<PAGE> 1
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, 1998
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
Common stock: 3,274,075 shares outstanding
as of November 11, 1998
Transitional Small Business Disclosure Format (check one); Yes No X
<PAGE> 2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
Financial Statements:
Consolidated Balance Sheets.......................................... 3
Consolidated Statements of Operations................................ 4
Consolidated Statements of Cash Flows ............................... 5-6
Notes to Consolidated Financial Statements........................... 7-9
</TABLE>
2
<PAGE> 3
DIGITAL RECORDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
ASSETS (Unaudited) (Audited)
------------------ -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 354,332 $ 472,285
Trade accounts receivable 2,959,290 3,173,959
Other receivables 26,813 54,288
Inventories 3,852,656 3,723,446
Prepaids and other current assets 140,845 74,486
---------- ----------
Total current assets 7,333,936 7,498,464
---------- ----------
Property and equipment, net 291,080 528,033
Goodwill, net 1,412,090 1,515,281
Intangible assets, net 333,396 403,263
Other assets 21,996 6,152
---------- ----------
TOTAL ASSETS $9,392,498 $9,951,193
========== ==========
LIABILITIES AND STOCKHOLDERS
Current Liabilities:
Short-term bank borrowings Note 4) $ 600,000 $1,893,540
Accounts payable 687,708 1,112,285
Accrued expenses 96,685 237,048
Accrued commissions 235,671 261,165
Accrued warranty reserve 226,657 146,892
Dividends payable 39,825 39,825
Deferred revenue 80,585
Other current liabilities 209,741 --
---------- ----------
Total current liabilities 2,096,287 3,771,340
---------- ----------
TOTAL LIABILITIES 2,096,287 3,771,340
---------- ----------
Series AAA Redeemable, Convertible, Nonvoting
Preferred Stock, $.10 par value, Liquidation
Preference of $5,000 per share, 20,000 shares
authorized; 354 shares issued and outstanding
at September 30, 1998 and December 31, 1997,
respectively 1,770,000 1,770,000
Stockholders' Equity: Common stock, $.10 par
value, 10,000,000 shares authorized; 3,274,075
shares issued and outstanding at September 30,
1998 and 2,674,075 shares issues and
outstanding at December 31, 1997. (Notes 7
and 8) 327,407 267,407
Additional paid-in capital 11,539,802 10,694,443
Translation adjustment (351) (186,081)
Accumulated deficit (6,340,646) (6,365,916)
----------- -----------
Total stockholders' equity 5,526,211 4,409,853
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $9,392,498 $ 9,951,193
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $ 3,297,574 $ 3,367,571 $ 8,469,983 $ 7,330,064
Cost of Sales 1,743,697 1,967,103 4,606,396 4,025,756
----------- ----------- ----------- -----------
Gross Profit 1,553,878 1,400,468 3,863,587 3,304,309
Operating Expenses
Selling, general and administrative 1,339,865 1,392,203 4,086,952 3,498,485
Engineering, research and development 263,948 214,705 726,474 564,574
----------- ----------- ----------- -----------
Total Operating Costs 1,603,813 1,606,908 4,813,427 4,063,059
----------- ----------- ----------- -----------
Operating Income (Loss) (49,935) (206,439) (949,840) (758,750)
Other Income (Expense), net (68,809) (62,390) (258,060) (107,265)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (118,744) (268,830) (1,207,900) (866,015)
Income Tax Expense -- -- -- --
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations (118,744) (268,830) (1,207,900) (866,015)
Discontinued Operations (Note 6)
Income from operations of discontinued HIS division -- 131,367 137,422 392,313
Gain on disposal of HIS division -- 1,097,012 --
----------- ----------- ----------- -----------
Net Income (Loss) (118,744) (137,462) 26,534 (473,702)
Preferred Dividend Requirements (39,825) (39,825) (119,475) (119,475)
----------- ----------- ----------- -----------
Net Income (Loss) Applicable to Common Stockholders $ (158,569) $ (177,287) $ (92,941) $ (593,177)
=========== =========== =========== ===========
Earnings per share:
Net Income (Loss) from continuing operations $ (0.05) $ (0.12) $ (0.46) $ (0.37)
Net income from discontinued operations -- 0.05 0.43 0.15
----------- ----------- ----------- -----------
Total Basic and Diluted Net Income (Loss) per Share $ (0.05) $ (0.07) $ (0.03) $ (0.22)
=========== =========== =========== ===========
Weight Average Number of Common Shares and Common
Equivalent Shares Outstanding 3,252,900 2,674,075 2,867,700 2,674,075
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ (118,744) $ (137,462) $ 26,534 $ (473,702)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization of
property and equipment 48,551 56,857 180,517 197,152
Amortization of goodwill and intangible assets 66,268 66,670 196,525 181,409
Other non-cash expenses -- 21,000 -- 21,000
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable (421,674) (1,184,409) 214,668 (2,573,742)
Decrease in other receivables 529 10,625 27,475 56,539
Decrease (increase) in inventories (12,405) (598,706) (129,211) (924,585)
Decrease (increase) in prepaids and other current assets (64,499) 79,359 (81,358) 80
Decrease (increase) in intangible assets (29,439) (3,452) (34,004) (119,802)
Decrease (increae) in other assets (1,279) 948 (842) 948
Increase (decrease) in accounts payable (473,283) (4,622) (424,577) (168,930)
Increase (decrease) in accrued expenses 22,155 152,702 (70,458) 147,420
(Decrease) in deferred revenue -- -- (80,585) --
(Decrease) increase in other current liabilities 125,322 -- 192,843 --
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities (858,498) (1,540,490) 17,527 (3,656,213)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (30,516) (127,639) (136,770) (215,988)
Sales of property and equipment -- 193,206
Sales of intangible assets -- -- 10,538 --
Sale (purchase) of short-term investments - net -- 1,267,524 -- 1,606,422
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities (30,516) 1,139,885 66,974 1,390,434
----------- ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 1,064,656 -- 1,064,656 --
Proceeds from short-term bank borrowings 1,150,000 2,662,532 4,779,461 5,433,272
Principal payments on short-term bank borrowings (1,170,000) (2,532,000) (6,073,000) (4,268,000)
Payment of dividends on preferred stock (39,825) (26,325) (159,300) (78,975)
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities 1,004,831 104,207 (388,183) 1,086,297
----------- ----------- ----------- -----------
Effect of exchange rate changes 138,455 147,660 185,729 34,931
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 254,272 (148,738) (117,953) (1,144,551)
Cash and cash equivalents at beginning of period 100,060 333,131 472,285 1,328,944
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 354,332 $ 184,393 $ 354,332 $ 184,393
=========== =========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 13,372 $ 19,504 $ 99,147 $ 34,303
=========== =========== =========== ===========
Cash paid during the period for income taxes $ -- $ 19,000 $ -- $ 70,800
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the three month periods ended September 30, 1998 and 1997
Supplemental disclosures of non cash financing activities:
The Company declared $39,825 in dividends on Series AAA Preferred Stock in
each of the three month periods ended September 30, 1998 and 1997. The
Company paid $159,300 in cash dividends in the nine month period ended
September 30, 1998. The difference between dividends declared and dividends
paid were the unpaid dividends as of December 31, 1997. During the nine
month period ended September 30, 1997, the Company paid cash dividends of
$92,475 with $23,475 of the remaining declared dividends being offset
against another receivable, and $3,525 of the remaining declared dividends
were unpaid.
6
<PAGE> 7
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998 and 1997
(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, 1997. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full calendar year.
(2) Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes new standards for computing and
presenting basic and diluted earnings per share. As required by SFAS No.
128, the Company adopted the provisions of the new standard with
retroactive effect beginning in 1997. Accordingly, all net income (loss)
per common share amounts for all prior periods have been restated to comply
with SFAS No. 128.
The basic net income (loss) per common share has been computed based
upon the weighted average of shares of common stock outstanding. Diluted
net income (loss) per common share assuming dilution has been computed
based upon the weighted average shares of common stock outstanding and
shares that would have been outstanding assuming the issuance of common
stock for all dilutive potential common stock outstanding. The Company's
outstanding stock options and warrants represent the only dilutive
potential common stock outstanding. The amounts of loss used in the
calculations of diluted and basic income loss per common share were the
same for all the periods presented. Diluted net loss per common share is
equal to the basic net loss per common share for the nine month periods
ended September 30, 1998 and 1997, respectively, as all common equivalent
shares from stock options and stock warrants would have an antidilutive
effect. Cash dividends declared on the preferred stock during the period
were added to the net loss to determine the net loss per share. Cash
dividends declared were $119,474 for each of the nine months ended
September 30, 1998 and 1997, 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> 8
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
September 30, 1998 and 1997
(4) Debt
On February 26, 1998, the Company renewed its $2,500,000 secured line
of credit facility and $1,000,000 secured letter of credit facility through
February of 1999. August 1, 1998 the amount of funds available under the
secured line of credit facility increased to $3,000,000 and secured letter
of credit decreased to $500,000. Both facilities are with the same
financial institution. These facilities provide for short-term borrowings
and import letters of credit, are subject to certain loan covenants, are
secured by substantially all of the Company's accounts receivable,
inventory and equipment, and bear interest, payable monthly, at the 90 day
LIBOR base rate plus 4.0%. Presently the borrowing base and credit line
availability is computed at eighty percent (80%) of all U.S. trade accounts
receivable less those accounts exceeding ninety days (90) outstanding. At
September 30, 1998, the Company had borrowed $600,000 against the
availability of $1,227,273.
(5) "AAA" Preferred Stock
On April 6, 1998 the holders of the Series AAA Preferred Stock
approved an amendment to the Company's Articles of Incorporation to (i)
extend the mandatory redemption date of the Series AAA Preferred Stock (the
"Preferred Shares") to December 31, 2003, (ii) permit the earlier
redemption of the Preferred Shares at the Company's option at any time upon
30 days' written notice, (iii) increase the amount of the quarterly
dividend payable with respect to each Preferred Share from $112.50 to
$125.00, and (iv) increase the number of shares of Common Stock of the
Company issuable upon conversion of each Preferred Share from 500 shares of
Common Stock to 625 shares of Common Stock. The amendment was presented to
a vote of the holders of Common Stock at the Shareholders Annual Meeting
held June 30, 1998 and was approved by a majority of the holders of Common
Stock.
(6) Sale of Highway Information Systems ("HIS") group
On April 14, 1998, the Company sold its Highway Information Systems
("HIS") business group to Quixote Corporation for $2.8 million in cash plus
other consideration of approximately $200,000. The Company realized a gain
on disposal, before applicable income taxes, of $1,097,012. The income tax
expense on this transaction, which the Company will offset with the tax
loss carryforwards which existed as of December 31, 1997, totaled
approximately $450,000. There were no sales revenues from the HIS business
group for the three months ended September 30, 1998. HIS had sales revenues
of $517,216 for the three months ended September 30, 1997, $685,930 for the
nine months ended September 30, 1998 and $1,916,706 for the nine months
ended September 30, 1997. The revenues of HIS comprised 8% and 21% of the
Company's revenues in each of the nine months ended September 30, 1998 and
1997, respectively. Net proceeds to the Company were used primarily to
reduce bank borrowings under the Company's secured line of credit facility.
(7) Lite Vision Corporation Share Purchase Agreement
On June 30, 1998, the Company and Lite Vision Corporation, a Taiwan
corporation ("Lite Vision"), entered into a share purchase agreement
whereby Lite Vision agreed to purchase 400,000 shares of the Registrant's
restricted Common Stock for a purchase price of $1,050,000. Lite Vision
also acquired an option to purchase an additional 100,000 shares at $2.4375
per share exercisable for a three year period from the closing date. Lite
Vision was granted "piggyback" registration rights on the shares purchased
and the option shares which can be purchased. The closing occurred on July
24, 1998.
Lite Vision is the developer and owner of certain technology used by the
Company in its transit display systems. Mr. Joseph Tang, President of Lite
Vision, was appointed to the Company's Board of Directors at the closing.
8
<PAGE> 9
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
September 30, 1998 and 1997
(8) RTI \ DRI Reorganization
On July 1, 1998, the Company, Robinson Turney International, Inc.
("RTI"), Digital Recorders Acquisition, Inc., a wholly owned subsidiary of
the Company (the "Subsidiary") and David L. Turney and Claude G. Robinson,
the two shareholders of RTI (the "Shareholders") consummated an Agreement
and Plan of Reorganization (the "Agreement") pursuant to which the
Subsidiary merged into RTI (the "Merger"). A disinterested majority of the
directors voting with respect to the transaction approved the Merger on
behalf of the Company.
Pursuant to the Merger, 200,000 restricted shares of the Company's
Common Stock were issued to the RTI Shareholders. For two years commencing
July 1, 1998, the RTI Shareholders have "piggyback" registration rights and
until January 1, 1999, the Shareholders also have demand registration
rights covering the 200,000 shares of Common Stock issued to them in the
Merger.
RTI is engaged in business development, marketing services, advisory
services, and merger, acquisition and financing assignments for selected
clients, including the Company, who are primarily in the transit and
transportation equipment industries. RTI assigned a sublicense agreement
and marketing agreement between RTI and TwinVision, Inc. to the Company and
also assigned a management services agreement between RTI and Transit Media
GmbH to the Company. Mr. Turney served as the Chairman of the Board and the
Chief Executive Officer of RTI since he and Mr. Robinson co-founded RTI in
August 1994. Their respective employment agreements with RTI were cancelled
on effectiveness of the Merger. Mr. Turney has served as the Company's
Chairman of the Board and Chief Executive Officer since April 1998 and as a
director since May 1996. The Company entered into a consulting agreement
with Mr. Robinson, commencing July 1, 1998 and extending through June 30,
1999 (which may be extended one additional year upon same terms and
conditions at the mutual agreement of the Company and Mr. Robinson,) to
provide services for the manufacturing and operational support of the
Company.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company designs, manufactures or contracts for the manufacture of,
and sells information technology products through its two business groups,
consisting of Transit Communication Systems ("TCS") and Digital Audio Company
("DAC"), and its two wholly-owned subsidiaries, Transit-Media GmbH
("Transit-Media") and TwinVision, na, Inc. ("TV"). On April 14, 1998, the
Company divested the Highway Information Systems ("HIS") business group as more
fully described in Footnote 6 to the consolidated financial statements.
The Company's products are currently marketed to the transit,
transportation and law enforcement markets. Customers include municipalities,
regional transit districts, federal, state, and local departments of
transportation, 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 a majority of these customers are dependent on federal,
state and local funding which may vary from year to year.
The following discussion provides an analysis of the Company's results
of operations and liquidity and capital resources. This 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.
RESULTS OF OPERATIONS
The following table sets forth 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,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100 % 100 % 100 % 100 %
Cost of Sales 53 58 54 55
--- --- --- ---
Gross Profit 47 42 46 45
Operating Expenses
Selling, general and administrative 41 41 48 48
Engineering, Research and Development 8 6 9 8
--- --- --- ---
Total Operating Expense 49 48 57 55
--- --- --- ---
Operating Income (Loss) (2) (6) (11) (10)
Other Income (Expense) - net (2) (2) (3) (1)
--- --- --- ---
Net Income from continuing operations (4) (8) (14) (12)
Income tax expense -- -- -- --
--- --- --- ---
Net Income from continuing operations (4) (8) (14) (12)
Discontinued Operation:
Net Income of discontinued operation -- 4 2 5
Gain on disposal of HIS division -- -- 13 --
--- --- --- ---
Net Income (Loss) (4)% (4)% 0 % (6)%
=== === === ===
</TABLE>
10
<PAGE> 11
Comparison of Three Months Ended September 30, 1998 and 1997.
Net sales for the three months ended September 30, 1998 were $3,297,574,
a decrease of $69,997 or 2.1%, as compared to $3,367,571 for the comparable
three months in 1997. The TCS group and TV experienced increases over 1997.
Transit Media and DAC realized sales decreases. DAC experienced extraordinary
high third quarter sales in 1997 due to one exceptionally large order of
$398,000 being shipped. Primarily in the Transit-Media and TV groups, the
company experienced substantial re-scheduling of deliveries by customers pushing
sales of the third quarter of 1998 into future periods.
During the three months ended September 30, 1998, TCS sales increased
$132,984 or 17.2% from the corresponding three months in the prior year. TCS
sales increased from $772,090 in 1997 to $905,074 in 1998. The increase reflects
TCS having improved market share. TCS business is subject to delivery schedules
of customers causing period to period fluctuations in revenues.
During the three months ended September 30, 1998, DAC sales decreased
$217,312, or 23.4%, from the corresponding three months in the prior year. DAC
sales decreased from $927,315 in 1997 to $710,003 in 1998. The higher third
quarter sales for 1997 was primarily the result of a $398,000 (43% of the total
third quarter DAC revenues) order being shipped.
Transit-Media sales decreased 31.9% from $645,216 in the third quarter
in 1997 to $439,553 in 1998. The decrease was substantially due to customer
delivery schedules changing on short notice.
During the three months ended September 30, 1998, TV sales increased
$303,710 or 29.7%. TV sales increased from $1,022,950 in 1997 to $1,326,660 in
1998. This increase is the result of additional market share capture and market
acceptance of the LEDOT(R) destination sign systems.
Gross profit for the three months ended September 30, 1998 was
$1,553,878, an increase of $153,406 or 11%, over gross profit of $1,400,468 for
the three months ended September 30, 1997. As a percentage of sales, gross
profit during the three months ended September 30, 1998 was 47.1% of net sales,
as compared to 41.6% during the corresponding three months in 1997. The increase
in gross profit percentage was caused primarily by a combination of improved
pricing and reduced costs in the three transit related (TCS, TM and TV) business
units.
Selling, general and administrative expenses during the three months
ended September 30, 1998 were $1,339,865, a decrease of $52,338 or 3.8%, as
compared to expenses of $1,392,203 during the three months ended September 30,
1997.
Engineering, research and development expenses for the three months
ended September 30, 1998 were $263,948, an increase of $49,243, or 22.9%, as
compared to expenses of $214,705 during the three months ended September 30,
1997. This increase related primarily to additional product development and
additional engineering personnel for sustaining product engineering.
Operating losses decreased by $156,504 from $206,439 for the three
months ended September 30, 1997 to $49,935 for the three months ended September
30, 1998 primarily due to the factors set forth above.
Total other income (expense) for the three months ended September 30,
1998 was a net expense of $68,809, an increase of $6,418 as compared to a net
expense for the three months ended September 30, 1997 of $63,390.
11
<PAGE> 12
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, 1998 and 1997, the Company did not record any income
tax expense. As a result of the accumulated losses incurred in past years, the
Company had a net operating loss carry forward for federal income tax purposes
of $2,845,535 as of December 31, 1997. This carry forward will be available to
offset federal taxable income, if any, through 2012. Also, as of December 31,
1997, one of the Company's subsidiaries had a net economic loss carry forward
for state income tax purposes of $593,616, which will be available to offset
future state taxable income, if any, through 2002. Following utilization of the
existing federal and state loss carry forwards, the Company's future operations,
if profitable, will be subject to income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
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, which included an
over-allotment of 165,000 units. The Company realized gross proceeds of
$7,273,750 and net proceeds of $5,562,225 after deducting offering costs of
$1,711,525.
The funds from this offering satisfied the Company's working capital
requirements until 1997. During 1997, the Company started to borrow money under
a $2,000,000 unsecured credit facility from a financial institution. On July 24,
1997, the Company's $2,000,000 unsecured credit facility from this 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.
On February 26, 1998, the Company renewed its $2,500,000 secured line
of credit facility and $1,000,000 secured letter of credit facility through
February of 1999. August 1, 1998 the amount of funds available under the secured
line of credit facility increased to $3,000,000 and secured letter of credit
decreased to $500,000. Both facilities are with the same financial institution.
These facilities provide for short-term borrowings and import letters of credit,
are subject to certain loan covenants, are secured by substantially all of the
Company's accounts receivable, inventory and equipment, and bear interest,
payable monthly, at the 90 day LIBOR base rate plus 4.0%. At September 30, 1998,
there were $600,000 of borrowings outstanding under the line of credit
agreement. In addition, at September 30, 1998, there was $452,814 committed
under import letters of credit for inventory purchases from an overseas
supplier.
As of September 30, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $354,332, trade accounts receivable of
$2,959,290, inventory of $3,852,656 and short-term bank borrowings of $600,000
providing the Company with net working capital of $5,237,649.
The Company's operating activities for the three months ended September
30, 1998 decreased cash in the amount of $858,498 consisting of higher quarter
ended trade accounts receivable due to September revenues being the highest of
three months and lower trade accounts payable over June 30, 1998 balance. For
the three months ended September 30, 1997, the decrease in cash from operating
activities totaled $1,540,490 and was the result of higher trade accounts
receivable and higher inventories (primarily in the Transit-Media and TV
groups). Working capital requirements will increase with growth in the Company's
sales, primarily due to the span between the time the Company must pay its
suppliers and the time the Company receives payment from its customers,
particularly its governmental customers and bus manufactures in Europe.
The Company's investing activities used cash of $30,516 in the quarter
ended September 30, 1998 primarily for computer systems related expenditures.
For the same time period in 1997, the sale of short term investments accounted
for the majority of net cash provided of $1,139,885.
12
<PAGE> 13
The Company's financing activities provided net cash of $1,004,831
during the three month period ended September 30, 1998 and provided cash of
$104,207 during the three month period ended September 30, 1997. The $1,050,000
net investment by Lite Vision (see Note 7 on Page 8) was recorded in the third
quarter of 1998. The remaining amounts of cash used in financing activities was
for "AAA" preferred stock dividends and slight net increase in short term
borrowings through the revolving credit facility. Financing activities during
the three month period ended September 30, 1997 provided cash related primarily
to the net increase in short term borrowings.
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 a combination of its net working capital, the borrowing capacity
available under its credit facility, the cash proceeds received from the sale in
April 1998 of the HIS business group and the modification of the terms of the
Series AAA Preferred Stock will provide the liquidity and capital resources
necessary to satisfy the Company's currently anticipated cash requirements for
1998.
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; inadequacy of the
Company's working capital and existing credit arrangement to fund its
operations; and the risk factors listed from time to time in the Company's SEC
reports, including but not limited to the Company's reports on Form 10-QSB, 8-K,
10-KSB, Annual Reports to Shareholders, and 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.
YEAR 2000 ISSUE
The Company is conducting a review of its computer systems to identify
the systems that could be affected by the Year 2000 issue, and is developing a
remediation plan , if warranted, to resolve any issues. The issue is whether the
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company has inquiries to suppliers of components and its processing
vendors that, in instances where the Company utilizes software or hardware that
is not Year 2000 compliant, such vendors are implementing plans to address Year
2000 issues.
Year 2000 issues may also affect the computer systems of the Company's
financing source. The Company has made inquiry of its financing source and has
been advised that its financing source is or will be Year 2000 compliant in
sufficient time to allow for testing and system implementation before December
31, 2000.
Based on the initial review of the computer systems, management does not
anticipate the expenditures to achieve Year 2000 compliance will exceed $30,000.
13
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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) REPORTS on FORM 8-K
(1) The Company filed a report on Form 8-K, dated August 5, 1998
regarding the Board of Director's approval of extending the
term of Redeemable Warrants to April 30, 1999.
(2) The Company filed a report on Form 8-K, dated August 5, 1998
regarding the Lite Vision Corporation Common Stock Share
Agreement.
(3) The Company filed a report on Form 8-K, dated August 5, 1998
regarding the Robinson-Turney International Agreement and
Plan of Reorganization.
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this Form 10-QSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: November 11, 1998 By: /s/ DAVID L. TURNEY
---------------------------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: November 11, 1998 By: /s/ LAWRENCE A. TAYLOR
----------------------------------------
Lawrence A. Taylor, Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 354,332
<SECURITIES> 0
<RECEIVABLES> 3,036,103
<ALLOWANCES> (50,000)
<INVENTORY> 3,852,656
<CURRENT-ASSETS> 7,333,936
<PP&E> 729,419
<DEPRECIATION> 438,338
<TOTAL-ASSETS> 9,392,498
<CURRENT-LIABILITIES> 2,096,287
<BONDS> 0
<COMMON> 327,407
1,770,000
0
<OTHER-SE> 5,198,804
<TOTAL-LIABILITY-AND-EQUITY> 9,392,498
<SALES> 1,743,697
<TOTAL-REVENUES> 1,743,697
<CGS> 1,553,878
<TOTAL-COSTS> 1,553,878
<OTHER-EXPENSES> 1,603,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (68,809)
<INCOME-PRETAX> (118,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> (118,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
