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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for the transition period from
____________ to ____________
Commission file number: 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer in its charter)
NORTH CAROLINA 56-1362926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 ENGLERT DRIVE, SUITE B
DURHAM, NORTH CAROLINA 27713
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (919) 361-2155
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
COMMON STOCK, $.10 PAR VALUE BOSTON STOCK EXCHANGE, INC.
WARRANTS TO PURCHASE COMMON STOCK BOSTON STOCK EXCHANGE, INC.
Securities registered pursuant to section 12(g) of the Exchange Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 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
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
The issuer's revenues for its most recent fiscal year were $14,239,251.
As of March 3, 1999, 3,274,075 shares of the issuer's Common Stock were
outstanding. The aggregate market value of the 2,372,267 shares of Common Stock
held by non-affiliates was $4,003,201 as of March 3, 1999. The market value of
the shares was calculated based on the closing bid price of such shares on The
Nasdaq SmallCap Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this annual report is incorporated by
reference to the Registrant's definitive proxy statement if filed with the
Commission on or before March 31, 1999 or if such proxy statement is not filed,
will be filed with the Commission as an amendment to this Form 10-KSB under the
cover of Form 10-KSB/A not later than April 30, 1999.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 (see "Acquisitions"). 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.
INDUSTRY OVERVIEWS
The transit communication industry is a market which has developed
principally as a result of the enactment of the Americans with Disabilities Act,
the Clean Air Act ("CAA"), the Intermodal Surface Transportation Efficiency Act
("ISTEA"), and Smart Highway initiatives. ADA requires that fixed route transit
systems announce major stops and transfer points to assist visually-impaired
passengers. Public transit authorities typically draw between 80% and 90% of
funding for purchases of ADA compliant products from the Federal Transit
Administration, with the remainder of product acquisition funding being provided
by state and local sources.
TEA-21, the follow-on legislation to ISTEA, is the program funding the
transit market from the federal level. TEA-21 is a $41 billion six-year federal
funding initiative. Within the transit market sector, it promotes development of
modern and expanded public transit systems in the United States and designates a
wide range of devices, services and programs intended to increase the capacity
of the nation's mobility systems. TEA-21 authorizes increased funding each of
the six years covered (1998-2003) progressing from $4.8 billion in 1998 to $8.2
billion in 2003. Federal funding accounts for roughly 20% of all transit
industry funding with the balance being derived from a combination of state,
local, and fare-box sources. On any given project or use of funds, the federal
component can vary from zero to the 80-90% range. Major capital programs
typically will have approximately 80% federal funding.
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The AVAS market emerged as a result of ADA legislation and has been
sustained by overall favorable acceptance of concept, design and technology by
transit management operators and passengers. Less than 40% of new bus vehicles
contained voice announcement systems in 1998. This percentage, however, is
expected to increase over the next few years as industry participants present
AVAS solutions that address cost, maintenance expense and complexity issues.
While the TCS group has had nominal international sales, the Company believes
that the ownership of Transit-Media may enable the Company to cross-sell TCS
products overseas.
The electronic destination sign market, which is the primary market for
Transit-Media and TwinVision, is a highly competitive, mature market with growth
closely tied to overall market size growth, increased market share capture, or
that which is precipitated by technological advances. Virtually all transit
buses manufactured worldwide have some form of destination sign system and the
percentage of those systems that are electronic is approximately 70% and 95% in
Europe and the United States, respectively. A single competitor in the domestic
electronic destination sign market holds dominant market share; no one supplier
dominates the worldwide market.
The DAC market consists of government organizations at the local,
state, and federal level. DAC also markets its products in twelve foreign
countries through a network of dealers. Approximately 39% of DAC sales are
international sales. DAC's digital filter and tape transcriber technology
reduces background noises that might otherwise make recorded voice signals
unintelligible. Additionally, DAC's products are applicable to the vibration,
acoustic, and communications disciplines in the commercial sector.
PRODUCTS AND PRODUCT DESIGN
TRANSPORTATION PRODUCTS SEGMENT
The Company's current products include the DR500C Talking Bus(R) by TCS
and light-emitting diode illuminated flip-dot electronic destination signs
marketed by Transit-Media and TwinVision. During 1998, 1997 and 1996, TCS
accounted for 35%, 36% and 65% of the Company's net sales, respectively. In
addition, Transit-Media accounted for 22%, 19% and 5% of net sales in 1998, 1997
and 1996, respectively. TwinVision accounted for 29% of sales in 1998 and 21% in
1997.
TCS Product Line. The Talking Bus(R) is an automated next stop
announcement and passenger information system which is designed for use
in transit buses, light rail vehicles, trains or subway cars, people
movers, monorails, airport vehicles and tour buses. The Talking Bus(R)
complies with ADA legislation and industry recognized standards. It
uses an open architecture computer-based electronics system design
which accommodates the addition of new features and capabilities,
including interoperability with third-party equipment. In the case of
the Talking Bus(R), the open architecture permits the expansion of
memory capacity to the size required by the transit customer and the
integration of the Talking Bus(R) with CAD/AVL, GPS receivers, internal
and external signs, and other future electronic systems. The Talking
Bus(R) offers easy downloading or transfer of software using an
industry standard personal computer memory card international
association ("PCMCIA") format. Also, wireless download is possible. The
Talking Bus(R) is designed to meet the operating demands for
temperature, humidity, shock, vibration and other environmental
conditions found in transit applications, and to satisfy ADA
requirements for internal and external stop announcements. The Talking
Bus(R) is manufactured in an ISO 9002 compliant facility.
When activated by a transit vehicle operator or by an automatic trigger
such as GPS signal, the Talking Bus(R) provides a high quality digital
audio announcement properly timed to the exact route location and which
can be recorded in any language. The Talking Bus(R) uses the vehicle's
power supply and can be operated on most vehicle voltage sources. The
Talking Bus(R) memory is provided by expandable memory cards with up to
40 megabyte capacity. The audio messages are stored in flash memory,
which does not require battery backup.
Transit-Media and TwinVision Product Line. The Company's electronic
destination sign products include various models covering essentially
all popular applications. These products adhere to ADA requirements and
function under industry recognized standards. They possess an open
architecture, microprocessor-based system incorporating a new
generation display device which utilizes a unique (Patent Pending)
light-emitting diode configuration to individually illuminate an
improved electro-magnetic flip-dot device. This new generation display
device improves distance of readability while reducing end user
maintenance
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expense. Destination message programming is accomplished via
proprietary software developed by the Company through PCMCIA memory
card download. The product is manufactured under various contracts in
ISO certified facilities.
LAW ENFORCEMENT AND SURVEILLANCE SEGMENT
The Company's current products by DAC includes ten digital filter instruments
and two digital tape transcription machines. During the 1998, 1997 and 1996, DAC
accounted for 14%, 24% and 30% of the Company's net sales, respectively.
DAC Product Line. The Company markets an extensive line of digital
signal processing ("DSP") instruments that are used by law enforcement
agencies and organizations to enhance tape recordings collected from a
variety of sources. Voices on such recordings are often obscured by
hum, room noises, acoustic resonances, muffling, background music, and
street noises. To enhance such recordings and make them understandable,
the tape's audio is played through a sequence of highly specialized
adaptive audio filters. These real-time devices have substantial
computational power with the typical digital filter employing 20
microprocessors.
DAC's most popular product is the Personal Computer Audio Processor
("PCAP"). The PCAP is a Windows(TM)-based system and processor used to
reduce undesired sounds on an audio source. This PC-controlled digital
processor implements up to five different digital filters
simultaneously and has built-in dual channel spectral analysis. An
expanded version, the Multi-Channel Audio Processor ("MCAP") was
introduced in 1996 and is a complement to the PCAP for more
sophisticated users.
MARKETING AND SALES
All of the Company's products are marketed on a direct basis by the
Company's sales and marketing personnel or through commissioned sales agents or
dealers. The Company's marketing activities combine data base marketing,
selective media advertising, direct contact selling, publication of newsletters
directed to customers, participation in trade shows and industry conventions,
cooperative activities with system integrators, and, in the case of DAC, a
one-week DAC School. This school offers end users opportunities to understand
DSP technology and to learn about DAC product operation via hands-on
instruction. DAC products are sold directly by the Company in the United States
and through a network of dealers internationally. The Company's electronic
destination sign products are marketed both direct by the Company and through
independent sales representatives to vehicle manufacturers and the end user
transit operating agencies. Several of DAC's products have been approved for
purchase by the General Services Administration of the U.S. Government, which
the Company believes enhances its sales opportunities to federal agencies
because the agency can, if they so choose, purchase scheduled products from the
Company at a specified negotiated price.
The Company typically generates a significant portion of its sales from
a relatively few key customers, the identity of which may vary from year to
year. Two major customers accounted for approximately 21% of net sales for 1998.
During 1997, no particular customer accounted for more than 10% of total Company
sales. In 1996, three major customers accounted for approximately 42% of net
sales.
RESEARCH AND DEVELOPMENT
The Company is committed to the continued enhancement of all of its
products and to the development or acquisition of products having related
applications. The Company's objective is to develop products that are considered
to be high quality, technically advanced and capable of capturing a significant
share of the applicable market.
In the transit market, enhancement of the Talking Bus(R) AVAS and
TwinVision LeDot(TM) destination sign system products will continue over the
next year to increase the Company's ability to integrate these products with
other technologies such as CAD/AVL, GPS, dead reckoning, and other on-vehicle
electronic systems. The Company believes the convergence of core technologies,
combined with the need for capital improvements and efficiencies in the transit
market, will justify continuing high levels of research and development. This
research and development will focus primarily on the ability to integrate
technologies with the Company's stop announcement system and cost reduction.
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In October 1996, the Company introduced a new generation display
element in its TwinVision LeDot(TM) destination sign system. This new
generation display combines known and proven benefits of light-emitting diodes
with proven electromagnetic flip-dot elements to enhance product performance.
These enhancements improve distance of readability and reduce maintenance
expense. Further development of this product is underway by the TwinVision and
Transit-Media subsidiaries and their supplier Lite Vision Corp of Taiwan.
The Company's engineering, research and development costs increased in
1998 as development activities continued in all business groups and in the
Transit-Media and TwinVision subsidiaries. The Company attempts to maximize its
use of the funds available for engineering, research and development by
following strategies to accelerate the development and introduction of new
products, reduce product costs and focus on systems integration. Engineering,
research and development expenses were $1,022,084, $852,097 and $463,874 in
1998, 1997 and 1996, respectively.
DAC is continuing to upgrade and enhance designs of existing products
to incorporate new technology to meet customer requirements.
ACQUISITIONS AND REORGANIZATION
On April 30, 1996, the Company acquired all of the outstanding stock of
Transit-Media, a company which assembles and markets proprietary on-board,
electronic destination signs for mass transit systems in Europe and the Far
East. The Company paid $35,000 for all of Transit-Media's stock at closing. The
Company recorded cash ($440), other receivables (valued at $1,736), fixed
assets (valued at $10,523), accounts payable (valued at $3,957), short-term
bank borrowings (valued at $117,177), and certain intangible assets (valued at
$143,435). Upon completing the acquisition, the Company invested $350,000 in
Transit-Media to pay off an existing bank credit line and provide working
capital.
On February 28, 1995, the Company entered into and closed an Asset
Purchase and Sale Agreement (the "Agreement") with Digital Audio Corporation
("Digital Audio"). Pursuant to this Agreement, the Company obtained
substantially all of the assets of Digital Audio for a purchase price in the
aggregate amount of approximately $2,100,000 which consisted of cash in the
amount of $1,171,000, a promissory note in the amount of $709,000 and 33,846
shares of the Company's Common Stock valued at $220,000 ("Acquisition Shares").
As additional consideration, the Agreement provided for an earn out payment to
be made over two years if certain performance criteria were met. The Company
did not make any earn-out payments pursuant to this agreement The unsecured
promissory note payable to Digital Audio, which accrued interest at the rate of
6% per annum, was paid in January 1996. Digital Audio operates as DAC, a
division of the Company.
On July 1, 1998, the Company, Robinson Turney International, Inc.
("RTI"), Digital Recorders Acquisition, Inc., a wholly owned subsidiary of the
Company (the "Subsidiary") and David L. Turney and Claude G. Robinson, the two
shareholders of RTI (the "Shareholders") consummated an Agreement and Plan of
Reorganization (the "Agreement") pursuant to which the Subsidiary merged into
RTI (the "Merger"). A disinterested majority of the directors voting with
respect to the transaction approved the Merger on behalf of the Company pursuant
to a fairness opinion related to same.
Pursuant to the Merger, 200,000 restricted shares of the Company's
Common Stock were issued to the RTI Shareholders. For two years commencing July
1, 1998, the RTI Shareholders have "piggyback" registration rights and until
January 1, 1999, the Shareholders also have demand registration rights covering
the 200,000 shares of Common Stock issued to them in the Merger.
RTI was 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 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 at the effective date
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
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may be extended one additional year upon same terms and conditions at the mutual
agreement of the Company and Mr. Robinson,) to provide services for the
manufacturing and operational support of the Company.
COMPETITION
The markets in which the Company participates are highly competitive.
The transit market in particular is characterized by rapid technological
advances and evolving industry standards. The Company believes that the
principal competitive factors in the markets for the TCS, Transit-Media and
TwinVision products include ease of use, service and support, price and the
ability to integrate these products with other technologies. The Company
currently views Luminator, an operating unit of Mark IV Industries, Inc., as its
principal competitor in the transit market. Luminator is a significant
competitor in destination signage and voice announcement products. The Company
believes that Luminator now purchases some of its voice announcement products
from an outside party. The Company also recognizes Clever Devices Ltd. and
Meister Electronics, LC., a German company, as competitors in the domestic
transit market, although neither of these competitors have the capital and other
resources of Luminator.
Competition in the digital signal processing filtering business is
limited and the Company believes that its DAC group is the dominant leader among
the small number of participants in the industry. The Company will attempt to
maintain that position through frequent product improvements and new product
introduction. Analog filtering products produced for the commercial sound
industry by companies such as AKG Acoustics GmbH are not specifically designed
for voice filtering and are not considered significant competition. The Company
recognizes Adaptive Digital System, Inc. as a competitor producing similar
technology products but in a more narrow product application range.
MANUFACTURING
The Company's principal supplier for TCS products, Quality
Manufacturing and Design of Raleigh, North Carolina ("QMD"), reorganized in
March 1999 with its customer base, outstanding purchase orders and work in
progress inventory acquired by Circuit Board Assemblers ("CBA") in Youngsville,
North Carolina. QMD was a contract electronics manufacturing firm producing TCS
designed equipment. CBA has agreed to complete all current purchase orders
previously with QMD. CBA was a supplier for prior versions of the Talking Bus(R)
equipment, and management is confident CBA has the capacity to meet the current
needs of TCS. TCS will be investigating alternative suppliers to assure a
constant flow of products.
The Company also purchases major components for its electronic
destination signs from Lite Vision Corporation ("Lite Vision"), an entity based
in Taiwan. Lite Vision is a major stockholder, holding 12.2% of the outstanding
shares of common stock. The Company has contracts with electronic manufacturing
or contract assembly firms to manufacture these products both domestically and
overseas. The display element is essentially a sole-source device, and the
Company is managing its inventory levels to minimize the risk of delays in parts
availability. The domestic production is compliant with all "Buy America"
regulations.
The Company's DAC group manufactures or assembles its own products.
Printed circuit board components and enclosure fabrication is purchased from
specialized vendors such as Texas Instruments, Motorola, and Crystal
Semiconductor. Because of the specialized nature of the DAC product and rapid
advances in technology, the Company believes that this practice is necessary to
maintain its competitive position and does not place the Company at excessive
supply risk.
PROPRIETARY RIGHTS
The Company currently relies on a combination of patent, copyright,
trade secret, nondisclosure agreements, and licensing agreements to establish
and protect its ownership of proprietary and intellectual property rights. The
Company attempts to keep the results of its research and development efforts
proprietary, but may not be able to prevent others from using some or all of
such information or technology or otherwise from "designing around" the
intellectual property rights of the Company. The Company has notice of patent
issue and pending issue of certain intellectual property rights under which it
is licensed. The Company has registered its Talking Bus(R) and TwinVision(R)
trademarks and logos, as well as certain slogans, by-lines, and trade-names with
the United States Patent and Trademark Office. In addition, Digital Recorders(R)
is a trademark of the Company.
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The Company intends to pursue new patents and other intellectual
property right protection covering new technologies and developments on an
on-going basis.
The Company intends to maintain the integrity of its service marks,
trade names and trademarks and other proprietary names and marks against
unauthorized use and to protect against infringement and unfair competition
where circumstances warrant.
EMPLOYEES
As of March 3, 1999, the Company employed fifty-six people. The
Company's employees are not covered by any collective bargaining agreements and
the Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 6,700 and 5,400 square feet of office
space in two different locations in an office complex in Durham, North Carolina.
This space is leased under two separate lease agreements. One lease agreement
provides for monthly rental payments of $5,641 and expired in January 1998. The
Company is continuing to lease this space on a month to month basis. The second
agreement provides for monthly rental payments ranging from $4,943 to $6,104 and
expires in October 2002. The Company leases approximately 1,000 square feet in
Richardson, Texas and provides for monthly rental payments of $1,069. The
Company also leases approximately 4,700 square feet of office and manufacturing
space in Raleigh, North Carolina. This lease agreement contains rental rates
ranging from $4,241 to $5,013 per month and runs through December 2002. The
German foreign subsidiary, Transit-Media GmbH, leases office and engineering
space in Ettlingen, Germany with monthly rental payments of $2,551 per month and
runs through May 2001.
The Company entered a lease agreement on December 18, 1998 for 18,484
square feet of new office and warehouse space in the Durham, North Carolina area
to ultimately consolidate the two separate Durham facilities. This new lease
agreement contains rental rates ranging from $13,093 to $17,083 and runs through
May 2009. Sub-let of the lease expiring in April 2002 is contemplated in this
consolidation of existing properties.
Management believes, if necessary, additional office and manufacturing
space will be available in or adjacent to its existing facilities at a cost
approximately equivalent to or slightly higher than that now paid by the Company
for its existing facilities.
On July 1, 1994, the Company entered into an agreement pursuant to
which William H. Wilson and Linda E. Wilson (the "Sellers") agreed to transfer
ownership to the Company of a condominium located in the Wailea resort
development known as the Polo Beach Club at 20 Makena Road, in Wailea,
Maui-Hawaii (the "Property"). In exchange for the Property, the Sellers received
a total of 120 shares of Series AAA Preferred Stock and warrants to acquire
54,284 shares of Common Stock at a price of $2.95 per share. The Company had the
Property listed for sale from 1994 until December 20, 1996 when the Company sold
this property for net proceeds of $467,625. (See Note 4 of the Notes to the
Consolidated Financial Statements.) The Company rented the property prior to
this sale.
ITEM 3. 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.
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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.
The Company is not a party to any other litigation and is not aware of
any other threatened or pending legal action which would have a material
adverse effect on the Company's business, operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ Small Cap Market
under the symbol "TBus" and on the Boston Stock Exchange under the symbol "TBU".
There are approximately 1,200 stockholders. The following table sets forth the
range of high and low closing bid prices, as reported by The NASDAQ SmallCap
Market, from January 1, 1997 through December 31, 1998. The prices set forth
reflect interdealer quotations, without retail markups, markdowns or
commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter ........... $ 4.00 3.00
Second Quarter .......... 3.50 2.25
Third Quarter ........... 4.25 2.25
Fourth Quarter .......... 3.13 1.69
1998
First Quarter ........... $ 2.50 1.38
Second Quarter .......... 3.63 1.50
Third Quarter ........... 3.19 1.81
Fourth Quarter .......... 1.88 1.41
</TABLE>
The Company had not declared any dividends on common stock during 1998 and 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company designs, manufactures or contracts for the manufacture of,
and sells information technology products 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 law enforcement and surveillance segment of the Company is
known as Digital Audio Company ("DAC"). On April 14, 1998, the Company divested
the Highway Information Systems ("HIS") business group as more fully described
in Note 2 to the consolidated financial statements. Since 1987, when the Company
generated net sales of $348,000, net sales have increased each year, reaching
$14,239,251 in 1998 for its continuing operations. The Company attributes its
sales growth primarily to introduction of new products, increased market
penetration, growing markets for its products and strategic acquisitions.
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The Company's products are currently marketed to the transit,
transportation and law enforcement markets. Customers include municipalities,
regional transit districts, federal, state, and local departments of
transportation, bus manufacturers, and law enforcement agencies or
organizations. Sales to these customers are characterized by a lengthy sales
cycle which generally extends for a period of two to twenty-four months. In
addition, purchases by a majority of these customers are dependent on federal,
state and local funding which may vary from year to year.
The Company typically recognizes revenue upon shipment of products to
customers. Because the Company's operations are characterized by significant
research and development expenses preceding product introduction, net sales and
related expenses may not be recorded in the same period, thereby producing
fluctuations in operating results. The Company's dependence on a small number of
relatively large customers or projects may increase the magnitude of
fluctuations in operating results.
The following discussion provides an analysis of the Company's results
of operations and liquidity and capital resources. This should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto. The operating results of the years presented were not significantly
affected by inflation.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items included in the Company's Statements of Operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales % 100.0 % 100.0 % 100.0
Cost of sales 58.7 62.0 40.0
------- ------- -------
Gross profit 41.3 38.0 60.0
------- ------- -------
Operating expenses:
Selling, general and administrative 41.7 51.7 45.5
Engineering, research and development 7.2 9.1 6.0
------- ------- -------
Total operating expenses 48.9 60.8 51.5
------- ------- -------
Operating income (loss) (7.6) (22.8) 8.5
Other income (expense), net (0.7) -- 1.7
------- ------- ------
Income (loss) before income taxes from continuing
operations (8.3) (22.8) 10.2
Income tax expense (benefit) (2.5) -- --
------- ------- -------
Income (loss) from continuing operations (5.8) (22.8) 10.2
Discontinued operations:
Income (loss) from operations of HIS division,
net of tax 0.6 4.1 (2.2)
Gain on disposal of HIS division, net of tax 4.7 -- --
------- ------- -------
Net income (loss) % (0.5) % (18.7) % 8.0
======= ======= =======
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997.
Net sales from continuing operations for 1998 were $14,239,251, an
increase of $4,833,221 or 51.4%, as compared to $9,406,030 for 1997. The sales
increase was due to higher sales for destination signs in the Company's
transportation products segment. Combined sales for Transit-Media and TwinVision
increased $3,348,462 or 87.2% as these two subsidiaries realized increased
orders for its destination sign products. TCS sales increased $1,725,367 or
52.0%; an increase primarily attributed to regaining market share lost to new
competition in 1997. In the Company's law enforcement and surveillance segment,
DAC experienced a slight sales decline of $290,319 or 12.9% as this limited
niche market did not realize any above average government orders as compared to
prior years.
Gross profit from continuing operations for 1998 was $5,883,027, an
increase of $2,307,626, or 64.5% as compared to gross profit of $3,575,401 in
1997. As a percentage of sales, gross profit was 41.3% of net sales in 1998 as
compared to 38.0% during 1997. The increase in gross profit reflected an
improvement for Transit-Media and TwinVision during 1998 as various cost
reduction initiatives, in conjunction with economy of scale, coincided with
the
9
<PAGE> 10
growth of the business. In addition, the sales volume increase in TCS help
generate a gross profit of $2,913,695 or 49.5% of total gross profit for 1998.
Selling, general and administrative expenses during 1998 were
$5,940,096, an increase of $1,073,982 or 22.1% as compared to selling, general
and administrative expenses of $4,886,114 during 1997. This increase is
attributed to overall growth of the Company and, specifically, to the expenses
incurred at TwinVision as this operation moved from its start-up phase during
1997.
Engineering, research and development expenses for 1998 were
$1,022,084, an increase of $169,987, or 20%, as compared to engineering,
research and development expenses of $852,097 in 1997. This increase primarily
related to the increase in technical personnel for all three U.S. businesses.
The operating loss decreased by $1,063,657 to $1,079,153 in 1998 as
compared to the operating loss of $2,142,810 for 1997. This decease during 1998
is due primarily to the factors set forth above.
Total other income (expense) for 1998 resulted in a net expense of
($110,052), an increase of $96,932, as compared to total net income (expense)
for 1997 of ($13,120.) This increase was primarily due to changes in interest
income and interest expense. Interest income and interest (expense) in 1997 were
$58,485 and ($62,045), respectively, as the Company moved to a net borrowing
position during the latter part of 1997. The net borrowing position continued
into 1998 until the sale of the HIS division and later capital infusion through
issuance of common stock decreased the working capital bank debt facility to
lower amounts, but which still resulted in a net interest expense of $89,814.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996.
Net sales from continuing operations for 1997 were $9,406,030, an
increase of $1,363,631, or 17.0% as compared to $8,042,399 for 1996. The sales
increase was primarily due to higher sales at Transit-Media and TwinVision which
were partially offset by lower sales at TCS. Combined sales for Transit-Media
and TwinVision increased $3,462,795, or 913%, primarily because these operations
were in the start-up phase during 1996. The decline in revenues at TCS of
$1,945,562, or 37%, was primarily related to increased competition in this
maturing market.
Gross profit from continuing operations for 1997 was $3,575,401, a
decline of $1,248,528, or 25.9%, as compared to gross profit of $4,823,929 in
1996. As a percentage of sales, gross profit was 38.0% of net sales in 1997 as
compared to 60.0% during 1996. The decrease in gross profit percentage reflected
a change in the composition of the Company's transportation products segment
sales during 1997, as there were increased sales of the lower margin electronic
destination sign products at Transit-Media and TwinVision and lower sales of the
higher margin TCS product line.
Selling, general and administrative expenses during 1997 were
$4,866,114, an increase of $1,208,346, or 33.0% as compared to selling, general
and administrative expenses of $3,657,768 during 1996. This increase was
attributed in general to the overall growth of the Company and, specifically, to
the expenses incurred at Transit-Media and TwinVision as these operations moved
from their start-up phase during 1997.
Engineering, research and development expenses for 1997 were $852,097,
an increase of $388,223, or 83.7%, as compared to engineering, research and
development expenses of $463,874 during 1996. This increase related to
additional development in every operation but DAC and to development activities
in new product introductions during 1997.
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 through mid 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
10
<PAGE> 11
financial institution. The new credit facility provided for short term
borrowings and import letters of credit, and was subject to certain loan
covenants, was secured by substantially all of the Company's accounts
receivable, inventory and equipment, and bore interest, payable quarterly, at 90
day LIBOR base rate plus 2.3% to 3.3% dependent upon the Company's rolling
four-quarter earnings before interest, taxes, depreciation and amortization. At
December 31, 1997, the borrowings under this agreement totaled $1,893,540. In
addition, at December 31, 1997, the Company had $127, 427 committed under two
import letters of credit for inventory purchases from an overseas supplier.
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 December 31, 1998,
there were $925,000 of borrowings outstanding under the line of credit
agreement. In addition, at December 31, 1998, there was $364,760 committed under
import letters of credit for inventory purchases from an overseas supplier. This
secured line of credit facility has been extended to March 25, 1999 as the
Company concludes negotiations for a larger credit facility with a new lending
entity.
On February 25, 1999, the Company extended its $3,000,000 secured line
of credit facility and $500,000 secured letter of credit facility through March
25, 1999 with the same financial institution. The Company expects to conclude
negotiations prior to the expiration date of March 25, 1999 for a similar credit
facility with the same financial institution. Management expects the term to be
between six months and one year with covenants, availability and interest rates
to remain the same.
As of December 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $703,639 and accounts receivable of
$3,371,365, providing the Company with net working capital of $5,133,740. The
Company had outstanding short-term borrowings at December 31, 1998, of $925,000.
The Company's operating activities used cash of $2,611,026 during 1998
and $3,782,213 during 1997. For 1998, excluding the gain on sale of the HIS
division of $1,097,012 and net book value of HIS assets disposed of $1,702,987,
the net cash provided by operating activities would be $188,973. For 1998, the
increases of inventory of $324,384 and accounts receivable of $197,406 were
offset by increases in accounts payable of $367,454. For 1997, increases in
inventories of $1,833,540, increases in accounts payable of $281,402 and
increases in accounts receivable of $1,083,078 were the primary components of
changes in working capital. The Company anticipates that its working capital
needs will continue to increase as the Company implements its expansion plans.
Working capital requirements will increase with growth in the Company's sales.
The Company's net investing activities during 1998 provided cash of
$2,800,931, primarily as the result of the HIS division sale recorded in the
second quarter. Investing activities during 1998 also reflected net payment of
short-term bank borrowings totaling $968,540.
The Company's net financing activities used cash of $95,793 during 1998
and provided cash of $1,774,065 during 1997. In 1998, $1,071,872 of proceeds
were received from the issuance of common stock. Available cash was used to pay
trade creditors and decrease the short term bank borrowings. The remaining
amounts of cash totaling $199,125 was used in financing activities for "AAA"
preferred stock dividends. In 1997, net bank borrowings of $1,893,540 were used
to finance the growth of the Company as accounts receivable and inventory
increased dramatically over December 31, 1996. Dividend payments of $119,475
during 1997 also used cash.
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 quarterly dividend payable with respect to
each Preferred Share from $112.50 to $125.00 beginning in 1999, 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. Such amendment was presented to a vote of the holders of Common
Stock in the Company's fiscal 1997 Proxy Statement and was approved.
11
<PAGE> 12
On April 14, 1998 the Company sold its Highway Information Systems
(HIS) business group for $2,800,000 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 federal income tax expense on this
transaction, which the Company will offset with operating loss carryforwards,
was approximately $346,000. The state tax expense was approximately $80,000.
The Company's cash requirements, other than for normal operating
expenses, relate primarily 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 pending credit facility, the cash proceeds
received from the sale in April 1998 of the HIS business group, proceeds from
the sale of common stock in 1998, and the modification of the terms of Series
AAA Preferred Stock provides the liquidity and capital resources to satisfy its
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 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.
12
<PAGE> 13
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements follow this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company determined a plan of rotation of independent public
accountants would be beneficial to the Company. The Company solicited proposals
from various accounting firms. KPMG Peat Marwick LLP (the "Former Accountants"),
which had acted as the independent public accountants for the Company for the
prior eight fiscal years, was not asked to submit a proposal after Form 10-KSB
for December 31, 1997 was filed with the SEC on April 20, 1998.
The Former Accountants reported on the Company's financial statements
for the fiscal years ended December 31, 1990 through December 31,1997. The
report of the Former Accountants on the financial statements for each of such
years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
The Company's Board of Directors approved the new independent
accountants on May 11, 1998 based on the proposals submitted.
During the Company's fiscal years ended December 31, 1996 and 1997,
and through the date of this report, there were no disagreements with the Former
Accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of the Former Accountants would have caused them to
make reference thereto in their report on the financial statements for such
years.
During the fiscal years ended December 31, 1996 and 1997, and through
the date of this report, none of the events described in paragraphs (a)(1)(v)(A)
through (D) of Item 304 of Regulation S-B occurred.
The Company engaged McGladrey & Pullen, LLP, as its new independent
accountants effective May 11, 1998. During the two fiscal years preceding its
appointment and through the date hereof, the Company had not consulted with
McGladrey & Pullen, LLP, on items regarding:
The application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be
rendered on the Company's financial statements; there was no written
or oral advice provided that was an important factor in reaching a
decision as to any accounting, auditing or financial reporting issue;
or
Any matter that was the subject of a disagreement (as defined in
paragraph (a)(1)(iv) of Item 304 of Regulation S-B) or a reportable
event (as described in paragraph (a)(1)(v) of Item 304 of Regulation
S-B)
The Company provided the Former Accountants with a copy of the
foregoing disclosures and requested in writing that the Former Accountants
furnish it with a letter addressed to the SEC stating whether or not it agrees
with such disclosures. The letter filed by the Former Accountants with the SEC
agreed with all the disclosures.
13
<PAGE> 14
DIGITAL RECORDERS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Independent Auditors' Reports 15-16
Consolidated Balance Sheets - December 31, 1998 and 1997................................ 17
Consolidated Statements of Operations - Years Ended December 31, 1998, 1997 and 1996 ... 18
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996........................................ 19
Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996.... 20
Notes to Consolidated Financial Statements................................................ 22-36
</TABLE>
14
<PAGE> 15
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Digital Recorders, Inc.
Durham, North Carolina
We have audited the accompanying consolidated balance sheet of Digital
Recorders, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations , stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Recorders,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Raleigh, North Carolina
February 18, 1999, except for
paragraph 2 of Note 14 as to which
the date is February 25, 1999
15
<PAGE> 16
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Digital Recorders, Inc.:
We have audited the accompanying consolidated balance sheet of Digital
Recorders, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Recorders, Inc., and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996, in conformity
with generally accepted accounting principles.
KPMG LLP
Raleigh, North Carolina
March 20, 1999
<PAGE> 17
DIGITAL RECORDERS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 703,639 $ 472,285
Trade accounts receivable, less allowance for doubtful accounts of $50,000 3,371,365 3,173,959
at December 31, 1998 and 1997, respectively
Other receivables 38,799 54,288
Inventories 4,047,830 3,723,446
Prepaids and other current assets 148,911 74,486
------------ ------------
Total current assets 8,310,544 7,498,464
============ ============
Property and equipment, less accumulated depreciation of 315,550 528,033
$354,179 and $405,642 at December 31, 1998 and 1997, respectively
Goodwill, less accumulated amortization of $546,679 and $393,154 1,361,756 1,515,281
at December 31, 1998 and 1997, respectively
Intangible assets, less accumulated amortization of $409,251 and $273,988 298,149 403,263
at December 31, 1998 and 1997, respectively
Other assets 5,451 6,152
------------ ------------
TOTAL ASSETS $ 10,291,450 $ 9,951,193
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $ 925,000 $ 1,893,540
Accounts payable 1,479,739 1,112,285
Accrued expenses 313,991 383,940
Accrued commissions 368,272 261,165
Income tax payable 49,977 --
Dividends payable 39,825 39,825
Deferred revenue -- 80,585
------------ ------------
Total current liabilities 3,176,804 3,771,340
============ ============
TOTAL LIABILITIES 3,176,804 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 December 31, 1998 and 1997, respectively 1,770,000 1,770,000
------------ ------------
Stockholders' Equity:
Common stock, $.10 par value, 10,000,000 shares authorized;
3,274,075 shares issued and outstanding at December 31, 1998
and 2,674,075 shares issued and outstanding at December 31, 1997 327,407 267,407
Additional paid-in capital 11,507,190 10,694,443
Accumulated other comprehensive income (loss) (48,839) (186,081)
Accumulated deficit (6,441,112) (6,365,916)
------------ ------------
Total stockholders' equity 5,344,646 4,409,853
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,291,450 $ 9,951,193
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 18
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net sales $ 14,239,251 $ 9,406,030 $ 8,042,399
Cost of sales 8,356,224 5,830,629 3,218,470
============ ============ ===========
Gross profit 5,883,027 3,575,401 4,823,929
------------ ------------ -----------
Operating expenses:
Selling, general and administrative 5,940,096 4,866,114 3,657,768
Engineering, research and development 1,022,084 852,097 463,874
------------ ------------ -----------
Total operating expenses 6,962,180 5,718,211 4,121,642
------------ ------------ -----------
Operating income (loss) (1,079,153) (2,142,810) 702,287
Other income (expense), net (110,052) (13,120) 133,467
------------ ------------ -----------
Income (loss) from continuing operations before income taxes (1,189,205) (2,155,930) 835,754
Income tax expense (benefit) (358,530) -- 20,000
------------ ------------ -----------
Income (loss) from continuing operations (830,675) (2,155,930) 815,754
------------ ------------ -----------
Discontinued operations:
Income (loss) from operations of HIS division, net of tax 84,123 390,291 (176,369)
Gain on disposal of HIS division, net of tax 671,356 -- --
------------ ------------ -----------
Income (loss) from discontinued operations 755,479 390,291 (176,369)
------------ ------------ -----------
Net income (loss) (75,196) (1,765,639) 639,385
Preferred dividend requirements (159,300) (159,300) (159,300)
------------ ------------ -----------
Net income (loss) applicable to common stockholders $ (234,496) $ (1,824,939) $ 480,085
============ ============ ===========
Earnings per share:
Net income (loss) from continuing operations $ (0.33) $ (0.87) $ 0.25
Net income (loss) from discontinued operations 0.25 0.15 (0.07)
------------ ------------ -----------
Total basic and diluted net income (loss) per share $ (0.08) $ (0.72) $ 0.18
============ ============ ===========
Weighted average number of common shares and common
equivalent shares outstanding 2,962,294 2,674,075 2,674,075
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Accumulated
-------------------- Other Total
Number Additional Accumu- Compre- Compre- Stock-
of shares Par Paid-in lated hensive hensive holders'
issued Value Capital Deficit Income Income Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 2,674,075 $267,407 $10,832,743 $(5,080,362) $ -- $ 6,019,788
Comprehensive income
Net income 639,385 639,385 639,385
Translation adjustment (9,791) (9,791) (9,791)
----------
Total comprehensive income 629,594
==========
Cash dividends declared and paid (105,300) (105,300)
Dividends payable (54,000) (54,000)
--------- -------- ----------- ----------- --------- -----------
Balance as of December 31, 1996 2,674,075 267,407 10,832,743 (4,600,277) (9,791) 6,490,082
Comprehensive income (loss)
Net loss (1,765,639) (1,765,639) (1,765,639)
Translation adjustment (176,290) (176,290) (176,290)
----------
Total comprehensive income (1,941,929)
==========
Cash dividends declared and paid (119,475) (119,475)
Dividends payable (39,825) (39,825)
Issuance of stock warrants for
services rendered 21,000 21,000
--------- -------- ----------- ----------- --------- -----------
Balance as of December 31, 1997 2,674,075 267,407 10,694,443 (6,365,916) (186,081) 4,409,853
Comprehensive income (loss)
Net loss (76,196) (76,196) (75,196)
Translation adjustment 137,242 137,242 137,242
----------
Total comprehensive income 62,046
==========
Issuance of common stock 600,000 60,000 1,011,872 1,071,872
Cash dividends declared and paid (159,300) (159,300)
Dividends payable (39,825) (39,825)
--------- -------- ----------- ----------- --------- -----------
Balance as of December 31, 1998 3,274,075 $327,407 $11,507,190 $(6,441,112) $ (48,839) $ 5,344,646
========= ======== =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (75,196) $(1,765,639) $ 639,385
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation of property and equipment 222,090 208,621 140,779
Amortization of goodwill and intangible assets 262,975 282,085 224,090
Other non-cash expenses related to issuance of stock warrants -- 21,000 --
Gain on sale of HIS division (1,097,012) -- --
Net book value of HIS assets disposed (1,702,987) -- --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable (197,406) (1,083,078) (262,155)
Decrease in other receivables 15,489 65,726 48,370
(Increase) in inventories (324,384) (1,833,540) (802,403)
Decrease (increase) in prepaids and other current assets (74,425) (23,157) 26,822
(Increase) in intangible assets (14,874) (127,922) (234,191)
Decrease (increase) in other assets 701 947 (198)
Increase in accounts payable 367,454 281,402 486,148
Increase in accrued expenses and commissions 37,158 110,757 190,264
Increase (decrease) in deferred revenue (80,585) 80,585 --
Increase in income tax payable 49,977 -- --
----------- ----------- ----------
Net cash provided (used) by operating activities (2,611,026) (3,782,213) 456,911
----------- ----------- ----------
Cash flows from investing activities:
Proceeds from sale of HIS division 2,800,000 -- --
Purchases of property and equipment (201,548) (278,643) (277,147)
Proceeds from sale of property and equipment 191,941 -- --
Proceeds from sale of intangible assets 10,538 -- --
Purchases of short-term investments -- (161,102) (121,725)
Sales and maturities of short-term investments -- 1,767,524 628,333
Payments for business acquired, net of cash received -- -- (34,560)
----------- ----------- ----------
Net cash provided by investing activities 2,800,931 1,327,779 194,901
----------- ----------- ----------
Cash flows from financing activities:
Issuance of common stock 1,071,872 -- --
Principal payments on long term debt -- -- (709,000)
Proceeds from short-term bank borrowings 5,379,460 8,004,540 520,000
Principal payments on short-term bank borrowings (6,348,000) (6,111,000) (637,177)
Proceeds from sale of property held for resale -- -- 442,625
Payment of dividends on preferred stock (199,125) (119,475) (105,300)
----------- ----------- ----------
Net cash provided (used) by financing activities (95,793) 1,774,065 (488,852)
----------- ----------- ----------
Effect of exchange rate changes 137,242 (176,290) (9,791)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 231,354 (856,659) 153,169
Cash and cash equivalents at beginning of year 472,285 1,328,944 1,175,775
----------- ----------- ----------
Cash and cash equivalents at end of year $ 703,639 $ 472,285 $1,328,944
=========== =========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 94,515 $ 41,772 $ 10,888
=========== =========== ==========
Cash paid during the year for income taxes $ - $ 65,800 $ 15,000
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Supplemental disclosures of non-cash investing and financing activities
During 1998, 1997 and 1996, the Company declared dividends on Series
AAA Preferred Stock in the amount of $159,300. During 1998, the Company paid
$199,125 in cash dividends which included $39,825 of unpaid dividends which had
been accrued. In addition, the 1998 cash dividends paid include the fourth
quarter 1997 dividends of $39,825 which were inadvertently not accrued at
December 31, 1997. As of December 31, 1998, $39,825 of remaining dividends
declared were unpaid. During 1997 and 1996, the Company paid $119,475 and
$105,300, respectively, in cash dividends relating to the 1996 and 1995
dividends declared.
During 1998, the Company, Robinson Turney International, Inc. ("RTI"),
Digital Recorders Acquisition, Inc., a wholly owned subsidiary of the Company
(the "Subsidiary") and David L. Turney and Claude G. Robinson, the two
shareholders of RTI (the "Shareholders") consummated an Agreement and Plan of
Reorganization (the "Agreement") pursuant to which the Subsidiary merged into
RTI (the "Merger"). Pursuant to the Merger, 200,000 restricted shares of the
Company's Common Stock were issued to the RTI Shareholders. The Company recorded
net assets totaling $16,939.
During 1996, the Company acquired Transit-Media GmbH. The Company paid
$35,000 for all of Transit-Media's stock at closing. The Company recorded cash
($440), other receivables (valued at $1,736), fixed assets (valued at $10,523),
accounts payable (valued at $3,957), short-term bank borrowings (valued at
$117,177), and certain intangible assets (valued at $143,435).
During 1994, the Company issued 80 shares of Series AAA Preferred Stock
and an unissued subscription of 40 shares of Series AAA Preferred Stock in
exchange for resort property with an estimated fair market value of $550,000.
During 1995, the 40 shares of subscribed Series AAA Preferred Stock were issued.
On December 20, 1996, the Company closed on the sale of the resort property. The
Company received net proceeds of $467,625 of which $25,000 was outstanding at
December 31, 1996. Because the property was sold for less than $600,000, all
dividends declared and payable to this shareholder who received Series AAA
Preferred Stock in exchange for the resort property were forfeited back to the
Company until the difference between the net sales price and $600,000 was
reduced to zero. At December 31, 1996, $108,900 in Series AAA Preferred Stock
dividends were forfeited back to the Company, and a receivable was established
for $23,475 for the remaining difference between the net sales price, the
forfeited dividends, and $600,000. Additional declared dividends totaling
$23,475 were forfeited back to the Company in 1997 as payment for this
receivable.
21
<PAGE> 22
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Digital Recorders, Inc. (the "Company") designs, manufactures or
contracts for the manufacture of, and sells products to the mass
transit market and the law enforcement market. Customers include
municipalities, regional transportation districts, federal, state and
local departments of transportation, turnpikes, bus manufacturers, and
law enforcement agencies or organizations. The Company markets
primarily to customers located in North America and Europe.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
(c) Adoption of New Accounting Pronouncements
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income,
which was issued in June 1997. Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components, but has no effect on the Company's net income (loss) or
total stockholders' equity. Statement No. 130 requires unrealized
exchange rate gains and losses on the Company's translation of foreign
currency into U. S. dollars, which prior to adoption were reported
separately in stockholders' equity, to be included in comprehensive
income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130. The Company has no
other items of other comprehensive income.
(d) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At times the
Company places temporary cash investments with high credit quality
financial institutions in amounts that may be in excess of FDIC
insurance limits.
(e) Trade Accounts Receivable
The Company establishes an allowance for doubtful accounts equal to the
estimated collection losses to be incurred. The estimated losses are
based on actual collection experience and management's opinion of the
current status of existing receivables.
(f) Inventories
Inventories, consisting principally of component parts and finished
goods, are valued at the lower of cost or market, with cost determined
by the first-in, first-out method.
(g) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets
(which range from three to ten years).
22
<PAGE> 23
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, Continued
(h) Goodwill
Goodwill was recorded as part of the acquisitions of Transit-Media GmbH
("Transit-Media") and Digital Audio Corporation ("Digital Audio").
Goodwill is amortized using a straight-line method over 4 to 15 years.
The Company periodically evaluates the recoverability of its goodwill.
If facts and circumstances suggest that the excess of cost over net
assets acquired will not be recoverable, as determined, based on the
undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the excess cost
over net assets acquired will be reduced to its fair market value.
(i) Intangible Assets
Intangible assets consist of certain deferred costs recorded as part of
the acquisitions of Transit-Media and Digital Audio, tooling and
related costs, and costs incurred to apply for and obtain patents on
internally developed technology. Intangible assets are amortized using
a straight-line method over 3-17 years. The Company periodically
evaluates the recoverability of its intangible assets. If facts and
circumstances suggest that the intangible assets will not be
recoverable, as determined, based on the undiscounted cash flows of the
entity acquired and the patented products over the remaining
amortization period, the Company's carrying value of the intangible
assets will be reduced to its fair market value.
(j) Research and Development Costs
Research and development costs are charged to operations as incurred.
(k) 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 years 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 has been computed based upon
the weighted average of 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 years presented. Diluted net income (loss)
per common share is equal to the basic net income (loss) per common
share for the years ended December 31, 1998, 1997, and 1996, as common
equivalent shares from stock options and stock warrants would not have
a dilutive effect because the average market price of the stock during
the three years has never exceeded the exercise price of the options
and warrants.
23
<PAGE> 24
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, Continued
(l) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(m) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board No. 25, "Accounting for Stock Issued To
Employees", and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the estimated
fair value of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock.
(n) 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 year. 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 included in accumulated comprehensive income in
stockholders' equity. Realized gains and losses on foreign currency
transactions, if any, are included in operations for the year.
(o) Certain Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statement balances to conform to the 1998 financial statement
classifications.
(2) Acquisitions and Divestitures
(a) Acquisition of Transit-Media GmbH
On April 30, 1996, the Company acquired Transit-Media GmbH in a
transaction accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities of the acquired entity were
recorded at their fair market value at the date of acquisition.
Transit-Media assembles and markets proprietary electronic destination
sign systems for mass-transit systems in Europe and the Far East. The
Company paid $35,000 for all of Transit-Media's stock at closing. The
Company recorded cash ($440), other receivables (valued at $1,736),
fixed assets (valued at $10,523), accounts payable (valued at $3,957),
short-term bank borrowings (valued at $117,177), and certain intangible
assets (valued at $143,435). Upon completing the acquisition, the
Company invested $350,000 in Transit-Media to pay off an existing bank
credit line and provide working capital. The Company's results of
operations for the twelve months ended December 31, 1996 include the
operations of Transit-Media from May 1, 1996 to December 31, 1996.
24
<PAGE> 25
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions and Divestitures, Continued
(b) RTI Merger
On July 1, 1998, the Company, Robinson Turney International, Inc.
("RTI"), Digital Recorders Acquisition, Inc., a wholly owned subsidiary
of the Company (the "Subsidiary") and David L. Turney and Claude G.
Robinson, the two shareholders of RTI (the "Shareholders") consummated
an Agreement and Plan of Reorganization (the "Agreement") pursuant to
which the Subsidiary merged into RTI (the "Merger"). A disinterested
majority of the directors voting with respect to the transaction
approved the Merger on behalf of the Company pursuant to a fairness
opinion related to same. The merger was accounted for as a pooling of
interests; however, the operating results of RTI are not material to
the operating results of the Company.
Pursuant to the Merger, 200,000 restricted shares of the Company's
Common Stock were issued to the RTI Shareholders. For two years
commencing July 1, 1998, the RTI Shareholders have "piggyback"
registration rights and until January 1, 1999, the Shareholders also
have demand registration rights covering the 200,000 shares of Common
Stock issued to them in the Merger.
RTI was 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
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 at the effective date of
the Merger. Mr. Turney has served as the Company's Chairman of the
Board and Chief Executive Officer since April 1998 and as a director
since May 1996. The Company entered into a consulting agreement with
Mr. Robinson, commencing July 1, 1998 and extending through June 30,
1999 (which may be extended one additional year upon same terms and
conditions at the mutual agreement of the Company and Mr. Robinson,) to
provide services for the manufacturing and operational support of the
Company.
(c) Sale of HIS
On April 14, 1998, the Company sold its Highway Information Systems
("HIS") business group for $2,800,000 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 federal income tax
expense on this transaction, which the Company will offset with
operating loss carryforwards, was approximately $346,000. The state tax
expense was approximately $80,000.
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements $ 480 131,966
Automobiles 4,000 24,304
Computer equipment 349,401 389,704
Test equipment 94,531 122,546
Furniture and fixtures 221,317 265,245
-------- --------
669,729 933,675
Less accumulated depreciation and amortization 354,179 405,642
-------- --------
$315,550 528,033
======== ========
</TABLE>
25
<PAGE> 26
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(4) Held for Resale
During 1994, the Company issued 80 shares of Series AAA Preferred Stock
and a subscription for 40 shares of Series AAA Preferred Stock in
exchange for resort property, which the Company listed for sale. During
1995, the 40 shares of subscribed Series AAA Preferred Stock were
issued. The fair market value of the property was estimated at $550,000
and, therefore, both the property and equity exchanged were recorded at
$550,000. On December 20, 1996, the Company closed on the sale of the
resort property. The Company received net proceeds of $467,625 of which
$25,000 was outstanding at December 31, 1996. Based on the original
agreement, since the property sold for less than the initial $600,000
stock valuation, all dividends declared and payable to this shareholder
were forfeited back to the Company until the difference between the net
sales price and $600,000 was reduced to zero. At December 31, 1996,
$108,900 in Series AAA Preferred Stock dividends were forfeited back to
the Company, and a receivable was established for $23,475 for the
remaining difference between the net sales price, the forfeited
dividends, and $600,000. Additional declared dividends totaling $23,475
were forfeited back to the Company in 1997 as payment for this
receivable.
(5) Leases
The Company leases its premises under various operating leases which
expire at various times through 2008. Rent expense under these
operating leases was $235,936, $195,272 and $162,736 for the years
ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, future minimum lease payments under the
non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 303,687
2000 321,211
2001 310,525
2002 286,775
2003 176,833
Thereafter 813,248
----------
Total minimum lease payments $2,212,279
==========
</TABLE>
(6) Debt
On July 24, 1997, the Company's $2,000,000 unsecured credit facility
from a financial institution expired and was replaced by a $2,500,000
secured line of credit facility and a $1,000,000 secured letter of
credit facility from the same financial institution. The new credit
facility provides for short-term borrowings and import letters of
credit, is subject to certain loan covenants, is secured by
substantially all of the Company's accounts receivable, inventory and
equipment, and bears interest, payable quarterly, at the 90 day LIBOR
base rate plus 2.3% to 3.3% dependent upon the Company's rolling four
quarter earnings before interest, taxes, depreciation and amortization.
At December 31, 1997, the borrowings under this agreement totaled
$1,893,540. In addition, at December 31, 1997, the Company had $127,427
committed under two import letters of credit for inventory purchases
from an overseas supplier. This secured facility requires the Company
to meet certain financial and other covenants. At December 31, 1997,
the Company was in compliance with all of the covenants not expressly
waived by this lender.
26
<PAGE> 27
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(6) Debt, Continued
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 (later extended through March 1999). Effective
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 December 31, 1998, borrowings under this agreement
totaled $925,000. At December 31, 1998, the Company was in compliance
with all of the covenants not expressly waived by this lender.
On February 25, 1999, the Company extended its $3,000,000 secured line
of credit facility and $500,000 secured letter of credit facility
through March 25, 1999 with the same financial institution. The Company
expects to conclude negotiations prior to the expiration date of March
25, 1999 for a similar credit facility with the same financial
institution. Management expects the term to be between six months and
one year with covenants, availability and interest rates to remain the
same.
Interest expense was $94,515, $41,772 and $10,888 for 1998, 1997 and
1996, respectively.
(7) Preferred Stock
The Company has the authority to issue 1,000,000 shares of preferred
stock of which 700,000 shares have been designated Series A Convertible
Preferred Stock and 10,000, 7,500, 10,020 and 20,000 shares have been
designated Series B, Series C, Series AA and Series AAA Redeemable
Nonvoting Preferred Stock, respectively. In addition, 252,480 shares of
undesignated preferred stock are authorized and unissued.
Series AAA Preferred shares are cumulative, nonvoting, fully
participating, convertible and redeemable at the Company's discretion
with the redemption price equal to the liquidation preference. The
liquidation preference equals $5,000 per share, plus all accrued and
unpaid dividends. Dividends accrue at a quarterly rate of $112.50 per
share. Each Preferred share may be converted into 500 shares of Common
Stock. The Company, at its option, may redeem these shares at any time
but no later than the fifth anniversary of the date of issuance of
these shares. These fifth anniversary dates range from December 1998
through June 1999.
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 beginning in 1999, 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. Such amendment was
27
<PAGE> 28
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(7) Preferred Stock, Continued
presented to a vote of the holders of Common Stock during the Company's
annual stockholders meeting and was adopted.
(8) Common Stock Warrants
Each warrant granted in connection with the public offering allows the
holder to purchase one share of Common Stock at a price of $7.50 per
share. These warrants were to expire in August 1998 but were extended
until April 1999. No other terms of these warrants were changed. At
December 31, 1998 and 1997, 1,265,000 warrants were outstanding, and no
warrants had been exercised.
During 1997, 75,000 warrants were granted which allow the holder to
purchase one share of Common stock for each warrant granted. 37,500 of
these warrants are to purchase Common Stock at a price of $3.00 per
share, 18,750 are to purchase Common Stock at a price of $5.00 per
share and the remaining 18,750 are to purchase Common Stock at a price
of $7.50 per share. At December 31, 1998, 100% of each group of these
warrants had vested and all 75,000 of these warrants were outstanding.
These warrants expire in June 2002.
During 1996, 30,000 warrants were granted which allow the holder to
purchase one share of Common Stock for each warrant granted. Exercise
of these warrants into common shares is contingent upon the market
price of the Company's common shares exceeding prices ranging from
$6.50 to $14.00 per share for ninety consecutive calendar days prior to
the exercise date. During 1998, these warrants were canceled as a
result of the RTI merger.
Each warrant granted in connection with the Series AAA Preferred Stock
allows the holder to buy, based on the number of Series AAA Preferred
Stock shares purchased, up to 23,160 shares of Common Stock at a price
of $2.95 per share which price increases annually to a maximum of
$11.79 per share. These warrants expired in December 1998.
28
<PAGE> 29
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(9) Common Stock Options
(a) Incentive Stock Option Plan
The Company has an incentive stock option plan for employees whereby
options to purchase Common Stock are granted at no less than the
stock's estimated fair market value at the date of the grant and may be
exercised during specified future periods.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 296,257 $4.12 218,557 $4.61 196,507 $4.75
Granted 310,341 2.73 84,300 2.91 69,800 5.42
Exercised -- -- -- -- -- --
Canceled (225,186) 4.29 (6,600) 5.08 (47,750) 6.39
-------- ------- -------
Outstanding at end of year 381,412 2.75 296,257 4.12 218,557 4.61
======== ======= =======
Weighted-average fair value of
options granted during the year $1.09 $1.47 $2.30
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Number Weigted-Average Number
Range of Outstanding Remaing Weighted- Average Exercisable Weighted- Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C>
$2.00 - 3.00 381,412 8.7 years $2.75 357,455 $2.76
</TABLE>
(b) Non-Qualified Stock Options
The Company has issued options to purchase Common Stock to certain key
executives and non-employee members of the Board of Directors or
committees of the Board of Directors which are exercisable at times and
in increments as specified by the individual agreements.
The following is a summary of nonqualified stock options:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 40,702 $3.61 27,702 $4.19 30,041 $4.23
Granted 65,987 2.62 13,000 2.38 -- --
Exercised -- -- -- -- -- --
Canceled (22,701) 3.67 -- -- (2,339) 4.73
------- ------ ------
Outstanding at end of year 83,988 2.64 40,702 3.61 27,702 4.19
======= ====== ======
Weighted-average fair value of
options granted during the year $1.11 $1.47 $ --
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Number Weigted-Average Number
Range of Outstanding Remaing Weighted- Average Exercisable Weighted- Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C>
$2.00 - 3.00 83.988 8.4 years $2.64 78,048 $2.68
</TABLE>
29
<PAGE> 30
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(c) Stock-Based Compensation
As described in Note 1, the Company has chosen to continue to account
for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and,
accordingly, no compensation cost has been recognized for stock options
issued under the Company's stock option plans or stock warrant grants
other than $21,000 of expense recorded in 1997 pursuant to the stock
warrant grant to a non-employee. Had compensation cost for the
Company's stock option plans and stock warrant grants been determined
consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company's pro forma
basic and diluted net income (loss) per common share would have been as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) applicable to
common stockholders $ (234,496) (1,924,939) 480,085
Pro forma net income (loss) applicable
to common stockholders $ (638,167) (2,067,984) 319,870
Basic and diluted net income (loss)
per common share $ (0.08) (0.72) 0.18
Pro forma basic and diluted net income (loss)
per common share $ (0.22) (0.77) 0.12
</TABLE>
In the pro forma calculations shown above, the Company used the
Black-Scholes option pricing model to calculate the fair value of the
stock options and stock warrants granted during 1998, 1997 and 1996.
Significant assumptions used by the Company for these pro forma
calculations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 4.75% 6.50% 6.75%
Expected life 10 years 7 years 7 years
Expected volatility 73.91% 50.52% 21.82%
Expected dividends None None None
</TABLE>
(10) Income Taxes
(a) The components of income tax expense (benefit) charged to
continuing operations for the years ended December 31, 1998, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current expense:
Federal $ 9,562 -- 20,000
State 21,367 -- --
---------- ---------- ----------
30,929 -- 20,000
Deferred expense (benefit):
Federal (389,459) -- --
State -- -- --
---------- ----------
Income tax expense (benefit) $ (358,530) -- 20,000
========== ========== ==========
</TABLE>
Income tax expense attributable to the discontinued operations was
$478,775 in 1998. There was no income tax expense allocated to
discontinued operations in 1997 or 1996 due to the immaterial amount of
total expense or benefit in those years.
30
<PAGE> 31
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes, Continued
(b) The components of the net deferred tax assets as of December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 869,216 $ 1,006,276
Tax credits 106,156 120,185
Warranty reserve 23,271 57,456
Inventory reserve 31,028 88,009
Inventory capitalization 43,536 30,544
Accrued bonuses 39,990 23,712
Depreciation and amortization 6,921 53,759
Organization and start-up costs 170,325 171,774
Other accruals and reserves 36,968 50,087
----------- -----------
Total gross deferred tax assets 1,327,411 1,601,802
Less valuation allowance (1,327,411) (1,601,802)
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The Company has determined that the need for a valuation allowance
arises due to the Company's history of operating losses.
(c) The reasons for the difference between actual income tax expense
(benefit) for the years ended December 31, 1998, 1997 and 1996 and
the amount computed by applying the statutory federal income tax
rate to pretax earnings (loss) from continuing operations are as
follows:
<TABLE>
<CAPTION>
1998
-----------------------------
% of
Pretax
Amount Earnings (Loss)
------ ---------------
<S> <C> <C>
Income tax (benefit) at statutory rate $(404,330) (34.0%)
State income taxes, net of federal income tax benefit 21,367 1.8%
Foreign subsidiary losses 278,665 23.5%
Change in the beginning-of-year balance of the
valuation allowance for deferred tax assets
allocated to the provision for income taxes (274,391) (23.1%)
Other 20,159 1.7%
--------- -----
Income tax expense (benefit) $(358,530) (30.1%)
========= =====
<CAPTION>
1997
-----------------------------
% of
Pretax
Amount Earnings (Loss)
------ ---------------
<S> <C> <C>
Income tax (benefit) at statutory rate $(733,016) (34.0%)
Foreign subsidiary losses 387,408 18.0%
Change in the beginning-of-year balance of the
valuation allowance for deferred tax assets
allocated to the provision for income taxes 195,122 9.0%
Other 150,486 7.0%
--------- -----
Income tax expense (benefit) $ -- --%
========= =====
</TABLE>
31
<PAGE> 32
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes, Continued
<TABLE>
<CAPTION>
1996
----------------------------
% of
Pretax
Amount Earnings (Loss)
------ ---------------
<S> <C> <C>
Income tax expense at statutory rate $ 284,156 34.0%
Foreign subsidiary losses 132,227 15.8%
Change in the beginning-of-year balance of the
valuation allowance for deferred tax assets
allocated to the provision for income taxes (337,221) (40.3%)
Other (59,162) (7.1%)
---------- -----
Income tax expense $ 20,000 2.4%
========== =====
</TABLE>
(d) At December 31, 1998, the Company has net operating loss
carryforwards for federal income tax purposes of $2,342,020 which
are available to offset future federal taxable income, if any,
through 2006 to 2012. In addition, one of the Company's
subsidiaries has net economic loss carryforwards for state income
tax purposes of $1,524,112 which are available to offset future
state taxable income, if any, through 2002 and 2003.
The Tax Reform Act of 1986 contains provisions which limit the
ability to utilize net operating loss carryforwards in the case of
certain events including significant changes in ownership
interests. If the Company's net operating loss carryforwards are
limited, and the Company has taxable income which exceeds the
permissible yearly net operating loss, the Company would incur a
federal income tax liability even though net operating losses
would be available in future years.
The Company has research and development tax credits for federal
income tax purposes of $87,908 at December 31, 1998 which expire
in various years through 2013.
32
<PAGE> 33
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(11) Foreign Operations
Transit-Media, headquartered in Germany, assembles and markets
propriety electronic destination sign systems for mass-transit vehicles
in Europe and the Far East. Summarized financial information for the
Company's domestic and foreign operations for the years ended December
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
Foreign Domestic Total
------------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 3,304,929 10,934,322 14,239,251
Income (loss) from continuing operations $ (656,362) (174,313) (830,675)
Identifiable assets $ 2,769,769 7,521,681 10,291,450
<CAPTION>
1997
----------------------------------------------
Foreign Domestic Total
------------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 1,824,609 7,581,421 9,406,030
Income (loss) from continuing operations $ (818,505) (1,337,425) (2,155,930)
Identifiable assets $ 2,800,524 7,150,669 9,951,193
<CAPTION>
1996
----------------------------------------------
Foreign Domestic Total
------------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 448,159 7,594,240 8,042,399
Income (loss) from continuing operations $ (388,901) 1,224,655 835,754
Identifiable assets $ 961,784 8,663,529 9,625,313
</TABLE>
The operating losses shown above do not reflect the allocation of any
domestic corporate overhead costs to the foreign subsidiary. For the
years ended December 31, 1998, 1997, and 1996 foreign sales represented
22%, 19% and 5% of total net sales, respectively.
(12) Major Customers
The Company typically generates a significant portion of its sales from
a relatively few key customers, the identity of which may vary from
year to year. Two major customers accounted for approximately 21% of
net sales for 1998. During 1997, no particular customer accounted for
more than 10% of total Company sales. In 1996, three major customers
accounted for approximately 42% of net sales.
(13) Related Party Transactions
Effective March 1996, the Company entered into various marketing,
distribution, licensing and management agreements with an affiliate of
a director of the Company. The Company paid fees and commissions earned
under these various agreements totaling $55,013, $233,660 and $173,880
during 1998, 1997, and 1996, respectively.
The Company had retained a director of the Company to perform certain
business consulting services for the Company. The Company paid fees
under this agreement totaling $48,023, $83,860, and $67,000 during
1998, 1997, and 1996, respectively.
33
<PAGE> 34
Effective April 1997, the Company entered into a lease agreement for an
office building with a stockholder. The Company paid $50,892, $43,396,
and $20,800 in rental fees during 1998, 1997, and 1996 to the
stockholder.
The Company purchases electronic components supporting the
transportation products segment from a major stockholder, Lite Vision
Corporation ("Lite Vision"), a public Taiwan company. Lite Vision holds
12.2% of the outstanding shares of common stock. The components consist
primarily of light emitting diodes (LED) printed circuit boards and
power supplies. The Company purchased approximately $4.0 million, $3.9
million and $ .7 million during 1998, 1997 and 1996, respectively.
(14) Subsequent Events
In January 1999, the Company's Board of Directors declared a dividend
on Series AAA Preferred Stock for stockholders of record as of December
31, 1998. The dividends totaled $39,825.
On February 25, 1999, the Company extended its $3,000,000 secured line
of credit facility and $500,000 secured letter of credit facility
through March 25, 1999 with the same financial institution. The Company
expects to conclude negotiations prior to the expiration date of March
25, 1999 for a similar credit facility with the same financial
institution. Management expects the term to be between six months and
one year with covenants, availability and interest rates to remain the
same.
34
<PAGE> 35
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(15) Quarterly Information (Unaudited)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,208,375 $ 2,964,033 $ 3,297,574 $ 5,769,269
Gross profit 896,359 1,413,349 1,553,878 2,019,441
Net income (loss) from continuing operations (564,099) (46,101) (118,744) (101,731)
Net income from discontinued HIS operation, net of tax 84,123 -- -- --
Gain on sale of HIS division, net of tax 671,356
Net income (loss) applicable to common stockholders (519,801) 585,430 (158,569) (141,556)
Basic and diluted net income (loss) per common share (0.19) 0.22 (0.05) (0.04)
<CAPTION>
1997
--------------------------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,832,045 $ 2,130,448 $ 3,367,571 $ 2,075,966
Gross profit 948,382 876,527 1,400,468 350,024
Net income (loss) from continuing operations (214,384) (382,802) (268,830) (1,289,914)
Net income (loss) from discontinued HIS operation 66,875 194,071 131,367 (2,022)
Gain on sale of HIS division -- -- -- --
Net income (loss) applicable to common stockholders (187,334) (228,556) (177,287) (1,331,762)
Basic and diluted net income (loss) per common share (0.07) (0.09) (0.06) (0.50)
</TABLE>
(16) 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.
35
<PAGE> 36
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements, Continued
(16) Segment Information, Continued
Sales, operating income (loss), identifiable assets, depreciation and
amortization, and geographic information for the Company's two
operating segments are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net sales
Transportation products $ 12,280,982 $ 7,157,442 $ 5,640,211
Law enforcement and surveillance 1,958,269 2,248,588 2,402,188
------------ ----------- -----------
$ 14,239,251 $ 9,406,030 $ 8,042,399
============ =========== ===========
Income (loss) from operations
Transportation products $ 266,452 $(1,678,114) $ 735,570
Law enforcement and surveillance 862,105 994,679 1,203,733
Corporate office and administration (1,959,232) (1,472,495) (1,123,550)
------------ ----------- -----------
$ (830,675) $(2,155,930) $ 815,754
============ =========== ===========
Identifiable assets
Transportation products $ 7,119,285 $ 6,478,060 $ 3,930,345
Law enforcement and surveillance 2,072,882 2,597,599 2,314,768
Corporate office and administration 1,099,283 875,534 3,380,200
------------ ----------- -----------
$ 10,291,450 $ 9,951,193 $ 9,625,313
============ =========== ===========
Depreciation and amortization
Transportation products $ 161,955 $ 156,673 $ 95,184
Law enforcement and surveillance 181,778 187,370 176,781
Corporate office and administration 141,332 146,663 92,904
------------ ----------- -----------
$ 485,065 $ 490,706 $ 364,869
============ =========== ===========
Geographic information
United States $ 9,599,101 $ 6,460,416 $ 7,051,240
Canada 815,184 634,986 543,000
United Kingdom 126,775 91,230 --
Turkey 966,189 115,000 --
France 650,055 325,000 --
Germany 1,779,026 1,642,148 448,159
Italy 119,624 78,950 --
Sweden 25,667 -- --
Saudi Arabia 99,839 45,800 --
Hong Kong 57,790 12,500 --
------------ ----------- -----------
$ 14,239,251 $ 9,406,030 $ 8,042,399
============ =========== ===========
</TABLE>
36
<PAGE> 37
(17) Pronouncement Issued, But Not Yet Effective
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 will
require the Company to charge against operations, as a cumulative
effect of a change in accounting principle in the first quarter of
1999, approximately $220,000 of organization costs to conform with this
statement.
37
<PAGE> 38
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement) not later than 120 days after the end of
the fiscal year covered by this report and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference.
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference
to the Company's Proxy Statement.
ITEM 10: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the Company's Proxy Statement.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
to the Company's Proxy Statement.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
to the Company's Proxy Statement.
PART IV
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and are
incorporated herein by this reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ------------ --------
<S> <C> <C>
+++ 2.1 Stock Acquisition Agreement, dated March 20, 1996, between
the Company and Transit-Media GmbH.
+++ 2.2 Notary Public Closing Document, dated April 30, 1996, between
the Company and Transit-Media GmbH.
+++++ 2.3 Agreement and Plan of Reorganization among Robinson Turney
International, Inc., the Company, Digital Recorders, Inc., a
wholly owned subsidiary of the Company, and the shareholders
of Robinson Turney International, Inc.
+++++ 2.4 Registration Rights Agreement among the Company, David L.
Turney and Claude G. Robinson.
+++++ 2.5 Claude G. Robinson Consulting Agreement.
* 3.1.1 Articles of Incorporation of the Company as filed on March 2,
1983, with the Secretary of State of the State of North
Carolina.
* 3.1.2 Articles of Amendment to Articles of Incorporation of the
Company as filed on September 13, 1983, with the Secretary of
State of the State of North Carolina.
* 3.1.3 Articles of Amendment to Articles of Incorporation of the
Company as filed on June 26, 1986, with the Secretary of State
of the State of North Carolina.
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
- ------- --------
<S> <C> <C>
* 3.1.4 Articles of Amendment to Articles of Incorporation of the
Company as filed on November 19, 1986, with the Secretary of
State of the State of North Carolina.
* 3.1.5 Articles of Amendment to Articles of Incorporation of the
Company as filed on March 3, 1988, with the Secretary of State
of the State of North Carolina.
* 3.1.6 Amended and Restated Articles of Incorporation of the Company
as filed on December 28, 1990, with the Secretary of State of
the State of North Carolina.
* 3.1.7 Articles of Amendment to Articles of Incorporation of the
Company as filed on January 14, 1993, with the Secretary of
State of the State of North Carolina.
* 3.1.8 Articles of Amendment to Articles of Incorporation of the
Company as filed on February 4, 1993, with the Secretary of
State of the State of North Carolina.
* 3.1.9 Articles of Amendment to Articles of Incorporation of the
Company as filed on October 20, 1993, with the Secretary of
State of the State of North Carolina.
* 3.1.10 Form of Amended and Restated Articles of Incorporation to be
filed with the Secretary of State of the State of North
Carolina.
* 3.1.11 Form of Amendment to Articles of Incorporation to be filed
with the Secretary of State of the State of North Carolina.
* 3.2.1 Form of Amended and Restated By-Laws of the Company.
* 4.1 Form of specimen certificate for Common Stock of the Company.
* 4.2 Form of specimen certificate for Warrants of the Company.
* 4.3 Form of Underwriter's Warrants to be issued by the Company to
the Underwriter.
* 4.4 Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company.
* 10.1.1 Form of Employment Agreement, by and between J. Phillips L.
Johnston and the Company.
* 10.1.3 Employment Agreement, dated June 26, 1986, by and between
Virgil D. Duncan and the Company.
* 10.2 Incentive Stock Option Plan, adopted April 27, 1993,
authorizing 200,000 shares of Common Stock for issuance
pursuant to the Plan.
* 10.4 Form of 12.5% Subordinated Debentures, issued in the aggregate
principal amount of $250,050.
* 10.5 Promissory Note, dated January 1, 1993, payable to John M.
Reeves in the principal amount of $85,843.
* 10.6 Exclusive Marketing and Sales Agreement, dated February 1,
1992, by and between the Company and Federal Signal
Corporation.
* 10.7 International Master Distributor Agreement, dated June 22,
1994, by and between First Exim Financial Limited and the
Company.
* 10.8 Form of domestic Sales Representative Agreement.
* 10.9 Office Lease Agreement, dated September 20, 1989, by and
between Research Triangle Industrial Park West Associates
Joint Venture and the Company.
** 10.9.1 Commercial Lease Agreement, dated February 28, 1995, by and
between James E. Paul, Jr. and the Company.
++ 10.9.2 Sublease, dated April 24, 1996, by and between family Health
International and the Company.
++++ 10.9.3 Commercial Lease Agreement, dated April 24, 1997, by and
between Realmark Property Investors Ltd. Partnership V and the
Company.
* 10.10 Technology Purchase and Consulting Agreement, dated July 17,
1987, as amended on July 10, 1990, by and between the Company
and Intermark Corp.
* 10.11 Representation Agreement, dated February 8, 1993, as amended
May 12, 1994, by and between Business Development Associates,
Inc. and the Company.
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
- ------- --------
<S> <C> <C>
* 10.12 Highway Advisory Radio System Agreement, dated February 25,
1994, by and between the Company and New Jersey Turnpike
Authority.
* 10.13 Memorandum concerning consulting services, dated as of January
10, 1992, as amended on April 28, 1993, by and between the
Company and Curtis L. Kring.
* 10.14 Purchase Order, dated September 9, 1993, by and between the
Company and Harris Corporation.
* 10.15 Purchase Order, dated September 9, 1994, by and between New
Flyer Industries, Ltd. And the Company.
* 10.16 Purchase Order, dated September 15, 1994, by and between
Gillig Corporation and the Company.
* 10.17 Agreement for Transfer of Hawaii condominium, dated July 1,
1994, by and between William H. Wilson and Linda E. Wilson, on
the one hand, and the Company, on the other.
* 10.18 Apartment Deed, filed August 2, 1994, from William H. Wilson
and Linda E. Wilson to the Company.
* 10.19 Appraisal Report, dated as of May 10, 1994, from Island
Appraisals to the Company.
+ 10.20 Asset Purchase and Sale Agreement, dated February 28, 1995, by
and between Digital Audio Corporation and the Company.
++ 10.21 Note, Commitment Letter, and Continuing Letter of Credit
Agreement, dated May 24, 1996, by and between Wachovia Bank of
North Carolina, N. A. and the Company.
++++ 10.21.1 Note, Commitment Letter and General Security Agreement, dated
July 24, 1997, by and between Wachovia Bank of North Carolina,
N. A. and the Company.
*** 10.22 Services Agreement, dated April 19, 1996, by and between the
Company and Robinson Turney International, Inc.
*** 10.22.1 Amendment to April 19, 1996, Services Agreement, dated July
29, 1996, by and between the Company and Robinson Turney
International, Inc.
*** 10.23 Exclusive Distribution and Sublicense Agreement, dated June 1,
1996, by and between Robinson Turney International, Inc. and
TwinVision Corp. of North America, Inc.
*** 10.23.1 Amendment and Supplement to June 1, 1996 Exclusive
Distribution and Sublicense Agreement, also dated June 1,
1996, by and between Robinson Turney International, Inc. and
TwinVision Corp. of North America, Inc.
*** 10.23.2 Amendment to June 1, 1996 Exclusive Distribution and
Sublicense Agreement, dated July 29, 1996, and between
TwinVision Corp. of North America, Inc. and Robinson Turney
International, Inc.
*** 10.24 Management Services Agreement, dated as of April 19, 1996, by
and between the Company, Transit-Media GmbH and Robinson
Turney International, Inc.
*** 10.24.1 Amendment to April 19, 1996, Management Services Agreement,
also dated April 19, 1996, by and between the Company,
Transit-Media GmbH and Robinson Turney International, Inc.
++++ 10.24.2 Amendment to April 19, 1996, Management Services Agreement
dated May 15, 1997, by and between the Company and Robinson
Turney International, Inc.
++++ 10.24.3 Amendment to April 19, 1996 Management Services Agreement and
to April 19, 1996 Services Agreement dated June 30, 1997, by
and between the Company, Transit-Media GmbH, TwinVision Corp.
of North America, Inc. and Robinson Turney International, Inc.
*** 10.25 Exclusive International Marketing Agreement, dated as of April
19, 1996, by and between the Company, Twin Vision Corp. of
North America, Inc. and Robinson Turney International, Inc.
*** 10.26 Common Stock Warrant Agreement by and between Robinson Turney
International , Inc. and the Company
++++++ 10.27 Share Purchase Agreement between Lite Vision Corporation and
the Company.
++++++ 10.28 Option Agreement between Lite Vision Corporation and the
Company.
11 Not Applicable
13 Not Applicable
16 Not Applicable
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
------- --------
<S> <C> <C>
18 Not Applicable
*** 21 Listing of Subsidiaries of the Company
22 Not Applicable
* 23.4 Consent of Island Appraisals
27 Financial Data Schedule
28 Not Applicable
99 Not Applicable
</TABLE>
- ------------------------------------
* Incorporated by reference from the Company's Registration on Form SB-2
(S. E. C. File No. 33-82870-A)
** Incorporated by reference from the Company's Form 10-KSB dated March
28, 1996.
*** Incorporated by reference from the Company's Form 10-KSB dated March
31, 1997.
+ Incorporated by reference from the Company's current Report on Form 8-K
dated on or about March 15, 1995.
++ Incorporated by reference from the Company's third quarter Form 10-QSB
dated August 14, 1996.
+++ Incorporated by reference from the Company's Form 8-K dated May 15,
1996.
++++ Incorporated by reference from the Company's second quarter Form 10-QSB
dated August 14, 1997.
+++++ Incorporated by reference from the Company's Form 8-K dated August 5,
1998.
+++++ Incorporated by reference from the Company's Form 8-K dated August 5,
1998.
- ------------------------------------
(B) REPORTS ON FORM 8-K
None
41
<PAGE> 42
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIGITAL RECORDERS, INC.
Date: March 19, 1999 By: /s/ David L. Turney
---------------------------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------- ----------
<S> <C> <C>
/s/ David L. Turney Chairman of the Board, Chief March 19, 1999
- ----------------------------------
David L. Turney Executive Officer (Principal
Executive Officer)
/s/ Lawrence A. Taylor Chief Financial Officer and March 19, 1999
- ----------------------------------
Lawrence A. Taylor Secretary (Principal Financial
and Accounting Officer)
/s/ John D. Higgins, Sr. Director March 19, 1999
- ----------------------------------
John D. Higgins, Sr.
/s/ C. James Meese, Jr. Director March 19, 1999
- ----------------------------------
C. James Meese, Jr.
/s/ John K. Pirotte Director March 19, 1999
- ----------------------------------
John K. Pirotte
/s/ John M. Reeves, II Director March 19, 1999
- ----------------------------------
John M. Reeves, II
/s/ Juliann Tenney Director March 19, 1999
- ----------------------------------
Juliann Tenney
/s/ John W. Thomas, Jr. Director March 19, 1999
- ----------------------------------
John W. Thomas, Jr.
</TABLE>
42
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 703,639
<SECURITIES> 0
<RECEIVABLES> 3,460,164
<ALLOWANCES> (50,000)
<INVENTORY> 4,047,830
<CURRENT-ASSETS> 8,310,544
<PP&E> 3,285,564
<DEPRECIATION> 1,315,560
<TOTAL-ASSETS> 10,291,450
<CURRENT-LIABILITIES> 3,176,803
<BONDS> 0
1,770,000
0
<COMMON> 327,407
<OTHER-SE> 5,017,239
<TOTAL-LIABILITY-AND-EQUITY> 10,291,450
<SALES> 14,239,251
<TOTAL-REVENUES> 14,239,251
<CGS> 8,356,224
<TOTAL-COSTS> 8,356,224
<OTHER-EXPENSES> 6,962,180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,052
<INCOME-PRETAX> (1,189,205)
<INCOME-TAX> (358,530)
<INCOME-CONTINUING> (830,675)
<DISCONTINUED> 84,123
<EXTRAORDINARY> 671,356
<CHANGES> 0
<NET-INCOME> (234,496)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
