<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, 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)
4018 PATRIOT DRIVE, SUITE 100
DURHAM , NORTH CAROLINA 27709
(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 August 5, 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
<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>
June 30, 1999 December 31, 1998
ASSETS (Unaudited) Audited
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 216,838 $ 703,639
Trade accounts receivable, less allowance for doubtful accounts of $50,000 3,745,471 3,371,365
at June 30, 1999 and December 31, 1998, respectively
Other receivables 59,542 38,799
Inventories 4,529,129 4,047,830
Prepaids and other current assets 588,342 148,911
-------------- --------------
Total current assets 9,139,322 8,310,544
-------------- --------------
Property and equipment, less accumulated depreciation of 415,269 315,550
$424,132 and $354,179 at June 30, 1999 and December 31, 1998, respectively
Goodwill, less accumulated amortization of $623,422 and $546,679 1,284,993 1,361,756
at June 30, 1999 and December 31, 1998, respectively
Intangible assets, less accumulated amortization of $276,092 and $409,251 111,309 298,149
at June 30, 1999 and December 31, 1998, respectively
Other assets 5,451 5,451
-------------- --------------
TOTAL ASSETS $ 10,956,344 $ 10,291,450
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $ 1,705,000 $ 925,000
Accounts payable 2,296,447 1,479,739
Accrued expenses 251,976 313,991
Accrued commissions 367,131 368,272
Accrued warranty reserve 60,000 49,977
Dividends payable 41,800 39,825
-------------- --------------
Total current liabilities 4,722,354 3,176,804
-------------- --------------
TOTAL LIABILITIES 4,722,354 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 June 30, 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 June 30, 1999
and at December 31, 1998 327,407 327,407
Additional paid-in capital 11,423,590 11,507,190
Accumulated other comprehensive income - foreign currency translation (257,650) (48,839)
Accumulated deficit (7,029,357) (6,441,112)
-------------- --------------
Total stockholders' equity 4,463,990 5,344,646
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,956,344 $ 10,291,450
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 4,956,272 $ 2,964,033 $ 8,995,643 $ 5,172,408
Cost of sales 3,350,222 1,560,729 5,700,968 2,927,428
------------ ------------ ------------ ------------
Gross profit 1,606,050 1,403,304 3,294,675 2,244,980
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 1,560,157 1,610,365 2,959,506 2,812,615
Engineering, research and development 335,367 249,278 731,682 462,526
------------ ------------ ------------ ------------
Total operating expenses 1,895,524 1,859,643 3,691,188 3,275,141
------------ ------------ ------------ ------------
Operating income (loss) (289,474) (456,339) (396,513) (1,030,161)
Other income (expense), net (36,792) (15,418) (56,965) (58,520)
------------ ------------ ------------ ------------
Income (loss) before income taxes (326,266) (471,757) (453,478) (1,088,681)
Income tax expense (benefit) 2,167 (425,656) 3,080 (478,480)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (328,433) (46,101) (456,558) (610,201)
------------ ------------ ------------ ------------
Discontinued operations:
Income (loss) from operations of HIS division, net of tax -- -- -- 84,123
Gain on sale of HIS division, net of tax -- 671,356 -- 671,356
------------ ------------ ------------ ------------
Income (loss) from discontinued operations -- 671,356 -- 755,479
------------ ------------ ------------ ------------
Net income (loss) (328,433) 625,255 (456,558) 145,278
Preferred dividend requirements (41,800) (39,825) (83,600) (79,650)
------------ ------------ ------------ ------------
Net income (loss) before change in accounting principle (370,233) 585,430 (540,158) 65,628
Less: Cumulative effect of change in accounting principle -- -- 131,686 --
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders $ (370,233) $ 585,430 $ (671,844) $ 65,628
============ ============ ============ ============
Earnings per share:
Net Income (loss) from continuing operations before income taxes $ (0.10) $ (0.18) $ (0.14) $ (0.41)
Income tax expense (benefit) -- 0.16 -- 0.18
Net income (loss) from discontinued operations, net of tax -- 0.25 -- 0.28
Preferred dividend requirements (0.01) (0.01) (0.03) (0.03)
Cumulative effect of change in accounting principle -- -- (0.04) --
------------ ------------ ------------ ------------
Total basic and diluted net income (loss) per share $ (0.11) $ 0.22 $ (0.21) $ 0.02
============ ============ ============ ============
Weighted average number of common shares and common
equivalent shares outstanding 3,274,075 2,674,075 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
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ (328,433) $ 625,255 $ (588,244) $ 145,278
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization of property and equipment 35,760 62,637 69,954 131,966
Amortization of goodwill and intangible assets 53,474 58,052 120,831 130,257
Net book value of intangible assets written off -- -- 131,686 --
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable (390,687) 495,401 (374,105) 636,342
Decrease (increase) in other receivables 4,622 10,871 (16,508) 26,946
Decrease (increase) in inventories 132,959 200,331 (481,299) 7,962
Decrease (Increase) in prepaids and other current assets (171,660) 31,643 (439,431) (16,859)
Decrease (increase) in intangible assets 270 4,826 11,085 (4,565)
Decrease in other assets -- 113,243 -- 437
Increase (decrease) in accounts payable 785,209 (399,962) 659,958 48,706
Increase (decrease) in accrued expenses 24,467 (92,177) 151,334 (92,613)
(Decrease) in deferred revenue -- -- -- (80,585)
Increase in other current liabilities -- 67,521 (49,977) 67,521
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities 145,981 1,177,641 (804,716) 1,000,793
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (98,314) (177,471) (169,672) (231,022)
Sales of property and equipment -- 193,206 -- 193,206
Sales of intangible assets -- 10,538 -- 10,538
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities (98,314) 26,273 (169,672) (27,278)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 705,000 1,320,000 1,780,000 3,629,460
Principal payments on short-term bank borrowings (550,000) (3,153,000) (1,000,000) (4,903,000)
Payment of dividends on preferred stock (41,800) (79,649) (83,600) (119,474)
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities 113,200 (1,912,649) 696,400 (1,393,014)
----------- ----------- ----------- -----------
Effect of exchange rate changes (57,005) 90,808 (208,813) 47,274
----------- ----------- ----------- -----------
Net (decrease) in cash and cash equivalents 103,862 (617,927) (486,801) (372,225)
Cash and cash equivalents at beginning of period 112,976 717,987 703,639 472,285
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 216,838 $ 100,060 $ 216,838 $ 100,060
=========== =========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 34,576 $ 57,499 $ 53,526 $ 85,775
=========== =========== =========== ===========
Cash paid during the period for income taxes $ 118,915 $ -- $ 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 June 30, 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 June 30, 1999 and 1998, respectively.
The Company paid $41,800 and $39,825 in cash dividends in the three month
periods ended June 30, 1999 and 1998, respectively.
6
<PAGE> 7
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 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
June 30, 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 six month periods
ended June 30, 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 June 30, 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)
June 30, 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 June 30, 1999, the Company had borrowed $1,705,000 against
the availability of $2,434,124.
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 which was subsequently extended to August 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 existing 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 June 30, 1998 totaled
$685,930 and have been excluded from the net sales amount for the three
month period ended June 30, 1998. The net operating income, net of tax for
the three month period ended June 30, 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)
June 30, 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 June 30,
1999 1998
------------- ------------
<S> <C> <C>
Net sales
Transportation products $ 4,496,755 $ 2,375,704
Law enforcement and surveillance 459,517 588,329
------------- -------------
$ 4,956,272 $ 2,964,033
============= =============
Income (loss) from operations
Transportation products $ 53,708 $ (174,107)
Law enforcement and surveillance 139,824 304,360
Corporate office and administration (483,006) (586,592)
------------- -------------
$ (289,474) $ (456,339)
============= =============
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Identifiable assets
Transportation products $ 7,848,359 $ 7,584,136
Law enforcement and surveillance 2,530,385 2,457,252
Corporate office and administration 577,600 250,062
------------- -------------
$ 10,956,344 $ 10,291,450
============= =============
Depreciation and amortization
Transportation products $ 26,107 $ 32,340
Law enforcement and surveillance 45,587 40,373
Corporate office and administration 17,540 47,975
------------- -------------
$ 89,234 $ 120,689
============= =============
</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 July 26, 1999, the Company's Board of Directors declared a
dividend on Series AAA Preferred Stock for stockholders of record as of
June 30, 1999. The dividends totaled $41,800.
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 signal
processing 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 JUNE 30
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales ............................................................................. 100.0% 100.0%
Cost of sales ......................................................................... 67.6 52.7
------------ ------------
Gross profit .................................................................... 32.4 47.3
------------ ------------
Operating expenses:
Selling, general and administrative ............................................. 31.4 54.3
Engineering, research and development ........................................... 6.8 8.4
------------ ------------
Total operating expenses ................................................... 38.2 62.7
------------ ------------
Operating income (loss) ......................................................... (5.8) (15.4)
Other income (expense), net ........................................................... (0.7) (0.5)
------------ ------------
Income (loss) before income taxes from continuing operations .................... (6.5) (15.9)
Income tax expense (benefit) .......................................................... -- (14.4)
------------ ------------
Income (loss) from continuing operations before accounting change ............... (6.5) (1.5)
Less: Change in accounting ........................................................... -- --
Discontinued operations:
Income (loss) from operations of HIS division, net of tax .................. -- 22.6
============ ============
Net income (loss) ..................................................................... (6.5)% 21.1%
============ ============
</TABLE>
Comparison of Three Months Ended June 30, 1999 and 1998
Net sales for the three months ended June 30, 1999 were $4,956,272, an
increase of $1,992,239 or 67%, as compared to $2,964,033 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 June 30, 1999, TPS sales increased
$2,121,051 or 89% from the corresponding three months in the prior year. TPS
sales increased from $2,375,704 in 1998 to $4,496,755 in 1999. This significant
increase is primarily the result of additional market share capture and market
acceptance of the TwinVision LeDot(R) Destination Sign System.
During the three months ended June 30, 1999, DAC sales decreased
$128,812, or 21.9%, from the corresponding three months in the prior year. DAC
sales decreased from $588,329 in 1998 to $459,517 in 1999. Such quarter over
quarter differences are normal for this type of business as DAC does not
specifically work from any significant backlog.
Gross profit for the three months ended June 30, 1999 was $1,606,050,
an increase of $202,746 or 14.4%, over gross profit of $1,403,304 for the three
months ended June 30, 1998. As a percentage of sales, gross profit during the
three months ended June 30, 1999 was 32.4 % net sales, as compared to 47.3%
during the corresponding three months in 1998 The decrease in gross profit
percentage was caused primarily by a lower percentage of sales in DAC which
historically has higher gross margins than the TPS business units.
Selling, general and administrative expenses during the three months
ended June 30, 1999 were $1,560,157, a decrease of $50,208 or 3.1% as compared
to expenses of $1,610,365 during the three months ended June 30, 1998. This
increase was attributed primarily to personnel actions.
Engineering, research and development expenses for the three months
ended June 30, 1999 were $335,367, an increase of $86,089, or 34.5%, as
compared to expenses of $249,278 during the three months ended June 30, 1998.
This increase related primarily to additional hardware and software engineering
personnel for sustaining product engineering and new product development.
11
<PAGE> 12
Operating losses decreased by $166,865 from $456,339 for the three
months ended June 30, 1998 to $289,474 for the three months ended June 30, 1999
primarily due to the factors set forth above.
Total other income (expense) for the three months ended June 30, 1999
was a net expense of $36,792, an increase of $21,374 as compared to a net
expense for the three months ended June 30, 1998 of $15,418. This increase is
primarily the result of higher interest expense in the three months ended June
30, 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 June 30, 1999 and 1998, the Company did not record any U.S.
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 June 30, 1999, there were $1,705,000 of borrowings outstanding
under the line of credit agreement. This secured line of credit facility has
been extended to August 31, 1999 as the Company concludes negotiations for a
larger credit facility with a new lending entity.
As of June 30, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $216,838, trade accounts receivable of
$3,745,471, inventory of $4,529,129, short-term bank borrowings of $1,705,000
and trade accounts payable of $2,296,447 providing the Company with net working
capital of $4,416,968.
The Company's operating activities provided cash of $145,981 and
$1,177,641 during the three-month period ended June 30, 1999 and 1998,
respectively. For the three-month period ended June 30, 1999, the net operating
loss, increases in trade receivables and other assets were offset by increases
in accounts payable and decreases in inventory. For the three-month period
ended June 30, 1998 the net operating income, decreases in trade receivables,
inventory and other assets were offset by decreases in accounts payable and
accrued expenses. Working capital requirements will increase with growth in the
Company's sales wherein significant spans of time between the time the Company
must pay its suppliers and the time the Company receives payment from its
customers are experienced.
The Company's investing activities used cash of $98,314 during the
three-month period ended June 30, 1999 and provided $26,273 during the
three-month period ended June 30, 1998. During both periods, the use of cash
was primarily for computer system related expenditures, while sale of assets in
the disposition of the discontinued HIS division provided the June 30, 1998
cash.
12
<PAGE> 13
The Company's financing activities provided cash of $113,200 during
the three-month period ended June 30, 1999 and used cash of $1,912,649 during
the three-month period ended June 30, 1998. Financing activities during the
three-month period ended June 30, 1999 related to the net increase in short
term borrowing of $155,000 and the payment of dividends on preferred stock of
$41,800. Financing activities during the three-month period ended June 30, 1998
related to the net reduction of short-term bank borrowings totaling $1,833,000
and the payment of dividends on preferred stock of $79,649. Cash received from
the sale of the HIS division was primarily used to reduce the short-term bank
debt.
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 existing and anticipated credit facilities, 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 1999.
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 as of this date
has updated approximately ninety-five percent (95%) of the internal systems
including hardware and software to Year 2000 compliance. 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 progress to date,
management does not anticipate any additional material expenditures to achieve
complete Year 2000 compliance.
13
<PAGE> 14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 24, 1999, Mark IV Industries, Ltd. ("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, alleging the Company
is infringing two U.S. patents held by Mark IV and seeking unspecified monetary
damages, treble damages, and injunctive relief. 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. On
April 7, 1999, the Company filed an answer to the complaint, in which it denied
all the plaintiff's allegations and asserted counterclaims against Mark IV,
including alleged violations of the antitrust laws. The Company has
subsequently filed amended answers and counterclaims, and has moved for summary
judgment of noninfringement.
In a separate action filed July 26, 1999, also in the United States
District Court for the Northern District of Texas, Mark IV further alleged the
Company is infringing a continuation patent related to one of the two patents
that is the subject of the lawsuit filed in February described above. In this
second action, Mark IV asserts similar claims and seeks similar relief. The
Company intends to move to have the court consolidate the two actions, as they
relate to substantially the same facts and circumstances. 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. On April 27, 1999, that patent issued, and a continuation of
that patent presently is pending in the United States Patent and Trademark
Office. The Company believes that Lite Vision's U.S. and foreign patents, and
patents pending, will support the Company's position in both matters described
above.
The Company believes Mark IV's claims and allegations, in both
actions, are without merit. The Company 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
(A) The annual meeting of shareholders was held April 26, 1999.
(B) The following were elected directors to hold office for
one-year terms or until their successors are elected and
qualified.
<TABLE>
<CAPTION>
Votes For Witheld
--------- -------
<S> <C>
David L. Turney 2,675,017 503,751
J. Phillips L. Johnston 2,675,017 503,751
John D. Higgins, Sr. 2,672,454 503,751
James C. Meese, Jr. 2,672,508 503,751
John K. Pirotte 2,672,454 503,751
John M. Reeves, II 2,675,017 503,751
Juliann Tenney 2,675,017 503,751
Joseph Tang 2,675,017 503,751
</TABLE>
14
<PAGE> 15
(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 160,000 shares of Common Stock
pursuant to the Plan.
<TABLE>
<S> <C>
For 2,657,797
Against 103,765
Abstain 8,762
Not voted 503,751
</TABLE>
(D) To ratify the appointment of McGladrey & Pullen LP as the
independent certified public accountants of the Company.
<TABLE>
<S> <C>
For 2,686,420
Against 3,847
Abstain 80,057
Not voted 503,751
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS
<S> <C>
27 Financial Data Schedule
</TABLE>
15
<PAGE> 16
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: August 5, 1999 By:/s/ DAVID L. TURNEY
-----------------------------------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: August 5, 1999 By:/s/ LAWRENCE A. TAYLOR
-----------------------------------------------
Lawrence A. Taylor, Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 216,838
<SECURITIES> 0
<RECEIVABLES> 3,855,013
<ALLOWANCES> (50,000)
<INVENTORY> 4,529,129
<CURRENT-ASSETS> 9,139,322
<PP&E> 839,401
<DEPRECIATION> 424,132
<TOTAL-ASSETS> 10,956,344
<CURRENT-LIABILITIES> 4,722,354
<BONDS> 0
1,770,000
0
<COMMON> 327,407
<OTHER-SE> 41,136,583
<TOTAL-LIABILITY-AND-EQUITY> 10,956,344
<SALES> 4,956,272
<TOTAL-REVENUES> 4,956,272
<CGS> 3,350,222
<TOTAL-COSTS> 3,350,222
<OTHER-EXPENSES> 1,895,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (36,792)
<INCOME-PRETAX> (326,266)
<INCOME-TAX> 2,167
<INCOME-CONTINUING> (328,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (41,800)
<NET-INCOME> (370,233)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
