<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ______________
Commission file number 1-13408
DIGITAL RECORDERS, INC.
(Name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1362926
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4018 PATRIOT DRIVE, SUITE 100
DURHAM, NORTH CAROLINA 27703
(Address of principal executive offices)
(919) 361-2155
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity
Common stock: 3,274,075 shares outstanding
as of November 14, 2000
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
PAGE
Financial Statements:
Consolidated Balance Sheets....................................... 3
Consolidated Statements of Operations............................. 4
Consolidated Statements of Cash Flows ............................ 5-6
Notes to Consolidated Financial Statements........................ 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS 11-15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15-16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
2
<PAGE> 3
DIGITAL RECORDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
ASSETS (Unaudited) (Note)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 103,962 $ 242,820
Trade accounts receivable, less allowance for doubtful accounts of $43,834
and $77,250 at September 30, 2000 and December 31, 1999, respectively 6,832,425 5,571,452
Other receivables 52,084 212,182
Inventories 5,818,448 4,322,391
Prepaids and other current assets 566,516 623,139
------------ ------------
Total current assets 13,373,435 10,971,984
------------ ------------
Property and equipment, less accumulated depreciation of
$684,763 and $525,875 at September 30, 2000 and December 31, 1999, respectively 593,032 555,567
Goodwill, less accumulated amortization of $800,408 and $700,205
at September 30, 2000 and December 31, 1999, respectively 1,108,027 1,208,230
Intangible assets, less accumulated amortization of $342,077 and $290,771
at September 30, 2000 and December 31, 1999, respectively 83,632 86,974
Deferred taxes 122,235 122,235
Other assets 244,612 239,583
------------ ------------
TOTAL ASSETS $ 15,524,973 $ 13,184,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 4,719,773 $ 3,292,619
Accounts payable 4,542,773 3,047,336
Accrued expenses 706,521 650,733
Preferred stock dividends payable 88,500 44,250
------------ ------------
Total current liabilities 10,057,567 7,034,938
------------ ------------
Series AAA Redeemable, Convertible, Nonvoting Preferred Stock, $.10 par value
Liquidation Preference of $5,000 per share (mandatory redemption on
December 31, 2003); 20,000 shares authorized; 354 shares issued
and outstanding at September 30, 2000 and December 31, 1999 1,770,000 1,770,000
------------ ------------
Stockholders' Equity:
Common stock, $.10 par value, 10,000,000 shares authorized; 3,274,075
shares issued and outstanding at September 30, 2000
and at December 31, 1999 327,407 327,407
Additional paid-in capital 11,202,340 11,335,090
Accumulated other comprehensive loss - foreign currency translation (353,261) (237,278)
Accumulated deficit (7,479,080) (7,045,584)
------------ ------------
Total stockholders' equity 3,697,406 4,379,635
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,524,973 $ 13,184,573
============ ============
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date.
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 7,404,376 $ 6,559,334 $ 20,387,165 $ 15,554,977
Cost of sales 4,693,841 4,156,221 12,757,384 9,857,189
------------ ------------ ------------ ------------
Gross profit 2,710,535 2,403,113 7,629,781 5,697,788
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 1,906,896 1,621,132 5,960,539 4,580,638
Engineering, research and development 567,164 475,022 1,735,283 1,206,704
------------ ------------ ------------ ------------
Total operating expenses 2,474,060 2,096,154 7,695,822 5,787,342
------------ ------------ ------------ ------------
Operating Income (loss) 236,475 306,959 (66,041) (89,554)
Other expense (8,699) (3,839) (9,503) 3,336
Interest expense (146,522) (54,260) (357,952) (117,278)
------------ ------------ ------------ ------------
Total other expense and interest (155,221) (58,099) (367,455) (113,942)
------------ ------------ ------------ ------------
Income (loss) before income taxes 81,254 248,860 (433,496) (203,496)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Income (loss) before change in accounting principle 81,254 248,860 (433,496) (203,496)
Less: Cumulative effect of change in accounting principle -- -- -- 135,887
------------ ------------ ------------ ------------
Net Income (loss) 81,254 248,860 (433,496) (339,383)
Preferred stock dividend requirements (44,250) (44,250) (132,750) (127,850)
------------ ------------ ------------ ------------
Net Income (loss) applicable to common shareholders $ 37,004 $ 204,610 $ (566,246) $ (467,233)
============ ============ ============ ============
Earnings per share:
Net income (loss) from continuing operations $ 0.01 $ 0.06 $ (0.17) $ (0.10)
Cumulative effect of change in accounting principle -- -- -- (0.04)
============ ============ ============ ============
Total basic and diluted net income (loss) per share $ 0.01 $ 0.06 $ (0.17) $ (0.14)
============ ============ ============ ============
Weighted average number of common shares and common
equivalent shares outstanding 3,274,075 3,274,075 3,274,075 3,274,075
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 81,254 $ 248,860 $ (433,496) $ (339,383)
Adjustments to reconcile net income (loss) to net cash
provided by (used) in operating activities:
Depreciation of property and equipment 50,108 45,329 158,888 115,282
Amortization of goodwill and intangible assets 37,277 59,540 151,511 180,371
Cumulative effect of change in accounting principle -- -- -- 131,687
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 117,374 (803,978) (1,260,973) (1,178,083)
Decrease (increase) in other receivables (9,552) (57,838) 160,098 (74,347)
Decrease (increase) in inventories 50,679 (352,030) (1,496,057) (833,329)
Decrease (increase) in prepaids and other current assets 33,856 95,573 56,623 (343,858)
(Increase) in intangibles -- (11,716) (47,966) (630)
(Increase) in other assets (500) (346,883) (5,029) (346,883)
Increase (decrease) in accounts payable (241,783) 1,160,716 1,495,437 1,977,423
Increase (decrease) in accrued expenses (129,823) 40,194 55,787 32,803
(Decrease) in income tax payable -- -- -- (49,977)
------------ ------------ ------------ ------------
Net cash provided by (used) in operating activities (11,110) 77,767 (1,165,177) (728,924)
------------ ------------ ------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (53,851) (127,609) (196,353) (297,282)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 6,915,627 3,642,089 18,262,928 5,422,089
Principal payments on short-term bank borrowings (6,857,998) (3,425,708) (16,835,774) (4,425,708)
Payment of dividends on preferred stock (44,250) (41,800) (88,500) (123,425)
------------ ------------ ------------ ------------
Net cash provided by financing activities 13,379 174,581 1,338,654 872,956
------------ ------------ ------------ ------------
Effect of exchange rate changes (73,767) 69,774 (115,982) (139,038)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (125,349) 194,513 (138,859) (292,288)
Cash and cash equivalents at beginning of period 229,311 216,838 242,820 703,639
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 103,962 $ 411,351 $ 103,961 $ 411,351
============ ============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 150,346 $ 54,260 $ 342,309 $ 117,278
============ ============ ============ ============
Cash paid during the period for income taxes $ -- $ -- $ -- $ 118,915
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the three months ended September 30, 2000 and 1999
Supplemental disclosures of non cash financing activities:
The Company declared and paid $44,250 and $41,800 in dividends on Series
AAA Preferred Stock in the three month periods ended September 30, 2000 and
1999, respectively.
6
<PAGE> 7
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000 and 1999
(1) Basis of Presentation and Disclosure
The unaudited interim condensed financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. However, in the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring accruals) considered
necessary to present fairly the results for the interim periods presented.
The accompanying condensed financial statements and related notes
should be read in conjunction with the Company's audited financial statements
included in its Annual Report on Form 10-KSB for the year ended December 31,
1999. The results of operations for the three and nine months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full calendar year.
(2) Per Share Amounts
The basic net income (loss) per common share has been computed based
upon the weighted average of shares of common stock outstanding. Diluted net
income (loss) per common share assuming dilution has been computed based upon
the weighted average shares of common stock outstanding and shares that would
have been outstanding assuming the issuance of common stock for all dilutive
potential common stock outstanding. The Company's outstanding stock options
and warrants represent the only dilutive potential common stock outstanding.
The amounts of income or loss used in the calculations of diluted and basic
income loss per common share were the same for all the periods presented.
Diluted net income or loss per common share is equal to the basic net income
or loss per common share for the three and nine month periods ended September
30, 2000 and 1999, respectively, as all common equivalent shares from stock
options and stock warrants would have an antidilutive effect.
(3) Translation of Foreign Currency
Foreign currency assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of operations are
translated using the average exchange rate prevailing throughout the period.
The effects of unrealized exchange rate fluctuations on translating foreign
currency assets and liabilities into U. S. dollars are accumulated as the
cumulative translation adjustment in stockholders' equity. Realized gains and
losses on foreign currency transactions, if any, are included in operations
for the period.
(4) Debt
On February 25, 1999, the Company extended its $3,000,000 secured line
of credit facility and $500,000 secured letter of credit facility with
Wachovia Bank, N.A. through March 25, 1999 and subsequently extended to
August 31, 1999 as the Company completed a new and expanded financing
agreement with Fremont Financial Corporation, a subsidiary of Finova Group,
Inc. Fremont Financial Corporation was acquired in December, 1999 by Finova
Group, Inc.
On August 23, 1999, Digital Recorders, Inc. ("DRI") and related
subsidiaries signed a four year Revolving and Term Lines of Credit Agreement
("Credit Agreement") with Fremont Financial Corporation, a subsidiary of
Finova Group Inc. The Credit Agreement provides up to $10 million for
borrowing by DRI to be used for acquisitions, working capital and general
corporate purposes. The amount available to borrow under the revolving
portion of the Credit Agreement is determined based on a formula of eligible
trade accounts receivable and inventory. The trade accounts receivable basis
is eighty-five percent (85%) of eligible domestic U.S. trade accounts plus
the lesser of fifty percent (50%) or $750,000 of eligible trade accounts of
the German subsidiary.
7
<PAGE> 8
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
September 30, 2000 and 1999
(4) Debt , continued
The inventory basis is a weighted average formula on the ratio of
domestic U.S. inventory to the total confirmed sales orders with advances of
thirty-five percent (35%) of primary components and eight percent (8%) of
general inventory with a combined limit of $1,000,000. The term portion of
the Credit Agreement will be primarily used to fund the machinery and
equipment and real estate assets of acquisitions.
The interest rate on the revolving credit portion of the agreement is
at the published prime lending rate plus one and three-quarters percent.
Credit extended for acquisitions will bear an interest rate of prime plus two
percent. The outstanding debt under the revolving credit portion of the
agreement at September 30, 2000 was $4,719,773 with additional borrowing
availability of $891,039 as of September 30, 2000. On October 17, 2000, the
revolving credit line cap under the agreement was increased to $6,250,000
thereby increasing the availability under the agreement.
The Credit Agreement includes customary covenants and conditions
relating to the conduct and operation of DRI's businesses. Specifically, DRI
will be subject to a 1:1 Earnings Before Interest, Taxes, Depreciation and
Amortization to interest coverage ratio to be calculated on a cumulative
basis for the initial four fiscal quarters after the signing date and
thereafter calculated for the four fiscal quarters immediately preceding the
date of determination. The Company was not in compliance with the interest
coverage ratio covenant for the nine months ended September 30, 2000, but
Finova formally waived the non-compliant event through September 30, 2000. In
addition, any acquisitions will require approval from Finova.
(5) 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 ("TPS")
produces automated announcement and passenger information systems and
electronic destination sign products for municipalities, transportation
districts, departments of transportation and bus manufacturers. The law
enforcement and surveillance segment produces digital signal processing
products for law enforcement agencies and organizations.
Operating income (loss) for each segment is total sales less operating
expenses applicable to the segment. Certain corporate overhead expenses
including executive salaries and benefits, public company administrative
expenses, legal and audit fees, and interest expense are not included in
segment operating income (loss). Segment identifiable assets include accounts
receivable, inventories, net property and equipment, net intangible assets
and net goodwill.
8
<PAGE> 9
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
September 30, 2000 and 1999
(5) Segment Information, continued
Sales, operating income (loss), identifiable assets and depreciation
and amortization information for the Company's two operating segments are as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales
Transportation products $ 7,079,446 $ 6,259,678 $ 19,651,901 $ 14,093,211
Law enforcement and surveillance 324,930 299,656 735,264 1,461,766
------------ ------------ ------------ ------------
$ 7,404,376 $ 6,559,334 $ 20,387,165 $ 15,554,977
============ ============ ============ ============
Income (loss) from operations
Transportation products $ 931,849 $ 875,593 $ 2,466,460 $ 1,075,992
Law enforcement and surveillance (83,828) (866) (353,915) 464,440
Corporate office and administration (766,767) (625,867) (2,546,041) (1,748,128)
------------ ------------ ------------ ------------
$ 81,254 $ 248,860 $ (433,496) $ (207,696)
============ ============ ============ ============
Depreciation and amortization
Transportation products $ 42,067 $ 41,694 $ 118,808 $ 97,850
Law enforcement and surveillance 21,696 45,830 112,367 137,738
Corporate office and administration 23,622 17,345 79,224 60,065
------------ ------------ ------------ ------------
$ 87,385 $ 104,869 $ 310,399 $ 295,653
============ ============ ============ ============
Capital expenditures
Transportation products $ 30,281 $ 33,509 $ 128,326 $ 86,043
Law enforcement and surveillance 11,829 5,079 24,667 24,123
Corporate office and administration 11,741 89,021 43,360 187,116
------------ ------------ ------------ ------------
$ 53,851 $ 127,609 $ 196,353 $ 297,282
============ ============ ============ ============
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------ ------------
Identifiable assets
Transportation products $ 12,837,190 $ 10,110,525
Law enforcement and surveillance 1,828,990 1,947,536
Corporate office and administration 858,793 588,172
------------ ------------
$ 15,524,973 $ 12,646,233
============ ============
Long-lived assets
Transportation products $ 419,626 $ 282,624
Law enforcement and surveillance 1,163,313 1,291,465
Corporate office and administration 568,599 271,937
------------ ------------
$ 2,151,538 $ 1,846,026
============ ============
</TABLE>
9
<PAGE> 10
(6) Pronouncement Issued
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities,
which requires start-up activities, including organization costs to be
expensed as incurred. The impact of this pronouncement required the Company
to charge against operations, as a cumulative effect of a change in
accounting principle in the nine month period ended September 30, 1999,
$135,887 of organization costs to conform with this statement.
(7) Comprehensive Income (loss)
Comprehensive income (loss) is comprised of net income (loss) and
foreign currency translation adjustments as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 81,254 $ 248,860 ($433,496) ($339,383)
Translation adjustment (73,767) 69,774 (115,982) (139,038)
--------- --------- --------- ---------
Comprehensive income (loss) $ 7,487 $ 318,634 ($549,478) ($478,421)
========= ========= ========= =========
</TABLE>
(8) Subsequent Events
On October 9, 2000, the Company's Board of Directors declared a dividend
of $44,250 on Series AAA Preferred Stock for stockholders of record as of
September 30, 2000.
On October 27, 2000 the Company and its subsidiary, TwinVision of North
America, Inc. ("TwinVision"), reached a settlement with Mark IV Industries,
Ltd. and the Luminator Holding LP subsidiary of Mark IV Industries, Inc.
(the ultimate parent of Mark IV Industries, Ltd.) in a patent dispute. The
dispute, dating from February 1999, involved three separate legal actions,
and counter actions, in both the United States District Court of the
Northern District of Texas and the United States District Court of the
Eastern District of Texas. DRI was the Defendant in the Northern District
and DRI's TwinVision subsidiary was the Plaintiff in the Eastern District.
The supplier (Lite Vision) of the disputed TwinVision(R) display-technology
components, which is holder of the patents and technology to which DRI's
TwinVision subsidiary is licensed, was also party to the settlement. The
settlement, reached under court-ordered mediation proceedings, included all
related legal actions in this matter. The parties have agreed to settle the
litigation with prejudice, which bars future litigation of the same claims.
Under terms of the settlement agreement no financial consideration is, will,
or has been paid by or among any of the parties. Further, all parties will
bear their own legal expenses.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
Digital Recorders, Inc. (the "Company") designs, manufactures or
contracts for the manufacture of, sells, and services information technology
products primarily through two major business segments. These segments are 1)
the transportation products segment; and 2) the law enforcement and surveillance
segment. The transportation products segment consists of the Digital Recorders
business unit and two wholly owned subsidiaries, Transit-Media GmbH and
TwinVision of North America, Inc. The Company's transportation segment's
products are sold in the transit and transportation vehicle equipment market.
These customers include municipalities, regional transportation districts,
federal, state, and local departments of transportation, transit agencies,
vehicle manufacturers, and public, private, or commercial operators of those
vehicles. The law enforcement and surveillance segment of the Company, Digital
Audio Corporation ("DAC"), primarily serves the law enforcement market
consisting of foreign and United States federal, state, and local law
enforcement agencies or organizations.
The Digital Recorders business unit focuses on supplying the transit
and transportation vehicle equipment market with Automatic Voice Announcement
Systems and services. The DR500C+ Talking Bus(R) system marketed by the Company
includes four core components: a vehicle logic unit (the DR500C+), an Operator
Control Unit, an internal light-emitting diode sign and a Global Positioning
Satellite 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 service for all
passengers, complies with Americans with Disabilities Act legislation, and
further assists the vehicle operator with vehicle management and monitoring
capabilities. The demonstrated and ongoing integration of the DR500C+ product
with other "Intelligent Transportation Systems" technologies is a key element
for potential market growth. Customers include operating agencies that use
transit and transportation vehicles, commercial transportation vehicle
operators, and manufacturers of those vehicles.
Transit-Media GmbH became a wholly owned subsidiary of Digital
Recorders, Inc. after being acquired by the Company in May 1996. Shortly
thereafter, the Company formed TwinVision of North America, Inc. as another
wholly owned subsidiary of the Company and transferred the new technology of the
then recently acquired Transit-Media GmbH to TwinVision of North America, Inc.
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. These products are primarily
sold under the name "TwinVision(R)". Transit-Media GmbH serves the European and
Far Eastern markets while TwinVision of North America, Inc. serves the North
American Free Trade Agreement market. Customers include operating agencies,
which use transit and transportation vehicles, commercial transportation vehicle
operators, and manufacturers of those vehicles.
Digital Audio Corporation, a wholly owned subsidiary of Digital
Recorders, Inc., was acquired in 1995. It produces a line of digital audio
filter systems and tape transcribers used to improve the quality and
intelligibility of both live and recorded voices. Products are marketed, both
domestically and internationally, to law enforcement entities and other
customers in government organizations.
The following discussion provides an analysis of the Company's results
of operations and liquidity and capital resources. This should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto. The operating results of the periods presented were not significantly
affected by inflation.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items included in the Company's Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................................ 63.4 63.4 62.6 63.4
----- ----- ----- -----
Gross profit ........................................ 36.6 36.6 37.4 36.6
----- ----- ----- -----
Operating expenses:
Selling, general and administrative ................. 25.8 24.7 29.2 29.4
Engineering, research and development ............... 7.7 7.2 8.5 7.8
----- ----- ----- -----
Total operating expenses ........................ 33.5 31.9 37.7 37.2
----- ----- ----- -----
Operating income (loss) ............................. 3.2 4.7 (0.3) (0.6)
Other expense and interest ............................... (2.1) (0.9) (1.8) (0.8)
----- ----- ----- -----
Income (loss) before income taxes ................... 1.1 3.8 (2.1) (1.4)
Income tax expense ....................................... -- -- -- --
----- ----- ----- -----
Income (loss) before change in accounting principle . 1.1 3.8 (2.1) (1.4)
Less: Cumulative effect of change in accounting principle -- -- -- 0.8
----- ----- ----- -----
Net income (loss) ........................................ 1.1% 3.8% (2.1)% (0.6)%
===== ===== ===== =====
</TABLE>
Comparison of Three Months Ended September 30, 2000 and 1999
Net sales for the three months ended September 30, 2000 were $7,404,376,
an increase of $845,042 or 12.9%, as compared to $6,559,334 for the comparable
three months in 1999. Increased sales resulting from an increase in market share
in the TPS was the most significant factor contributing to the increase.
During the three months ended September 30, 2000, TPS sales increased
$819,768 or 13.1% from the corresponding three months in the prior year or from
$6,259,678 in 1999 to $7,079,446 in 2000. The increase reflects TPS having
improved market share. TPS business is subject to delivery schedules of
customers causing period to period fluctuations in revenues.
During the three months ended September 30, 2000, DAC sales increased
$25,274, or 8.4%, from the corresponding three months in the prior year or from
$299,656 in 1999 to $324,930 in 2000.
Gross profit for the three months ended September 30, 2000 was
$2,710,535, an increase of $307,422 or 12.8%, over gross profit of $2,403,113
for the three months ended September 30, 1999. As a percentage of sales, gross
profit during the three months ended September 30, 2000 was 36.6% of net sales,
identical to 36.6% during the corresponding three months in 1999.
Selling, general and administrative expenses during the three months
ended September 30, 2000 were $1,906,896, an increase of $285,764 or 17.6% as
compared to expenses of $1,621,132 during the three months ended September 30,
1999. This increase was attributable primarily to higher payroll and related
fringe benefits to support the Company's continued growth. As a percentage of
sales, Selling, General and Administrative increased slightly from 24.7% in 1999
to 25.8% in 2000.
12
<PAGE> 13
Engineering and research and development expenses for the three months
ended September 30, 2000 were $567,164, an increase of $92,142, or 19.4%, as
compared to expenses of $475,022 during the three months ended September 30,
1999. As a percent of sales, these expenses were 7.7% in 2000 and 7.2% in the
same period in 1999. This increase related primarily to additional engineering
personnel and outside engineering expense for software and hardware development,
sustaining product engineering and new product development.
The net change in operating income was a decrease of $70,484 for the
three months ended September 30, 2000 over the same period of year ago. The
operating income for the three months ended September 30, 2000 was $236,475
compared to an operating profit of $306,959 for the three months ended September
30, 1999. The decrease for the three months ended September 30, 2000 is
primarily due to the factors set forth herein.
Total other income (expense) and interest expense for the three months
ended September 30, 2000 was ($155,221), an increase of $97,122 as compared to
($58,099) for the three months ended September 30, 1999.. This increase is
primarily the result of higher interest expense due to increased borrowings and
higher interest rates in the three months ended September 30, 2000.
Comparison of Nine Months Ended September 30, 2000 and 1999
Net sales for the nine months ended September 30, 2000 were $20,387,165,
an increase of $4,832,188 or 31.1%, as compared to $15,554,977 for the
comparable nine months in 1999. Increased sales resulting from an increase in
market share in the TPS was the most significant factor contributing to the
increase.
During the nine months ended September 30, 2000, TPS sales increased
$5,558,690 or 39.4% from the corresponding nine months in the prior year or from
$14,093,211 in 1999 to $19,651,901 in 2000. The increase reflects TPS having
improved market share.
During the nine months ended September 30, 2000, DAC sales decreased
$726,502, or 49.7%, from the corresponding nine months in the prior year or from
$1,461,766 in 1999 to $735,264 in 2000. The sales revenue decline was the result
of timing in new product introduction, reduced customer funding and strategic
issues in addition to a significant government order completed at the end of
March 1999.
Gross profit for the nine months ended September 30, 2000 was
$7,629,781, an increase of $1,931,993 or 34%, over gross profit of $5,697,788
for the nine months ended September 30, 1999. As a percentage of sales, gross
profit during the nine months ended September 30, 2000 was 37.4% of net sales,
as compared to 36.6% during the corresponding nine months in 1999. The increase
in gross profit percentage was caused primarily by a lower cost of sales in the
TPS business units.
Selling, general and administrative expenses during the nine months
ended September 30, 2000 were $5,960,539, an increase of $1,379,901 or 30.1% as
compared to expenses of $4,580,638 during the nine months ended September 30,
1999. This increase was attributed primarily to higher payroll and related
fringe benefits, plus increases in outside services and legal expense. As a
percentage of sales, Selling, General and Administrative decreased from 29.4% in
1999 to 29.2% in 2000.
Engineering and research and development expenses for the nine months
ended September 30, 2000 were $1,735,283, an increase of $528,579, or 43.8%, as
compared to expenses of $1,206,704 during the nine months ended September 30,
1999. As a percent of sales, these expenses were 8.5% in 2000 and 7.8% in the
same period in 1999. This increase related primarily to additional engineering
personnel and outside engineering expense for software and hardware development,
sustaining product engineering and new product development.
The net change in operating loss was a decrease of $23,513 for the nine
months ended September 30, 2000 over the same period of a year ago. The
operating loss for the nine months ended September 30, 2000 was $66,041 compared
to an operating loss of $89,554 for the nine months ended September 30, 1999.
The decrease for the nine months ended September 30, 2000 is primarily due to
the factors set forth herein.
Total other income (expense) and interest expense for the nine months
ended September 30, 2000 was ($367,455), an increase of $253,513 as compared to
($113,942) for the nine months ended September 30, 1999. This increase is
primarily the result of higher interest expense due to increased borrowings and
higher interest rates in the nine months ended September 30, 2000.
13
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LIQUIDITY AND CAPITAL RESOURCES
On February 25, 1999, the Company extended its $3,000,000 secured line
of credit facility and $500,000 secured letter of credit facility with Wachovia
Bank, N.A. through March 25, 1999 and subsequently extended to August 31, 1999
as the Company completed a new and expanded financing agreement with Fremont
Financial Corporation, a subsidiary of Finova Group, Inc. Fremont Financial
Corporation was acquired in December, 1999 by Finova Group, Inc.
On August 23, 1999, Digital Recorders, Inc. ("DRI") and related
subsidiaries signed a four year Revolving and Term Lines of Credit Agreement
("The Credit Agreement") with Fremont Financial Corporation, a subsidiary of
Finova Group Inc. The Credit Agreement provides up to $10 million for borrowing
by DRI to be used for acquisitions, working capital and general corporate
purposes. The amount available to borrow under the revolving portion of the
Credit Agreement is determined based on a formula of eligible trade accounts
receivable and inventory. The trade accounts receivable basis is eighty-five
percent (85%) of eligible domestic U.S. trade accounts plus the lesser of fifty
percent (50%) or $750,000 of eligible trade accounts of the German subsidiary.
The inventory basis is a weighted average formula on the ratio of domestic U.S.
inventory to the total confirmed sales orders with advances of thirty-five
percent (35%) of primary components and eight percent (8%) of general inventory
with a limit of $1,000,000. The term portion of the Credit Agreement will be
primarily used to fund the machinery and equipment and real estate assets of
acquisitions. The outstanding debt under the revolving credit portion of the
agreement at September 30, 2000 was $4,719,773 with additional borrowing
availability of $891,039 as of September 30, 2000. On October 17, 2000, the
revolving credit line cap under the agreement was increased to $6,250,000
thereby increasing the availability under the agreement.
The Credit Agreement includes customary covenants and conditions
relating to the conduct and operation of DRI's businesses. Specifically, DRI
will be subject to a 1:1 Earnings Before Interest, Taxes, Depreciation and
Amortization to interest coverage ratio to be calculated on a cumulative basis
for the initial four fiscal quarters after the signing date and thereafter
calculated for the four fiscal quarters immediately preceding the date of
determination. The Company was not in compliance with the interest coverage
ratio covenant for the nine months ended September 30, 2000, but Finova formally
waived the non-compliant event through September 30, 2000. In addition, any
acquisitions will require approval from Finova.
The interest rate on the revolving credit portion of the agreement is
at the published prime lending rate plus one and three-quarters percent. Credit
extended for acquisitions will bear an interest rate of prime plus two percent.
As of September 30, 2000 the Company's principal sources of liquidity
included cash and cash equivalents of $103,962, trade accounts receivable of
$6,832,425, inventory of $5,818,448, short-term borrowings under its Credit
Agreement of $4,719,773 and trade accounts payable of $4,542,773 providing the
Company with net working capital of $3,315,868.
The Company's operating activities used cash of $11,110 and provided
cash of $77,767 during the three months ended September 30, 2000 and 1999,
respectively. For the three months ended September 30, 2000, the lower operating
profit and decrease in trade accounts payable was offset by the decrease in
accounts receivable. For the three months ended September 30, 2000, the decrease
in trade accounts payable accounted for the majority of the cash used. Working
capital requirements will continue to increase with growth in the Company's
sales, primarily due to the span between the time the Company must pay its
suppliers and the time the Company receives payment from its customers,
particularly its governmental customers and bus manufacturers in Europe.
The Company's investing activities used cash of $53,851 and $127,609 in
the three months ended September 30, 2000 and 1999, respectively. During both
periods, the use of cash was primarily for computer systems related expenditures
and office furniture and fixtures for additional personnel.
The Company's financing activities provided net cash of $13,379 and
$174,581 during the three month periods ended September 30, 2000 and 1999,
respectively.
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<PAGE> 15
The Company's cash requirements, other than for normal operating
expenses, will relate to the development of new products and enhancement of
existing products, financing anticipated growth, and the possible acquisition of
products or technologies complementary to the Company's business. The Company
believes a combination of its net working capital and the borrowing capacity
available under its credit facility provide the liquidity and capital resources
necessary to satisfy the Company's currently anticipated internal cash
requirements for 2000 and 2001.
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 24, 1999, Mark IV Industries, Ltd. ("Mark IV") filed a
lawsuit, Mark IV Industries, Ltd. v. Digital Recorders, Inc ("The Company"), in
the United States District Court for the Northern District of Texas, alleging
the Company is infringing two U.S. patents held by Mark IV and seeking
unspecified monetary damages, treble damages, and injunctive relief. The
allegations relate to the display elements used in the TwinVision of North
America, Inc. ("TwinVision") destination sign systems manufactured and marketed
by TwinVision, a subsidiary of the Company under an exclusive license for the
display patented technology from Lite Vision Corporation ("Lite Vision") of
Taiwan. Lite Vision also supplies certain display components and assemblies used
in the systems. On April 7, 1999, the Company filed an answer to the complaint,
in which it denied all the plaintiff's allegations and asserted counterclaims
against Mark IV, including alleged violations of the antitrust laws. The Company
subsequently filed amended answers and counterclaims, moved for summary judgment
of non-infringement, and achieved U. S. Patent Office agreement to review the
validity, or lack thereof, of one of the two Mark IV patents in question.
In a separate action filed July 26, 1999, also in the United States
District Court for the Northern District of Texas, Mark IV further alleged the
Company is infringing a continuation patent related to one of the two patents
that is the subject of the lawsuit filed in February 1999, described above. In
this second action, Mark IV asserts similar claims and seeks similar relief.
On April 27, 1999, a U.S. patent on the technology used in the
TwinVision sign systems product was issued to Lite Vision. Further, on February
15, 2000, the U.S. Patent Office issued a second patent to Lite Vision under a
continuation of the first Lite Vision Patent.
On February 15, 2000, TwinVision filed a legal action, TwinVision v.
Luminator, in the United States District Court for the Eastern District of
Texas, against the Luminator Holding LP subsidiary of Mark IV Industries, Inc.,
the ultimate parent of Mark IV Industries, Ltd. This action alleges infringement
of the Lite Vision patents, including the recently issued continuation patent,
to which TwinVision holds an exclusive license and seeks damages, and injunctive
relief.
15
<PAGE> 16
On July 10, 2000 the Company and Mark IV entered into the second of two
court ordered mediation meetings to discuss possible terms of settlement.
Subsequently, on October 27, 2000, the Company and TwinVision, reached
a settlement with Mark IV Industries, Ltd. and the Luminator Holding LP
subsidiary of Mark IV Industries, Inc., on the foregoing disputes. The
settlement, reached under court-ordered mediation proceedings, included all
related legal actions in this matter. The parties have agreed to settle the
litigation with prejudice, which bars future litigation of the same claims.
Under terms of the settlement agreement no financial consideration is, will, or
has been paid by or among any of the parties. Further, all parties will bear
their own legal expenses.
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 2 . CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) There were no reports Form 8-K for the quarter ended September 30,
2000
16
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this Form 10-QSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: November 14, 2000 By: /s/ DAVID L. TURNEY
-------------------------------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: November 14, 2000 By: /s/ LAWRENCE A. TAYLOR
-------------------------------------------
Lawrence A. Taylor, Chief Financial Officer
17
