<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 MARCH 31, 1999.
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 May 7, 1999
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
Financial Statements:
<S> <C>
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>
March 31, 1999 December 31, 1998
ASSETS (Unaudited) (Audited)
-------------- -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 112,975 $ 703,639
Trade accounts receivable, less allowance for doubtful accounts of $50,000 3,354,783 3,371,365
at March 31, 1999 and December 31, 1998, respectively
Other receivables 59,929 38,799
Inventories 4,662,088 4,047,830
Prepaids and other current assets 416,682 148,911
------------ ------------
Total current assets 8,606,457 8,310,544
------------ ------------
Property and equipment, less accumulated depreciation of 352,714 315,550
$388,373 and $354,179 at March 31, 1999 and December 31, 1998, respectively
Goodwill, less accumulated amortization of $585,060 and $546,679 1,323,375 1,361,756
at March 31, 1999 and December 31, 1998, respectively
Intangible assets, less accumulated amortization of $260,999 and $409,251 126,672 298,149
at March 31, 1999 and December 31, 1998, respectively - See Note 8
Other assets 5,451 5,451
------------ ------------
TOTAL ASSETS $ 10,414,669 $ 10,291,450
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $ 1,550,000 $ 925,000
Accounts payable 1,354,487 1,479,739
Accrued expenses 447,081 313,991
Accrued commissions 360,074 368,272
Income tax payable -- 49,977
Dividends payable 41,800 39,825
Deferred revenue -- --
------------ ------------
Total current liabilities 3,753,442 3,176,804
------------ ------------
TOTAL LIABILITIES 3,753,442 3,176,804
------------ ------------
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 March 31, 1999 and December 31, 1998, 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 March 31, 1999
and at December 31, 1998 327,407 327,407
Additional paid-in capital 11,465,390 11,507,190
Accumulated other comprehensive income - foreign currency translation (200,647) (48,839)
Accumulated deficit (6,700,923) (6,441,112)
------------ ------------
Total stockholders' equity 4,891,227 5,344,646
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,414,669 $ 10,291,450
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
<S> <C> <C>
Net sales $ 4,039,371 $ 2,208,375
Cost of sales 2,350,746 1,366,699
----------- -----------
Gross profit 1,688,625 841,676
----------- -----------
Operating expenses:
Selling, general and administrative 1,399,349 1,202,250
Engineering, research and development 396,316 213,248
----------- -----------
Total operating expenses 1,795,665 1,415,498
----------- -----------
Operating income (loss) (107,040) (573,822)
Other income (expense), net (20,172) (43,102)
----------- -----------
Income (loss) before income taxes (127,212) (616,923)
Income tax expense (benefit) 913 (52,824)
----------- -----------
Income (loss) from continuing operations (128,125) (564,099)
Discontinued operations:
Income (loss) from operations of HIS division, net of tax 84,123
----------- -----------
Net income (loss) (128,125) (479,976)
Preferred dividend requirements (41,800) (39,825)
----------- -----------
Net income (loss) before change in accounting (169,925) (519,801)
Less: Accumulative effect of change in accounting principle - see Note 8 131,686
----------- -----------
Net income (loss) applicable to common shareholders $ (301,611) $ (519,801)
=========== ===========
Earnings per share:
Net Income (loss) from continuing operations $ (0.05) $ (0.23)
Net loss from change in accounting (0.04)
Net income (loss) from discontinued operations 0.04
----------- -----------
Total basic and diluted net income (loss) per share $ (0.09) $ (0.19)
=========== ===========
Weighted average number of common shares and common
equivalent shares outstanding 3,274,075 2,674,075
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (259,811) $ (479,977)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation of property and equipment 34,194 69,329
Amortization of goodwill and intangible assets 67,357 72,205
Net book value of intangible assets written off 131,686 --
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 16,582 140,941
Decrease (increase) in other receivables (21,130) 16,075
(Increase) in inventories (614,259) (192,369)
(Increase) in prepaids and other current assets (267,770) (48,502)
Decrease (Increase) in intangible assets 10,815 (9,391)
(Increase) in other assets -- (112,806)
Increase (decrease) in accounts payable (125,251) 448,668
Increase (decrease) in accrued expenses and commissions 126,867 (436)
(Decrease) in deferred revenue -- (80,585)
(Decrease) in income tax payable (49,977) --
----------- -----------
Net cash used by operating activities (950,697) (176,848)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (71,358) (53,551)
Cash flows from financing activities:
Proceeds from short-term bank borrowings 1,075,000 2,309,460
Principal payments on short-term bank borrowings (450,000) (1,750,000)
Payment of dividends on preferred stock (41,800) (39,825)
----------- -----------
Net cash provided by financing activities 583,200 519,635
----------- -----------
Effect of exchange rate changes (151,809) (43,534)
----------- -----------
Net increase (decrease) in cash and cash equivalents (590,664) 245,702
Cash and cash equivalents at beginning of period 703,639 472,285
----------- -----------
Cash and cash equivalents at end of period $ 112,975 $ 717,987
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 18,950 $ 28,276
=========== ===========
Cash paid during the year for income taxes $ 118,915 $ --
=========== ===========
</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 March 31, 1999 and 1998
Supplemental disclosures of non cash financing activities:
The Company declared $41,800 and $39,825 in dividends on Series AAA Preferred
Stock in the three month periods ended March 31, 1999 and 1998, respectively.
The Company paid $39,825 in cash dividends in each of the three month periods
ended March 31, 1999 and 1998.
6
<PAGE> 7
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1999 and 1998
(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, 1998. The results of operations for the
three months ended March 31, 1999 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 March 31, 1999 and 1998,
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
$41,800 and $39,825 for each of the three month periods ended March 31,
1999 and 1998, 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)
March 31, 1999 and 1998
(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 March 31,
1999, the Company had borrowed $1,550,0000 against the availability of
$2,346,087.
On March 25, 1999, the Company extended its $3,000,000 secured
line of credit facility and $500,000 secured letter of credit facility
through July 31, 1999 as the Company concludes negotiations for a
larger credit facility with a new lending entity.
(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 existed as of
December 31, 1998, totaled approximately $425,656. Net proceeds to the
Company were used primarily to reduce bank borrowings under the
Company's secured line of credit facility. Operating revenues for the
quarter ended March 31, 1998 totaled $685,930 and have been excluded
from the net sales amount for the three month period ended March 31,
1998. The net operating income, net of tax for the three month period
ended March 31, 1998 was $84,123.
(7) Segment Information
The Company has two principal business segments which are
based upon differences in products and technology: (1) transportation
products and (2) law enforcement and surveillance. The transportation
products segment produces automated announcement and passenger
information systems and electronic destination sign products for
municipalities, transportation districts, departments of transportation
and bus manufacturers. The law enforcement and surveillance segment
produces digital signal processing products for law enforcement
agencies and organizations.
Operating income (loss) for each segment is total sales less
operating expenses applicable to the segment. Certain corporate
overhead expenses including executive salaries and benefits, public
company administrative expenses, legal and audit fees, and interest
expense are not included in segment operating income (loss). Segment
identifiable assets include accounts receivable, inventories, net
property and equipment, net intangible assets and net goodwill.
8
<PAGE> 9
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
March 31, 1999 and 1998
(7) Segment Information, continued
Sales, operating income (loss), identifiable assets and
depreciation and amortization information for the Company's two
operating segments are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
1999 1998
------------ ------------
<S> <C> <C>
Net sales
Transportation products $ 3,336,778 $ 1,935,665
Law enforcement and surveillance 702,593 272,710
------------ ------------
$ 4,039,371 $ 2,208,375
============ ============
Income (loss) from operations
Transportation products $ 53,708 $ (301,105)
Law enforcement and surveillance 322,258 7,556
Corporate office and administration (483,006) (280,273)
------------ ------------
$ (107,040) $ (573,822)
============ ============
Identifiable assets
Transportation products $ 7,808,003 $ 8,233,253
Law enforcement and surveillance 2,414,763 1,891,645
Corporate office and administration 191,903 190,066
------------ ------------
$ 10,414,669 $ 10,314,964
============ ============
Depreciation and amortization - see Note 8
Transportation products $ 66,652 $ 50,555
Law enforcement and surveillance 88,415 45,445
Corporate office and administration 78,170 19,205
------------ ------------
$ 233,237 $ 141,444
============ ============
</TABLE>
(8) Pronouncement Issued
In April, 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities, which requires start-up activities, including organization
costs to be expensed as incurred. The impact of this pronouncement
required the Company to charge against operations, as a cumulative
effect of a change in accounting principle in the three month period
ended March 31, 1999 $131,686 of organization costs to conform with
this statement.
(9) Subsequent Events
On April 26, 1999, the Company's Board of Directors declared a
dividend on Series AAA Preferred Stock for stockholders of record as of
March 31, 1999. The dividends totaled $41,800.
On April 26, 1999, the Board of Directors 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, 2000. 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") incorporated in 1983 designs,
manufactures or contracts for the manufacturing of, and sells information
technology products primarily through two major business segments. These
segments are 1) the transportation products segment ("TPS"); and, 2) the law
enforcement and surveillance segment. TPS consists of Transit Communication
Systems ("TCS") and two wholly-owned subsidiaries, Transit-Media GmbH
("Transit-Media") and TwinVision Corp. of North America, Inc. ("TwinVision").
The Company's TPS products are marketed to the mass transit market. TPS
customers include municipalities, regional transportation districts, federal,
state, and local departments of transportation, transit agencies, turnpikes, and
bus manufacturers. The law enforcement and surveillance segment of the Company
is known as Digital Audio Company ("DAC") and serves the law enforcement market
consisting of foreign and U.S. federal, state, and local law enforcement
agencies or organizations.
The TCS group focuses on supplying the public transit market with
Automatic Voice Announcement Systems ("AVAS") and services. The DR500C Talking
Bus system marketed by the Company includes four core components: a vehicle
logic unit (the DR500C), an Operator Control Unit ("OCU"), an internal
light-emitting diode ("LED") sign and a Global Positioning Satellite ("GPS")
navigation system. The Talking Bus system automatically provides voice
announcements including next stop, transfer points, route and destination
identification and public service messages. This system enhances public transit
service for all passengers and complies with Americans with Disabilities Act
("ADA") legislation. The demonstrated and ongoing integration of the DR500C
product with other "smart bus" technologies is a key element for potential
market growth. Customers include transit operating agencies which use mass
transit vehicles, commercial bus transportation vehicle operators, and
manufacturers of those vehicles.
Transit-Media became a wholly owned subsidiary of Digital Recorders
after being acquired by the Company in May 1996 (see "Acquisitions"). Shortly
thereafter, the Company formed TwinVision as another wholly owned subsidiary of
the Company. Both of these subsidiaries design, manufacture or contract for
manufacture of, sell and service a new generation of electronic destination sign
systems primarily used on transit bus vehicles worldwide. Transit-Media serves
the European and Far Eastern markets while TwinVision serves the NAFTA market.
Customers include transit operating agencies which use mass transit vehicles as
well as the manufacturers of those vehicles.
The DAC group was established in 1995 upon the Company's acquisition of
Digital Audio Corporation. The DAC group produces a line of digital filter
systems and tape transcribers used to improve the quality and intelligibility of
live and recorded voices. Products are marketed, both domestically and
internationally, to law enforcement entities and other customers in government
organizations.
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.
10
<PAGE> 11
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 MARCH 31
---------------------------
1999 1998
----- -----
<S> <C> <C>
Net sales................................................................. 100.0 % 100.0 %
Cost of sales............................................................. 58.2 61.9
----- -----
Gross profit........................................................ 41.8 38.1
----- -----
Operating expenses:....................................................... --
Selling, general and administrative................................. 34.7 54.4
Engineering, research and development............................... 9.8 9.7
----- -----
Total operating expenses....................................... 44.5 64.1
----- -----
Operating income (loss)............................................. (2.7) (26.0)
Other income (expense), net............................................... (0.5) (2.0)
----- -----
Income (loss) before income taxes from continuing operations........ (3.2) (27.9)
Income tax expense (benefit).............................................. -- (2.4)
----- -----
Income (loss) from continuing operations before accounting change... (3.2) (25.5)
Less: Change in accounting............................................... (3.2)
Discontinued operations:
Income (loss) from operations of HIS division, net of tax 3.8
----- -----
Net income (loss)......................................................... (6.4)% (21.7)%
===== =====
</TABLE>
Comparison of Three Months Ended March 31, 1999 and 1998
Net sales for the three months ended March 31, 1999 were $4,039,371 an
increase of $1,830,996 or 83%, as compared to $2,208,375 for the comparable
three months in 1998. Increased sales resulting from an increase in market share
in the TPS was the most significant factor contributing to the increase.
During the three months ended March 31, 1999, TCS sales increased
$766,118 or 76.1% from the corresponding three months in the prior year. TCS
sales increased from $1,007,329 in 1998 to $1,773,447 in 1999. 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 March 31, 1999, DAC sales increased
$429,883, or 157.6%, from the corresponding three months in the prior year. DAC
sales increased from $272,710 in 1998 to $702,593 in 1999. A significant
government order completed at the end March accounted for this increase.
Transit-Media sales increased 12.6% from $342,375 in the first quarter
in 1998 to $385,454 in 1999.
During the three months ended March 31, 1999, TwinVision sales
increased $591,892 or 101%. TwinVision sales increased from $585,962 in 1998 to
$1,177,854 in 1999. 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 March 31, 1999 was $1,688,625,
an increase of $846,949 or 100.6%, over gross profit of $841,676 for the three
months ended March 31, 1998. As a percentage of sales, gross profit during the
three months ended March 31, 1999 was 41.8% of net sales, as compared to 38.1%
during the corresponding three months in 1997. The increase in gross profit
percentage was caused primarily by a higher percentage of sales in DAC which
historically has higher gross margins than the TPS business units.
11
<PAGE> 12
Selling, general and administrative expenses during the three months
ended March 31, 1999 were $1,399,349, an increase of $197,099 or 16.4% as
compared to expenses of $1,202,250 during the three months ended March 31, 1998.
This increase was attributed primarily to higher payroll and related fringe
benefits plus increases in outside services.
Engineering, research and development expenses for the three months
ended March 31, 1999 were $396,316, an increase of $183,068, or 85.8%, as
compared to expenses of $213,248 during the three months ended March 31, 1998.
This increase related primarily to additional engineering personnel for
sustaining product engineering and product development.
Operating losses decreased by $466,782 from $573,822 for the three
months ended March 31, 1998 to $107,040 for the three months ended March 31,
1999 primarily due to the factors set forth above.
Total other income (expense) for the three months ended March 31, 1999
was a net expense of $20,172, a decrease of $22,930 as compared to a net expense
for the three months ended March 31, 1998 of $43,102. This decrease primarily
the result of lower interest expense in the three months ended March 31, 1999.
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 March 31, 1999 and 1998, 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 $2,342,020 as of December 31, 1998. This carry forward will be available to
offset federal taxable income, if any, through 2006 to 2012. Also, as of
December 31, 1998, one of the Company's subsidiaries had a net economic loss
carry forward for state income tax purposes of $1,524,112, which will be
available to offset future state taxable income, if any, through 2002 and 2003.
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 1999. At 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 March 31, 1999,
there were $1,550,000 of borrowings outstanding under the line of credit
agreement. This secured line of credit facility has been extended to July 31,
1999 as the Company concludes negotiations for a larger credit facility with a
new lending entity.
As of March 31, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $112,975, trade accounts receivable of
$3,354,783, inventory of $4,662,088 and short-term bank borrowings of $1,550,000
providing the Company with net working capital of $4,853,015.
The Company's operating activities used cash of $950,697 and $176,848
during the three months ended March 31, 1999 and 1998, respectively. For the
three months ended March 31, 1999, an increase in inventories and higher prepaid
and other assets accounted for the majority of net cash used. For the three
months ended March 31, 1998, the net operating loss and was primarily offset by
an increase in trade accounts payable. 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 $71,358 and $53,551 in
the three months ended March 31,1999 and 1998, respectively. During both
periods, the use of cash was primarily for computer systems related
expenditures.
12
<PAGE> 13
The Company's financing activities provided net cash of $583,200 and
$519,635 during the three month periods ended March 31, 1999 and 1998,
respectively and related to the net increase in short term bank 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 has conducted a review of its computer systems to identify
the systems that could be affected by the Year 2000 issue, and has developed a
remediation plan. 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, 1999.
Based on the review of the computer systems and remediation plan,
management does not anticipate any additional material expenditures to achieve
Year 2000 compliance.
13
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company received a demand letter dated February 23, 1999
from counsel for Mark IV Industries, Ltd. ("Mark IV") alleging that the Company
is infringing two U.S. patents held by Mark IV. The letter requested a response
from the Company by March 17, 1999. On February 24, 1999, Mark IV filed a
lawsuit, Mark IV Industries, Ltd. v. Digital Recorders, Inc., in the United
States District Court for the Northern District of Texas based on the same
allegations and seeking unspecified monetary damages, treble damages, and
injunctive relief. As of March 15, 1999, Mark IV has not served the Company with
that lawsuit. The allegations relate to the display elements used in the
destination sign systems manufactured and marketed by a subsidiary of the
Company under an exclusive license for the technology from Lite Vision
Corporation ("Lite Vision") of Taiwan. Lite Vision also supplies certain display
components and assemblies used in the systems. The Company previously announced
on February 16, 1999 that Lite Vision had received notice of impending issuance
of a U.S. patent on the technology used in the sign systems product. The Company
believes that this pending patent, when issued by the United States Patent and
Trademark Office, will support the Company's position in this matter.
The Company believes Mark IV's claims are without merit and intends to
defend itself vigorously by all available legal means. However, there can be no
assurance that the Company will be successful in its defense of this matter or
that any liabilities or costs incurred in connection therewith will not have a
material impact on the Company's financial condition. The Company has entered
into a joint defense agreement pursuant to which a third party will bear a
portion of the defense costs. The Company also has certain contractual rights to
indemnification relating to the technology that is the subject of this dispute.
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
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: May 7, 1999 By: /s/ DAVID L. TURNEY
----------------------------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: May 7, 1999 By: /s/ LAWRENCE A. TAYLOR
----------------------------------------
Lawrence A. Taylor, Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGITAL RECORDERS, INC. FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 112,975
<SECURITIES> 0
<RECEIVABLES> 3,464,712
<ALLOWANCES> (50,000)
<INVENTORY> 4,662,088
<CURRENT-ASSETS> 8,606,457
<PP&E> 741,087
<DEPRECIATION> 388,373
<TOTAL-ASSETS> 10,414,669
<CURRENT-LIABILITIES> 3,753,442
<BONDS> 0
1,770,000
0
<COMMON> 327,407
<OTHER-SE> 4,563,820
<TOTAL-LIABILITY-AND-EQUITY> 10,414,669
<SALES> 4,039,371
<TOTAL-REVENUES> 4,039,371
<CGS> 2,350,746
<TOTAL-COSTS> 2,350,746
<OTHER-EXPENSES> 1,795,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20,172)
<INCOME-PRETAX> (127,212)
<INCOME-TAX> 913
<INCOME-CONTINUING> (128,125)
<DISCONTINUED> 0
<EXTRAORDINARY> (131,686)
<CHANGES> 0
<NET-INCOME> (301,611)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
