<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 June 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, as of the latest practicable date.
Common stock: 2,674,075 shares outstanding as of June 30, 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
Item Page
Financial Statements:
Consolidated Balance Sheets............................. 3
Consolidated Statement of Operations.................... 4
Consolidated Statements of Cash Flows .................. 5-6
Notes to Consolidated Financial Statements.............. 7-9
<PAGE> 3
DIGITAL RECORDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 100,060 $ 472,285
Trade accounts receivable 2,537,617 3,173,959
Other receivables 27,342 54,288
Inventories 3,840,252 3,723,446
Prepaids and other current assets 91,345 74,486
------------ ------------
Total current assets 6,596,616 7,498,464
------------ ------------
Property and equipment, net 309,155 528,033
Goodwill, net 1,441,507 1,515,281
Intangible assets, net 340,807 403,263
Other assets 5,715 6,152
------------ ------------
TOTAL ASSETS $ 8,693,760 $ 9,951,193
============ ============
LIABILITIES AND STOCKHOLDERS
Current Liabilities:
Short-term bank borrowings $ 620,000 $ 1,893,540
Accounts payable 1,160,991 1,112,285
Accrued expenses 101,481 237,048
Accrued commissions 178,644 261,165
Accrued warranty reserve 272,367 146,892
Dividends payable 39,825 39,825
Deferred revenue -- 80,585
Other current liabilities 67,521 --
------------ ------------
Total current liabilities 2,440,829 3,771,340
------------ ------------
TOTAL LIABILITIES 2,440,829 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 June 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; 2,674,075 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 267,407 267,407
Additional paid-in capital 10,574,969 10,694,443
Translation adjustment (138,807) (186,081)
Accumulated deficit (6,220,638) (6,365,916)
------------ ------------
Total stockholders' equity 4,482,931 4,409,853
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 8,693,760 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 2,964,033 $ 2,130,448 $ 5,172,408 $ 3,962,493
Cost of Sales 1,550,684 1,253,921 2,862,700 2,137,585
----------- ----------- ----------- -----------
Gross Profit 1,413,349 876,527 2,309,709 1,824,908
Operating Expenses
Selling, general and administrative 1,620,409 1,106,947 2,877,345 2,112,261
Engineering, Research and Development 249,278 164,264 462,526 349,870
----------- ----------- ----------- -----------
Total Operating Costs 1,869,687 1,271,211 3,339,871 2,462,131
----------- ----------- ----------- -----------
Operating Income (Loss) (456,338) (394,685) (1,030,162) (637,223)
Other Income (expense), net (15,418) 11,883 (58,994) 40,037
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (471,757) (382,802) (1,089,156) (597,186)
Income Tax Expense -- -- -- --
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations (471,757) (382,802) (1,089,156) (597,186)
Discontinued Operations (Note 6):
Income from operations of
discontinued HIS division -- 194,071 137,422 260,946
Gain on disposal of HIS division 1,097,012 -- 1,097,012 --
----------- ----------- ----------- -----------
Net Income (Loss) 625,255 (188,731) 145,278 (336,240)
Preferred Dividend Requirements (39,825) (39,825) (79,650) (79,650)
----------- ----------- ----------- -----------
Net Income (Loss) Applicable to
Common Stockholders $ 585,430 $ (228,556) $ 65,628 $ (415,890)
=========== =========== =========== ===========
Earnings per share:
Net Income (loss) from continuing operations $ (0.19) $ (0.16) $ (0.44) $ (0.25)
Net income from discontinued operation 0.41 0.07 0.46 0.10
----------- ----------- ----------- -----------
Total Basic and Diluted Net Income
(Loss) per Share $ 0.22 $ (0.09) $ 0.02 $ (0.16)
=========== =========== =========== ===========
Weight Average Number of Common Shares 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.
4
<PAGE> 5
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six month periods ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ 145,278 $ (336,240)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization of
property and equipment 131,966 140,295
Amortization of goodwill and intangible assets 130,257 114,739
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 636,342 (1,389,333)
Decrease in other receivables 26,946 45,914
Decrease (increase) in inventories (116,806) (325,879)
Decrease (Increase) in prepaids and other current assets (16,859) (79,279)
Decrease (increase) in intangible assets (4,565) (116,350)
Decrease in other assets 437 --
Increase (decrease) in accounts payable 48,706 (164,308)
Increase (decrease) in accrued expenses (92,613) (5,282)
(Decrease) in deferred revenue (80,585) --
Increase in other current liabilities 67,521 --
----------- -----------
Net cash provided (used) by operating activities 876,025 (2,115,723)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (106,254) (88,349)
Sales of property and equipment 193,206
Sales of intangible assets 10,538 --
Sale (purchase) of short-term investments - net -- 338,898
----------- -----------
Net cash provided (used) by investing activities 97,490 250,549
----------- -----------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 3,629,460 2,770,740
Principal payments on short-term bank borrowings (4,903,000) (1,736,000)
Payment of dividends on preferred stock (119,474) (52,650)
----------- -----------
Net cash provided (used) by financing activities (1,393,014) 982,090
----------- -----------
Effect of exchange rate changes 47,274 (112,729)
----------- -----------
Net (decrease) in cash and cash equivalents (372,225) (995,813)
Cash and cash equivalents at beginning of period 472,285 1,328,944
----------- -----------
Cash and cash equivalents at end of period $ 100,060 $ 333,131
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 85,775 $ 14,799
=========== ===========
Cash paid during the period for income taxes $ -- $ 51,800
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the six month periods ended June 30, 1998 and 1997
Supplemental disclosures of noncash financing activities:
The Company declared $79,650 in dividends on Series AAA Preferred Stock in each
of the six month periods ended June 30, 1998 and 1997. The Company paid $119,474
in cash dividends in the six month period ended June 30, 1998. The difference
between dividends declared and dividends paid were the unpaid dividends as of
December 31, 1997. During the six months period ended June 30, 1997, the Company
paid cash dividends of $52,650 with $23,475 of the remaining declared dividends
being offset against an other receivable, and $3,525 of the remaining declared
dividends were unpaid.
6
<PAGE> 7
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 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 six months ended June 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 income (loss) used in the calculations of diluted and basic income
(loss) per common share were the same for all the periods presented. Diluted net
income (loss) per common share is equal to the basic net income (loss) per
common share for the six month periods ended June 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 deducted from net income or added to the
net loss to determine the net income (loss) per share. Cash dividends declared
were $79,650 for each of the six months ended June 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)
June 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. 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%.
(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 June 30, 1998. HIS had sales revenues of 775,325 for the three
months ended June 30, 1997, $685,930 for the sixth months ended June 30, 1998
and $1,341,490 for the six months ended June 30, 1997. The revenues of HIS
comprised 12% and 25% of the Company's revenues in each of the six months ended
June 30, 1998 and 1997, respectively. Net proceeds to the Company were used
primarily to reduce bank borrowings under the Company's credit facility.
(7) Subsequent Events
On June 30, 1998, Digital Recorders, Inc. (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 commencing three years from the
closing date. 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.
On July 1, 1998, Digital Recorders, Inc. (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.
8
<PAGE> 9
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
June 30, 1998 and 1997
Subsequent Events - Continued
Pursuant to the Merger, 200,000 restricted shares of the Company's
Common Stock were issued to the Shareholders. For two years commencing July 1,
1998, the Shareholders have the right to include their shares on any
registration statement which the Company files to register any of its securities
under the Securities Act of 1933, as amended (the "Act"), in connection with a
public offering for cash proceeds payable in whole or in part to the Company.
After July 1, 1998 and before January 1, 1999, the Shareholders also have been
granted the right to demand that the Company file a registration statement under
the Act 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 maybe 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.
On June 30, 1998, the Board of Directors of Digital Recorders, Inc.
(the Company) authorized the extension of the term of its 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 April 30, 1999. All Warrants not exercised on or
prior to such date shall expire, subject to the right of the Company to extend
such date. All other terms of the Warrants remain unchanged.
9
<PAGE> 10
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 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 Corp. of North
America, Inc. ("TwinVision"). On April 14, 1998, the Company divested the HIS
business group as more fully described in Footnote 5 to the consolidated
financial statements.
The Company's products are currently marketed to the mass transit and
law enforcement markets. Customers include municipalities, regional
transportation 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 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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales 100 % 100 % 100 % 100 %
Cost of Sales 52 59 55 54
--- --- --- ---
Gross Profit 48 41 45 46
Operating Expenses
Selling, general and administrative 55 52 56 53
Engineering, Research and Development 8 8 9 9
--- --- --- ---
Total Operating Expense 63 60 65 62
--- --- --- ---
Operating Income (Loss) (15) (19) (20) (16)
Other Income (Expense) - net (1) 1 (1) 1
Net Income of Discontinued Operation -- 9 3 7
Gain on sale of Discontinued Operation 37 -- 21 --
--- --- --- ---
Income (loss) before income taxes 21 (9) 3 (8)
Income tax expense -- -- -- --
--- --- --- ---
Net Income (Loss) 21 % (9) % 3 % (8) %
=== === === ===
</TABLE>
10
<PAGE> 11
Comparison of Three Months Ended June 30, 1998 and 1997.
Net sales for the three months ended June 30, 1998 were $2,964,033,
an increase of $833,584, or 39%, as compared to $2,130,448 for the comparable
three months in 1997. Transit Communications System ("TCS") group, Transit Media
GmbH and Digital Audio Company ("DAC") all realized increases over 1997 due to
higher demand of systems.
During the three months ended June 30, 1998, TCS sales increased
$240,219, or 24%, from the corresponding three months in the prior year. The TCS
business group is continuing to aggressively market its products; however, the
timing of large orders may continue to cause fluctuations in TCS revenues.
During the three months ended June 30, 1998, DAC sales increased
$189,408, or 47%, from the corresponding three months in the prior year. This
increase primarily related to higher international sales and completing a
$163,192 for the FBI.
During the three months ended June 30, 1998, Transit-Media sales
increased $447,904, or 87%, from the corresponding three months in the prior
year. This increase reflects the fact that this subsidiary was still in its
start-up phase in the comparable three months of the prior year. During the
three months ended June 30, 1998, TwinVision sales decreased $54,931 or 23%
primarily due to fluctuations in bus builders' production schedules.
Gross profit for the three months ended June 30, 1998 was $1,413,349,
an increase of $536,822 or 61%, over gross profit of $876,527 for the three
months ended June 30, 1997. As a percentage of sales, gross profit during the
three months ended June 30, 1998 was 48% of net sales, as compared to 41% during
the corresponding three months in 1997. The increase in gross profit percentage
was caused primarily by higher service and programming revenues at TCS which
have higher gross margins and higher sales at DAC having an 85.4% gross margin
percent.
Selling, general and administrative expenses during the three months
ended June 30, 1998 were $1,620,409, an increase of $513,462, or 46%, as
compared to expenses of $1,106,947 during the three months ended June 30, 1997.
This increase is attributable to the overall growth of the Company and,
specifically, to expense such as commissions and freight which are variable but
included in this classification of expenses.
Engineering, research and development expenses for the three months
ended June 30, 1998 were $249,278, an increase of $85,014, or 52%, as compared
to expenses of $164,264 during the three months ended June 30, 1997. This
increase related primarily to additional product development in every business
group but DAC.
Operating losses increased by $61,653 from $394,685 for the three
months ended June 30, 1997 to $456,338 for the three months ended June 30, 1998
primarily due to the factors set forth above.
Total other income (expense) for the three months ended June 30, 1998
was a net expense of $15,418, an increase of $27,301 as compared to other income
for the three months ended June 30, 1997 of $11,883. This difference 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 fund working capital needs.
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 June 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 carryforward for federal income tax
purposes of $2,845,535 as of December 31, 1997. This carryforward 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
carryforward for state income tax purposes of $758,446, which will be available
to offset future state taxable income, if any, through 2002. 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> 12
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 27, 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. Effective August 1, 1998 the secured line of credit facility
will be $3,000,000 and a $500,000 secured letter of credit facility through
February of 1999. 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 June 30, 1998,
there were $620,000 of borrowings outstanding under the line of credit
agreement. In addition, at June 30, 1998, there was $127,380 committed under
import letters of credit for inventory purchases from an overseas supplier.
As of June 30, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $100,060, accounts receivable of
$2,537,617 and short-term bank borrowings of $620,000 providing the Company with
net working capital of $4,031,019.
The Company's operating activities including the transaction
disposing of the discontinued HIS operation provided cash of $1,000,793 during
the six month period ended June 30, 1998 and used cash of $2,115,723 for six
months ended June 30, 1997. For the six month period ended June 30, 1998,
decreases in accounts receivable of $636,342 was the primary component of
changes in working capital. 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 provided cash of $97,490 and
$250,549 during the six month periods ended June 30, 1998 and 1997,
respectively. Investing activities during the six month period ended June 30,
1998 related primarily to the sale of assets in the disposition of the
discontinued HIS division. Investing activities during the six month period
ended June 30, 1997 related to capital expenditures of $88,349 and net proceeds
received from sale of short-term investments totaling $338,898.
The Company's financing activities used cash of $1,393,014 during the
six month period ended June 30, 1998 and provided cash of $982,090 during the
six month period ended June 30, 1997. Financing activities during the six month
period ended June 30, 1998 related to the net reduction of short-term bank
borrowings totaling $1,273,540 and to the payment of dividends on preferred
stock of $119,474. Cash received from the sale of the HIS division was primarily
used to reduce the short-term bank debt. Financing activities during the six
months ended June 30, 1997 related primarily to net proceeds from short-term
bank borrowings totaling $1,034,740 and to the payment of dividends on preferred
stock totaling $52,650.
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 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 Highway Information Systems 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. The Company is reviewing various
proposals which would provide additional capital resources to the Company.
12
<PAGE> 13
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
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 if warranted. 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. Based on the initial review of the computer systems, management does not
believe the cost of any remediation effort will be material to the Company's
financial performance.
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.
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) The annual meeting of shareholders was held June 30, 1998
(B) The following were elected directors to hold office for
one-year terms or until their successors are elected and
qualified.
Votes For Withheld
--------- --------
David L. Turney 2,488,551 17,660
J. Phillips L. Johnston 2,488,551 17,660
John D. Higgins, Sr 2,459,126 47,085
D. James Meese, Jr 2,486,867 19,344
John K. Pirotte 2,487,151 19,060
John M. Reeves, II 2,460,988 45,223
Juliann Tenney 2,488,551 17,660
John W. Thomas, Jr 2,488,551 17,660
(C) To consider and act upon a proposal to approve an
amendment to the Company's 1993 Incentive Stock Option
Plan to permit the issuance of an additional 150,000
shares of Common Stock pursuant to the Plan.
For 1,333,938
Against 60,595
Abstain 23,311
Not voted 1,088,367
(D) To consider and act upon a proposal to approve an
amendment to the Company's Articles of Incorporation to
(I) extend the mandatory redemption date of the shares of
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 be effective as of the
originally scheduled mandatory redemption date which
applies to each Preferred share.
For 1,362,150
Against 35,153
Abstain 20,541
Not Voted 1,088,367
(E) To ratify the appointment of McGladrey & Pullen LP as the
independent certified public accountants of the Company.
For 2,482,721
Against 11,000
Abstain 12,490
14
<PAGE> 15
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, dated April 14,
1998, regarding the divestiture of the Highway Information
Systems business group.
(C) The Company filed a report on Form 8-K, dated May 12, 1998,
regarding a change in the Company's independent public
accountants.
(D) 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.
(E) The Company filed a report on Form 8-K, dated August 5, 1998
regarding the Lite Vision Corporation Common Stock Share
Agreement.
(F) The Company filed a report on Form 8-K, dated August 5, 1998
regarding the Robinson-Turney International ("RTI")
Agreement and Plan of Reorganization.
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: August 14, 1998 By: /s/ DAVID L. TURNEY
--------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: August 14, 1998 By: /s/ LAWRENCE A. TAYLOR
-----------------------
Lawrence A. Taylor, Chief Financial Officer
15
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 100,060
<SECURITIES> 0
<RECEIVABLES> 2,614,959
<ALLOWANCES> (50,000)
<INVENTORY> 3,840,252
<CURRENT-ASSETS> 6,596,616
<PP&E> 698,902
<DEPRECIATION> (389,787)
<TOTAL-ASSETS> 8,693,760
<CURRENT-LIABILITIES> 2,440,829
<BONDS> 0
1,770,000
0
<COMMON> 267,407
<OTHER-SE> 4,215,524
<TOTAL-LIABILITY-AND-EQUITY> 8,693,760
<SALES> 2,964,033
<TOTAL-REVENUES> 2,964,033
<CGS> 1,550,684
<TOTAL-COSTS> 1,550,684
<OTHER-EXPENSES> 1,869,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,739
<INCOME-PRETAX> (471,757)
<INCOME-TAX> 0
<INCOME-CONTINUING> (471,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,097,012
<CHANGES> 0
<NET-INCOME> 585,430
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