their
start-up phase in the corresponding periods in the prior year.
Research and development expenses for the three months ended September
30, 1997 were $273,261, an increase of $62,508, or 30%, as compared to expenses
of $210,753 during the three months ended September 30, 1996. Research and
development expenses for the nine months ended September 30, 1997 were $805,603,
an increase of $344,762, or 75%, as compared to expenses of $460,841 during the
nine months ended September 30, 1996. These increases are primarily due to the
hiring of additional engineers in all business groups for the purpose of
developing new and enhancing existing products.
Operating income decreased by $403,141 from $281,201 for the three
months ended September 30, 1996 to an operating loss of $121,940 for the three
months ended September 30, 1997. Operating income decreased by $1,004,294 from
$506,079 for the nine months ended September 30, 1996 to an operating loss of
$498,215 for the nine months ended September 30, 1997. These decreases in
operating income are due primarily to the factors set forth above.
Total other income (expense) for the three months ended September 30,
1997 was a net expense of $15,522, a decrease of $40,542 as compared to income
for the three months ended September 30, 1996 of $25,020. This decrease was due
primarily to a decrease in interest income, net of interest expense, as the
Company decreased its cash and cash equivalents and increased its bank
borrowings to finance operations during the three months ended September 30,
1997. Total other income (expense) for the nine months ended September 30, 1997
was $24,513, a decrease of $81,337, or 77%, as compared to total other income
(expense) for the nine months ended September 30, 1996 of $105,850. This
decrease was due primarily to the same factors noted for the three month period.
The Company's financial statements contain, when necessary, a
provision for income tax expense due to alternative minimum tax. For the three
month periods ended September 30, 1997 and 1996, the Company did not record any
income tax expense. For the nine month periods ended September 30, 1997 and
1996, the Company recorded income tax expense of zero and $20,000, respectively.
As a result of the accumulated losses incurred in past years, the Company had a
net operating loss carryforward for federal income tax purposes of $2,751,134 as
of December 31, 1996. This carryforward will be available to offset federal
taxable income, if any, through 2009. Also, as of December 31, 1996, the Company
had a net economic loss carryforward for state income tax purposes of $820,565,
which will be available to offset future state taxable income, if any, through
1999. Following utilization of the existing federal and state loss
carryforwards, the Company's future operations, if profitable, will be subject
to income tax expense.
11
<PAGE>
Liquidity and Capital Resources
From 1990 through 1994, the Company financed its operations primarily
through the private and public issuance of debt and equity securities.
On May 24, 1996, the Company obtained a $2,000,000 unsecured credit
facility from a financial institution. The agreement provided for short-term
borrowings and import letters of credit, was subject to certain loan covenants,
and bore interest at a rate of LIBOR plus 2.3%, payable quarterly. The unsecured
credit facility expired July 24, 1997 and was replaced by a $2,500,000 secured
line of credit facility and a $1,000,000 secured letter of credit facility from
this same financial institution. The new credit facility provides for short-term
borrowings and import letters of credit, is subject to certain loan covenants,
is secured by all of the Company's accounts receivable, inventory and equipment,
and bears interest, payable quarterly, at the 90 day LIBOR base rate plus 2.3%
to 3.3% dependent upon the Company's rolling four quarter earnings before
interest, taxes, depreciation and amortization. At September 30, 1997, there
were $1,165,272 of borrowings outstanding under this credit agreement. In
addition, at September 30, 1997 there was approximately $900,000 committed under
import letters of credit for inventory purchases from an oversees supplier.
As of September 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $184,393, accounts receivable of
$4,664,623 and short-term bank borrowings of $1,165,272 providing the Company
with net working capital of $5,228,738.
The Company's operating activities used cash of $3,656,213 during the
nine months ended September 30, 1997 and provided cash of $23,989 during the
nine months ended September 30, 1996. For the nine months ended September 30,
1997, increases in accounts receivable of $2,573,742, increases in inventories
of $924,585, decreases in accounts payable of $168,930 and increases in accrued
expenses of $147,420 were the primary components of changes in working capital.
This increase in accounts receivable was due primarily to significant sales in
September of 1997 as well as to long payment cycles from some of the Company's
governmental and quasi-governmental customers. For the nine months ended
September 30, 1996, increases in accounts receivable of $571,402, increases in
inventories of $102,694, increases in intangible assets of $148,682 and
increases in accrued expenses of $238,964 were the primary components of changes
in working capital. The Company anticipates that its working capital needs will
continue to increase as the Company implements its expansion plans. Working
capital requirements will increase 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.
The Company's investing activities provided cash of $1,390,434 during
the nine months ended September 30, 1997 and used cash of $154,066 during the
nine months ended September 30, 1996. Investing activities during the nine
months ended September 30, 1997 related to capital expenditures of $215,988 and
net sales of short-term investments totaling $1,606,422. Investing activities
during the nine months ended September 30, 1996 related to capital expenditures
of $233,633, net sales of short-term investments totaling $114,127 and the
purchase of Transit-Media for $34,560, net of cash received.
The Company's financing activities provided cash of $1,086,297 during
the nine months ended September 30, 1997 and used cash of $905,152 during the
nine months ended September 30, 1996. Financing activities during the nine
months ended September 30, 1997 related primarily to net proceeds from
short-term bank borrowings totaling $1,165,272 and to the payment of dividends
on preferred stock totaling $78,795. Financing activities during the nine months
ended September 30, 1996 related to principal payments on long-term debt of
$709,000, net principal payments on short-term bank borrowings of $117,177 and
to the payment of dividends on preferred stock totaling $78,975.
The Company's cash requirements, other than for normal operating
expenses, will relate to the 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 net working capital, as well as the borrowing capacity
available under the Company's $2,500,000 line of credit facility will be
sufficient to satisfy its currently anticipated cash requirements for 1997. The
Company believes that it will need to obtain additional capital in 1998 as it
continues to implement its expansion plans. The amount of capital needed in
1998, as well as its timing, is primarily dependent upon how quickly the Company
collects its accounts receivable and realizes the value of its inventories.
12
<PAGE>
Forward-Looking Statements
The statements contained herein that are not purely historical are
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, including
statements regarding the Company's expectations, hopes, intentions or strategies
regarding the future. Forward-looking statements include expectations of trends
to continue through the remainder of the current and the forthcoming fiscal
year, including the development and introduction of new products.
Forward-looking statements involve a number of risks and uncertainties. Among
other factors that could cause actual results to differ materially are the
following: business conditions and growth in the markets in which the Company
participates and the general economy; competitive factors, such as the entry of
new competitors into any of the markets in which the Company participates; price
pressures and increased competition in those markets; inventory risks due to
shifts in market demand and/or price erosion of purchased components; changes in
product mix; timely collection of accounts receivable; that the Company's
working capital and existing credit arrangement will be adequate to fund its
operation; and the risk factors listed from time to time in the reports or other
documents filed pursuant to the Securities Act of 1933 or the Securities
Exchange Act of 1934. All forward-looking statements included herein are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those in such forward-looking statements due to the factors cited above. As a
result of these factors, there can be no assurance the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis, which would materially and adversely affect the Company's
business, financial condition and results of operations.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2 . CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
13
<PAGE>
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, dated September 24, 1997,
regarding the extension of the term of the Company's Redeemable
Warrants to purchase Common Stock (the "Warrants") sold in the
Registrant's public offering in November 1994. As extended, the
Warrants may be exercised at any time prior to 5:00 P.M. Eastern
Time on August 3, 1998. All other terms of the warrants remain
unchanged.
SIGNATURES
In accordance with 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: December 11, 1997 By: /s/ J. PHILLIPS L. JOHNSTON
----------------------------
J. Phillips L. Johnston, Chairman of the Board,
President and Chief Executive Officer
Dated: December 11, 1997 By: /s/ JONATHAN E. KENNEDY
------------------------
Jonathan E. Kennedy, Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 184,393
<SECURITIES> 0
<RECEIVABLES> 4,664,623
<ALLOWANCES> 0
<INVENTORY> 2,814,491
<CURRENT-ASSETS> 7,754,756
<PP&E> 1,015,181
<DEPRECIATION> 538,334
<TOTAL-ASSETS> 10,248,854
<CURRENT-LIABILITIES> 2,526,018
<BONDS> 0
35
0
<COMMON> 267,407
<OTHER-SE> 7,455,394
<TOTAL-LIABILITY-AND-EQUITY> 10,248,854
<SALES> 3,942,788
<TOTAL-REVENUES> 3,942,788
<CGS> 2,299,891
<TOTAL-COSTS> 2,299,891
<OTHER-EXPENSES> 1,764,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,503
<INCOME-PRETAX> (137,462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (137,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (137,462)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
