<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 9, 2000
Transitional Small Business Disclosure Format (check one); Yes No X
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C> <C>
Financial Statements:
Consolidated Balance Sheets................................................................... 3
Consolidated Statements of Operations......................................................... 4
Consolidated Statements of Cash Flows ........................................................ 5-6
Notes to Consolidated Financial Statements.................................................... 7-9
</TABLE>
2
<PAGE>
DIGITAL RECORDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
ASSETS (Unaudited) (Audited)
------ -------------- -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 445,023 $ 242,820
Trade accounts receivable, less allowance for doubtful accounts of $77,250
at March 31, 2000 and December 31, 1999 5,470,164 5,571,452
Other receivables 38,933 212,182
Inventories 5,652,020 4,322,391
Prepaids and other current assets 573,030 623,139
-------------- -----------------
Total current assets 12,179,170 10,971,984
-------------- -----------------
Property and equipment, less accumulated deprecication of
$574,240 and $525,875 at March 31, 2000 and December 31, 1999, respectively 562,433 555,567
Goodwill, less accumulated amortization of $735,598 and $700,205
at March 31, 2000 and December 31, 1999, respectively 1,172,837 1,208,230
Intangible assets, less accumulated amortization of $313,407 and $290,771
at March 31, 2000 and December 31, 1999, respectively 108,122 86,974
Deferred taxes 122,235 122,235
Other assets 248,052 239,583
-------------- -----------------
TOTAL ASSETS $ 14,392,849 $ 13,184,573
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 3,533,622 $ 3,292,619
Accounts payable 4,662,490 3,047,336
Accrued expenses 610,552 650,733
Preferred stock dividends payable 88,500 44,250
-------------- -----------------
Total current liabilities 8,895,164 7,034,938
-------------- -----------------
TOTAL LIABILITIES 8,895,164 7,034,938
-------------- -----------------
Series AAA Redeemable, Convertible, Nonvoting Preferred Stock, $.10 par value
Liquidation Preference of $5,000 per share, 20,000 shares authorized;
354 shares issued and outstanding at March 31, 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 March 31, 2000 and at December 31, 1999 327,407 327,407
Additional paid-in capital 11,290,840 11,335,090
Accumulated other comprehensive loss - foreign currency translation (248,494) (237,278)
Accumulated deficit (7,642,068) (7,045,584)
-------------- -----------------
Total stockholders' equity 3,727,685 4,379,635
-------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,392,849 $ 13,184,573
============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------------ ----------------
<S> <C> <C>
Net sales $ 5,006,357 $ 4,039,371
Cost of sales 3,078,945 2,350,746
------------------ ----------------
Gross profit 1,927,412 1,688,625
------------------ ----------------
Operating expenses:
Selling, general and administrative 1,843,540 1,399,349
Engineering, research and development 598,220 396,316
------------------ ----------------
Total operating expenses 2,441,760 1,795,665
------------------ ----------------
Operating loss (514,348) (107,040)
Other income (expense) (157) 4,315
Interest expense (81,980) (24,487)
------------------ ----------------
Total other expense and interest (82,137) (20,172)
------------------ ----------------
Loss before income taxes (596,485) (127,212)
Income tax expense - 913
------------------ ----------------
Net loss before change in accounting principle (596,485) (128,125)
Less: Cumulative effect of change in accounting principle - 131,686
------------------ ----------------
Net loss (596,485) (259,811)
Preferred stock dividend requirements (44,250) (41,800)
------------------ ----------------
Net loss applicable to common shareholders $ (640,735) $ (301,611)
================== ================
Earnings per share:
Net loss before change in accounting principle $ (0.18) $ (0.04)
Net loss from change in accounting principle - (0.04)
Preferred stock dividend requirements (0.01) (0.01)
------------------ ----------------
Total basic and diluted net loss per share $ (0.19) $ (0.09)
================== ================
Weighted average number of common shares and common
equivalent shares outstanding 3,274,075 3,274,075
================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DIGITAL RECORDERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (596,485) $ (259,811)
Adjustments to reconcile net loss to net cash provided by
(used) in operating activities:
Depreciation of property and equipment 48,365 34,194
Amortization of goodwill and intangible assets 58,029 67,357
Net book value of intangible assets written off - 131,686
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 101,288 16,582
Decrease (increase) in other receivables 173,249 (21,130)
(Increase) in inventories (1,329,629) (614,259)
Decrease (increase) in prepaids and other current assets 50,109 (267,770)
Decrease (increase) in intangibles (43,784) 10,815
(Increase) in other assets (8,469) -
Increase (decrease) in accounts payable 1,615,153 (125,251)
Increase (decrease) in accrued expenses (40,180) 126,867
(Decrease) in income tax payable - (49,977)
-------------- -------------
Net cash provided by (used) in operating activities 27,646 (950,697)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (55,231) (71,358)
-------------- -------------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 4,439,235 1,075,000
Principal payments on short-term bank borrowings (4,198,231) (450,000)
Payment of dividends on preferred stock - (41,800)
-------------- -------------
Net cash provided by financing activities 241,004 583,200
-------------- -------------
Effect of exchange rate changes (11,216) (151,809)
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Net increase (decrease) in cash and cash equivalents 202,203 (590,664)
Cash and cash equivalents at beginning of period 242,820 703,639
-------------- -------------
Cash and cash equivalents at end of period $ 445,023 $ 112,975
============== =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 79,129 $ 24,487
============== =============
Cash paid during the period for income taxes $ - $ 118,915
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the three month periods ended March 31, 2000 and 1999
Supplemental disclosures of non cash financing activities:
The Company declared $44,250 and $41,800 in dividends on Series AAA Preferred
Stock in the three month periods ended March 31, 2000 and 1999, respectively.
The accrued dividend payments due in the three period ended March 31, 2000
were paid April 7, 2000. The Company paid $41,800 in cash dividends in the
three month period ended March 31, 1999.
6
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DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 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 of only normal recurring
accruals) considered necessary to present fairly the results for the
interim periods presented.
The accompanying condensed financial statements and related notes
should be read in conjunction with the Company's audited financial
statements included in its Annual Report on Form 10-KSB for the year
ended December 31, 1999. The results of operations for the three months
ended March 31, 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 loss used in the
calculations of diluted and basic income loss per common share were the
same for all the periods presented. Diluted net loss per common share is
equal to the basic net loss per common share for the three month periods
ended March 31, 2000 and 1999, respectively, as all common equivalent
shares from stock options and stock warrants would have an antidilutive
effect. Cash dividends declared on the preferred stock during the period
were added to the net loss to determine the net loss per share. Cash
dividends declared were $44,250 and $41,800 for each of the three month
periods ended March 31, 2000 and 1999, respectively.
(3) TRANSLATION OF FOREIGN CURRENCY
Foreign currency assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Results of
operations are translated using the average exchange rate prevailing
throughout the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into
U.S. dollars are accumulated as the cumulative translation adjustment
in stockholders' equity. Realized gains and losses on foreign currency
transactions, if any, are included in operations for the period.
7
<PAGE>
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
March 31, 2000 and 1999
(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 which was 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.. The outstanding indebtedness was retired on August
23, 1999 as the Company entered into a new credit agreement with Fremont
Financial Corporation as of that date.
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. 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 combined
phase in limit of $750,000. The term portion of the Credit Agreement
will be primarily used to fund machinery and equipment purchases and
acquisitions. The interest rate on the revolving credit portion of the
agreement is a variable rate of interest published by the Wall Street
Journal as the "prime rate" and based on the base rate on corporate
loans posted by at least 75% of the nation's 30 largest banks plus one
and three-quarters percent. Credit extended for acquisitions will bear
an interest rate of the previously defined prime rate plus two percent.
The outstanding debt under the revolving credit portion of the agreement
at March 31, 2000 was $3,533,621 with additional borrowing availability
of $1,524,436.
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. In addition, the acquisition of any
companies will require approval from Fremont.
(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 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
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DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
March 31, 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 March 31,
2000 1999
------------ ------------
<S> <C> <C>
Net sales
Transportation products $ 4,837,807 $ 3,336,778
Law enforcement and surveillance 168,550 702,593
------------ ------------
$ 5,006,357 $ 4,039,371
============ ============
Income (loss) from operations
Transportation products 360,487 53,708
Law enforcement and surveillance (140,157) 322,258
Corporate office and administration (734,678) (483,006)
------------ ------------
$ (514,348) $ (107,040)
============ ============
Identifiable assets
Transportation products $11,592,466 $ 7,808,003
Law enforcement and surveillance 1,803,013 2,414,763
Corporate office and administration 997,369 191,903
------------ ------------
$14,392,849 $10,414,669
============ ============
Depreciation and amortization
Transportation products $ 37,159 $ 30,049
Law enforcement and surveillance 44,727 46,321
Corporate office and administration 24,509 25,181
------------ ------------
$ 106,394 $ 101,551
============ ============
</TABLE>
(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 three month period
ended March 31, 1999 $131,686 of organization costs to conform with this
statement.
(7) SUBSEQUENT EVENTS
On April 25, 2000, the Board of Directors authorized the extension of
the term of its Redeemable Warrants to Purchase Common Stock (the
"Warrants") sold in the Registrant's public offering in November 1994.
As extended, the Warrants may be exercised at any time prior to 5:00
P.M. Eastern Time on December 29, 2000. All Warrants not exercised on or
prior to such date shall expire, subject to the right of the Company to
extend such date. All other terms of the Warrants remain unchanged.
On May 1, 2000, the Company's Board of Directors declared a dividend
on Series AAA Preferred Stock for stockholders of record as of March 31,
2000. The dividends totaled $44,250.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Digital Recorders, Inc. (the "Company") incorporated in 1983 designs,
manufactures or contracts for the manufacturing of, 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 products segment 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 is known as Digital Audio
Corporation and 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-Registered Tradmark- 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 which 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-Registered Tradmark-".
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.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items included in the Company's Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Net sales .......................................................................... 100.0 % 100.0 %
Cost of sales ...................................................................... 61.5 58.2
-------------- -------------
Gross profit ................................................................. 38.5 41.8
-------------- -------------
Operating expenses:
Selling, general and administrative .......................................... 36.9 34.7
Engineering, research and development ........................................ 11.9 9.8
-------------- -------------
Total operating expenses ............................................... 48.8 44.5
-------------- -------------
Operating Loss ............................................................... (10.3) (2.7)
Other expense and interest ......................................................... (1.6) (0.5)
-------------- -------------
Loss before income taxes ..................................................... (11.9) (3.2)
Income tax expense (benefit) .......................................................
-------------- -------------
Loss before accounting change in accounting principal ....................... (11.9) (3.2)
Less: Change in accounting in accounting principal ................................ - (3.2)
-------------- -------------
Net Loss ........................................................................... (11.9) % (6.4) %
============== =============
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net sales for the three months ended March 31, 2000 were $5,006,357 an
increase of $966,986 or 23.9%, as compared to $4,039,371 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 March 31, 2000, TPS sales increased
$1,501,029 or 45.0% from the corresponding three months in the prior year. TPS
sales increased from $3,336,778 in 1999 to $4,837,807 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 March 31, 2000, DAC sales decreased
$534,043, or 76.0%, from the corresponding three months in the prior year. DAC
sales decreased from $702,593 in 1999 to $168,550 in 2000. A significant
government order completed at the end March 1999 accounted for the
extraordinary high sales revenues in the quarter ended March 31, 1999.
Gross profit for the three months ended March 31, 2000 was $1,927,412,
an increase of $238,787 or 14.1%, over gross profit of $1,688,625 for the
three months ended March 31, 1999. As a percentage of sales, gross profit
during the three months ended March 31, 2000 was 38.5% of net sales, as
compared to 41.8% during the corresponding three months in 1999. The decrease
in gross profit percentage was caused primarily by a lower percentage of sales
in DAC that historically has higher gross margins than the TPS business units.
Selling, general and administrative expenses during the three months
ended March 31, 2000 were $1,843,540, an increase of $444,191 or 31.7% as
compared to expenses of $1,399,349 during the three months ended March 31,
1999. This increase was attributed primarily to higher payroll and related
fringe benefits plus increases in outside and professional services expense.
11
<PAGE>
Engineering, research and development expenses for the three months
ended March 31, 2000 were $598,220, an increase of $201,904, or 50.9%, as
compared to expenses of $396,316 during the three months ended March 31, 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.
Operating losses increased by $407,308 from $107,040 for the three
months ended March 31, 1999 to $514,348 for the three months ended March 31,
2000 primarily due to the factors set forth above.
Total other income (expense) and interest expense for the three
months ended March 31, 2000 was a net expense of $82,137, an increase of
$61,966 as compared to a net expense for the three months ended March 31, 1999
of $20,172. This increase is primarily the result of higher interest expense
in the three months ended March 31, 2000.
For the three-month periods ended March 31, 2000 and 1999, the
Company did not record any significant income tax expense. As a result of the
accumulated losses incurred in past years, the Company had a net operating
loss carry forward for federal income tax purposes of $2,280,925 as of
December 31, 1999. This carry forward will be available to offset federal
taxable income, if any, through 2006 to 2012. Also, as of December 31, 1999,
one of the Company's subsidiaries had a net economic loss carry forward for
state income tax purposes of $1,435,193, which will be available to offset
future state taxable income, if any, through 2002 and 2003. Following
utilization of the existing federal and state loss carry forwards, the
Company's future operations, if profitable, will be subject to income tax
expense.
LIQUIDITY AND CAPITAL RESOURCES
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 which was 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. The outstanding indebtedness was retired on August 23, 1999 as the
Company entered into a new credit agreement with Fremont Financial Corporation
as of that date.
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. 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 combined phase
in limit of $750,000. The term portion of the Credit Agreement will be
primarily used to fund machinery and equipment purchases and acquisitions. The
interest rate on the revolving credit portion of the agreement is a variable
rate of interest published by the Wall Street Journal as the "prime rate" and
based on the base rate on corporate loans posted by at least 75% of the
nation's 30 largest banks plus one and three-quarters percent. Credit extended
for acquisitions will bear an interest rate of the previously defined prime
rate plus two percent. The outstanding debt under the revolving credit portion
of the agreement at March 31, 2000 was $3,533,621 with additional borrowing
availability of $1,524,436.
As of March 31, 2000 the Company's principal sources of liquidity
included cash and cash equivalents of $445,023, trade accounts receivable of
$5,470,164, inventory of $5,652,020, short-term bank borrowings of $3,533,622
and trade accounts payable of $4,662,490 providing the Company with net
working capital of $3,284,006.
The Company's operating activities provided cash of $27,646 and used
cash of $950,697 during the three months ended March 31, 2000 and 1999,
respectively. For the three months ended March 31, 2000, the net operating
loss and increase in inventories was primarily offset by the increase in trade
accounts payable. For the three months ended March 31, 1999, the net operating
loss, the increase in inventories, increase in prepaids and other current
assets account for the majority of the cash used. Working capital
requirements will increase with growth in the Company's sales, primarily due
to the span between the time the Company must pay its suppliers and the time
the Company receives payment from its customers, particularly its governmental
customers and bus manufacturers in Europe.
12
<PAGE>
The Company's investing activities used cash of $55,231 and $71,358
in the three months ended March 31,2000 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 $241,004 and
$583,200 during the three month periods ended March 31, 2000 and 1999,
respectively and related to the net increase in short term bank borrowings.
The Company's cash requirements, other than for normal operating
expenses, will relate to the development of new products and enhancement of
existing products, financing anticipated growth, and the possible acquisition
of products or technologies complementary to the Company's business. The
Company believes a combination of its net working capital and the borrowing
capacity available under its credit facility provide the liquidity and capital
resources necessary to satisfy the Company's currently anticipated cash
requirements for 2000.
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., 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 destination sign systems
manufactured and marketed by the TwinVision of North America, Inc. 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 has
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.
13
<PAGE>
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, the TwinVision of North America, Inc.
subsidiary of the Company 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, under
which TwinVision holds an exclusive license, seeks damages, and injunctive
relief.
The Company believes Mark IV's claims and allegations, in both
actions brought against the Company, are without merit. The Company believes
that Lite Vision's U.S. and foreign patents, and patents pending, will support
the Company's position in all matters described above. The Company intends to
defend itself vigorously, and assert its rights, 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 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) Reports on Form 8-K
(1) The Company filed a report on Form 8-K, dated May 10, 2000,
regarding the extension of the terms of its Redeemable Warrants to
Purchase Common Stock (the "Warrants"). As extended, the Warrants
may be exercised at anytime prior to 5:00 P.M. Eastern Time on
December 29, 2000. All other terms of the Warrants remain
unchanged.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this Form 10-QSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: May 11, 2000 By: /s/ DAVID L. TURNEY
--------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: May 11, 2000 By: /s/ LAWRENCE A. TAYLOR
-----------------------
Lawrence A. Taylor, Chief Financial Officer
15
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