<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 10, 2000
Transitional Small Business Disclosure Format (check one); Yes No X
<PAGE> 2
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
ITEM PAGE
----
Financial Statements:
Consolidated Balance Sheets.........................................3
Consolidated Statements of Operations...............................4
Consolidated Statements of Cash Flows ..............................5-6
Notes to Consolidated Financial Statements..........................7-9
2
<PAGE> 3
DIGITAL RECORDERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited) (Note)
-------------- ---------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 229,311 $ 242,820
Trade accounts receivable, less allowance for doubtful accounts of $77,250
at June 30, 2000 and December 31, 1999 6,949,799 5,571,452
Other receivables 42,532 212,182
Inventories 5,869,127 4,322,391
Prepaids and other current assets 600,372 623,139
------------ ------------
Total current assets 13,691,141 10,971,984
------------ ------------
Property and equipment, less accumulated depreciation of
$634,655 and $525,875 at June 30, 2000 and December 31, 1999, respectively 589,289 555,567
Goodwill, less accumulated amortization of $770,991 and $700,205
at June 30, 2000 and December 31, 1999, respectively 1,137,444 1,208,230
Intangible assets, less accumulated amortization of $334,217 and $290,771
at June 30, 2000 and December 31, 1999, respectively 91,492 86,974
Deferred taxes 122,235 122,235
Other assets 244,112 239,583
------------ ------------
TOTAL ASSETS $ 15,875,713 $ 13,184,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 4,662,144 $ 3,292,619
Accounts payable 4,784,556 3,047,336
Accrued expenses 836,346 650,733
Preferred stock dividends payable 88,500 44,250
------------ ------------
Total current liabilities 10,371,546 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 June 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 June 30, 2000 and at
December 31, 1999 327,407 327,407
Additional paid-in capital 11,246,590 11,335,090
Accumulated other comprehensive loss - foreign currency translation (279,494) (237,278)
Accumulated deficit (7,560,334) (7,045,584)
------------ ------------
Total stockholders' equity 3,734,167 4,379,635
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,875,713 $ 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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 7,976,432 $ 4,956,272 $ 12,982,789 $ 8,995,643
Cost of sales 4,984,598 3,350,222 8,063,543 5,700,968
----------- ----------- ------------ -----------
Gross profit 2,991,834 1,606,050 4,919,246 3,294,675
----------- ----------- ------------ -----------
Operating expenses:
Selling, general and administrative 2,210,104 1,560,157 4,053,643 2,959,506
Engineering, research and development 569,899 335,367 1,168,119 731,682
----------- ----------- ------------ -----------
Total operating expenses 2,780,003 1,895,524 5,221,762 3,691,188
----------- ----------- ------------ -----------
Operating Income (loss) 211,831 (289,474) (302,514) (396,513)
Other expense (647) -- (804) --
Interest expense (129,451) (36,792) (211,430) (56,965)
----------- ----------- ------------ -----------
Total other expense and interest (130,098) (36,792) (212,234) (56,965)
----------- ----------- ------------ -----------
Income (loss) before income taxes 81,733 (326,266) (514,750) (453,478)
Income tax expense -- 2,167 -- 3,080
----------- ----------- ------------ -----------
Income (loss) before change in accounting principle 81,733 (328,433) (514,750) (456,558)
Less: Cumulative effect of change in accounting
principle -- -- -- 131,686
----------- ----------- ------------ -----------
Net Income (loss) 81,733 (328,433) (514,750) (588,244)
Preferred stock dividend requirements (44,250) (41,800) (88,500) (83,600)
----------- ----------- ------------ -----------
Net Income (loss) applicable to common shareholders $ 37,483 $ (370,233) $ (603,250) $ (671,844)
=========== =========== ============ ===========
Earnings per share:
Net income (loss) before change in accounting
principle $ 0.02 $ (0.10) $ (0.16) $ (0.14)
Loss from change in accounting principle -- -- -- (0.04)
Preferred stock dividend requirements (0.01) (0.01) (0.02) (0.02)
----------- ------------ ------------ -----------
Total basic and diluted net loss per share $ 0.01 $ (0.11) $ (0.18) $ (0.20)
=========== ============ ============ ===========
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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 81,733 $(328,433) $ (514,750) $ (588,244)
Adjustments to reconcile net income (loss)
to net cash provided by (used) in operating activities:
Depreciation of property and equipment 60,415 35,760 108,780 69,954
Amortization of goodwill and intangible assets 56,203 53,474 114,232 120,831
Cumulative effect of change in accounting
principle -- -- -- 131,686
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable (1,479,635) (390,687) (1,378,347) (374,105)
Decrease (increase) in other receivables (3,599) 4,622 169,650 (16,508)
Decrease (increase) in inventories (217,107) 132,959 (1,546,736) (481,299)
Decrease (increase) in prepaids and other current assets (27,342) (171,660) 22,767 (439,431)
Decrease (increase) in intangibles (4,180) 270 (47,966) 11,085
Decrease (increase) in other assets 3,940 -- (4,529) --
Increase in accounts payable 122,067 785,209 1,737,220 659,958
Increase in accrued expenses 225,793 24,467 185,613 151,334
(Decrease) in income tax payable -- -- -- (49,977)
----------- --------- ----------- -----------
Net cash provided by (used) in
operating activities (1,181,712) 145,981 (1,154,066) (804,716)
----------- --------- ----------- -----------
Cash flows used in investing activities:
Purchases of property and equipment (87,271) (98,314) (142,502) (169,672)
----------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from short-term bank borrowings 6,908,067 705,000 11,347,301 1,780,000
Principal payments on short-term bank borrowings (5,779,546) (550,000) (9,977,776) (1,000,000)
Payment of dividends on preferred stock (44,250) (41,800) (44,250) (83,600)
----------- --------- ----------- -----------
Net cash provided by financing activities 1,084,271 113,200 1,325,275 696,400
----------- --------- ----------- -----------
Effect of exchange rate changes (31,000) (57,005) (42,216) (208,813)
----------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (215,712) 103,862 (13,509) (486,801)
Cash and cash equivalents at beginning of period 445,023 112,976 242,820 703,639
----------- --------- ----------- -----------
Cash and cash equivalents at end of period $ 229,311 $ 216,838 $ 229,311 $ 216,838
=========== ========= =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 112,834 $ 34,576 $ 191,964 $ 53,526
============ ========= =========== ===========
Cash paid during the period for income taxes $ -- $ 118,915 $ -- $ 118,915
============ ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
DIGITAL RECORDERS, INC.
Consolidated Statements of Cash Flows, Continued (Unaudited)
For the three months ended June 30, 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 June 30,
2000 and 1999, respectively. The Company paid $44,250 and $41,800 in
cash dividends in the three month periods ended June 30, 2000 and 1999,
respectively.
6
<PAGE> 7
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 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 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 and six months ended June 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 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 and six month periods ended June 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. 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 the machinery and equipment
and real estate assets of acquisitions.
7
<PAGE> 8
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
June 30, 2000 and 1999
(4) Debt, continued
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 June 30, 2000 was $4,662,144 with
additional borrowing availability of $337,856. The revolving credit
facility cap was increased from $5.0 million to $5.75 million on August
3, 2000 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. 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.
Sales, operating income (loss), identifiable assets and
depreciation and amortization information for the Company's two
operating segments are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
----------- ------------- ------------ ------------
Net sales
<S> <C> <C> <C> <C>
Transportation products $ 7,734,648 $ 4,496,755 $ 12,572,456 $ 7,833,533
Law enforcement and surveillance 241,784 459,517 410,333 1,162,110
----------- ------------ ------------ -----------
$ 7,976,432 $ 4,956,272 $ 12,982,789 $ 8,995,643
=========== ============ ============ ===========
Income (loss) from operations
Transportation products $ 1,176,491 $ 176,307 $ 1,536,979 $ 230,016
Law enforcement and surveillance (129,929) 143,048 (270,086) 465,306
Corporate office and administration (834,731) (608,829) (1,569,407) (1,091,835)
----------- ------------ ------------ -----------
$ 211,831 $ (289,474) $ (302,514) $ (396,513)
=========== ============ ============ ===========
</TABLE>
8
<PAGE> 9
DIGITAL RECORDERS, INC.
Notes to Consolidated Financial Statements - Continued (Unaudited)
June 30, 2000 and 1999
(5) Segment Information, continued
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Depreciation and amortization
Transportation products $ 39,581 $ 26,107 $ 76,740 $ 56,156
Law enforcement and surveillance 45,944 45,587 90,670 91,908
Corporate office and administration 31,093 17,540 55,602 42,721
------------ ----------- ----------- ----------
$ 116,618 $ 89,234 $ 223,012 $ 190,785
============ =========== =========== ==========
Capital expenditures
Transportation products $ 54,732 $ 33,525 $ 98,045 $ 52,534
Law enforcement and surveillance 4,077 852 12,838 19,044
Corporate office and administration 28,462 63,937 31,619 98,094
------------ ----------- ----------- ----------
$ 87,271 $ 98,314 $ 142,502 $ 169,672
============ =========== =========== ==========
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Identifiable assets
Transportation products $ 13,017,797 $ 8,193,062
Law enforcement and surveillance 1,780,656 2,083,635
Corporate office and administration 1,077,260 679,647
------------ -----------
$ 15,875,713 $10,956,344
============ ===========
Long-lived assets
Transportation products $ 420,366 $ 273,797
Law enforcement and surveillance 1,173,180 1,332,216
Corporate office and administration 591,026 211,009
------------ -----------
$ 2,184,572 $ 1,817,022
============ ===========
</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 six month period
ended June 30, 1999 , $131,686 of organization costs to conform with
this statement.
(7) Comprehensive Income
Comprehensive income (loss) is comprised of new income (loss)
and foreign currency translations adjustments as follows:
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------- --------- --------- ---------
$50,733 ($385,438) ($556,966) ($797,057)
(8) Subsequent Events
On July 24, 2000, the Company's Board of Directors declared a
dividend of $44,250 on Series AAA Preferred Stock for stockholders of
record as of June 30, 2000.
9
<PAGE> 10
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 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, Digital
Audio Corporation, 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 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(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.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented
by certain items included in the Company's Statements of Operations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- ---------------
2000 1999 2000 1999
------- ------ ------ ------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 62.5 67.6 62.1 63.4
------ ------ ------ ------
Gross profit 37.5 32.4 37.9 36.6
------ ------ ------ ------
Operating expenses:
Selling, general and administrative 27.7 31.5 31.1 32.9
Engineering, research and development 7.1 6.8 9.0 8.1
------ ------ ------ ------
Total operating expenses 34.8 38.3 40.2 41.0
------ ------ ------ ------
Operating income (loss) 2.7 (5.9) (2.3) (4.4)
Other expense and interest (1.7) (0.7) (1.7) (0.6)
------ ------ ------ ------
Income (loss) before income taxes 1.0 (6.6) (4.0) (5.0)
Income tax expenses -- -- -- --
------ ------ ------ ------
Income (loss) before change in
accounting principle 1.0 (6.6) (4.0) (5.0)
Less: Cumulative effect of change in
accounting principle -- -- -- 1.5
------ ------ ------ ------
Net income (loss) 1.0 % (6.6)% (4.0)% (3.6) %
====== ====== ====== ======
Comparison of Three Months Ended June 30, 2000 and 1999
Net sales for the three months ended June 30, 2000 were $7,976,432, an
increase of $3,020,160 or 60.9%, as compared to $4,956,272 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 June 30, 2000, TPS sales increased
$3,237,893 or 72.0% from the corresponding three months in the prior year or
from $4,496,755 in 1999 to $7,734,648 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 June 30, 2000, DAC sales decreased
$217,733, or 47.4%, from the corresponding three months in the prior year or
from $459,517 in 1999 to $241,784 in 2000. The sales revenue decline was the
result of timing in new product introduction, customer funding and strategic
issues.
Gross profit for the three months ended June 30, 2000 was $2,991,834, an
increase of $1,385,784 or 86.3%, over gross profit of $1,606,050 for the three
months ended June 30, 1999. As a percentage of sales, gross profit during the
three months ended June 30, 2000 was 37.5% of net sales, as compared to 32.4%
during the corresponding three 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 three months
ended June 30, 2000 were $2,210,104, an increase of $649,947 or 41.7% as
compared to expenses of $1,560,157 during the three months ended June 30, 1999.
This increase was attributed primarily to higher payroll and related fringe
benefits plus increases in outside services and legal expense.
11
<PAGE> 12
Engineering and research and development expenses for the three months
ended June 30, 2000 were $569,899, an increase of $234,532, or 69.9%, as
compared to expenses of $335,367 during the three months ended June 30, 1999. As
a percent of sales, these expenses were 7.1% in 2000 and 6.8% 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 income was an increase of $501,305 for the
three months ended June 30, 2000 over the same period of a year ago. The
operating income for the three months ended June 30, 2000 was $211,831 compared
to an operating loss of $289,474 for the three months ended June 30, 1999. The
increase for the three months ended June 30, 2000 is primarily due to the
factors set forth above.
Total other income (expense) and interest expense for the three months
ended June 30, 2000 was a net expense of $130,098, an increase of $93,306 as
compared to a net expense for the three months ended June 30, 1999 of $36,792.
This increase is primarily the result of higher interest expense due to
increased borrowings and higher interest rates in the three months ended June
30, 2000.
Comparison of Six Months Ended June 30, 2000 and 1999
Net sales for the six months ended June 30, 2000 were $12,982,789 an
increase of $3,987,146 or 44.3%, as compared to $8,995,643 for the comparable
six 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 six months ended June 30, 2000, TPS sales increased
$4,738,923 or 60.5% from the corresponding six months in the prior year or from
$7,833,533 in 1999 to $12,572,456 in 2000. The increase reflects TPS having
improved market share.
During the six months ended June 30, 2000, DAC sales decreased $751,777,
or 64.7%, from the corresponding six months in the prior year or from $1,162,110
in 1999 to $410,333 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 six months ended June 30, 2000 was $4,919,246, an
increase of $1,624,571 or 49.3%, over gross profit of $3,294,675 for the six
months ended June 30, 1999. As a percentage of sales, gross profit during the
six months ended June 30, 2000 was 37.9% of net sales, as compared to 36.6%
during the corresponding six 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 six months ended
June 30, 2000 were $4,053,643, an increase of $1,094,137 or 37.0% as compared to
expenses of $2,959,506 during the six months ended June 30, 1999. This increase
was attributed primarily to higher payroll and related fringe benefits plus
increases in outside services and legal expense.
Engineering and research and development expenses for the six months
ended June 30, 2000 were $1,168,119, an increase of $436,437, or 59.6%, as
compared to expenses of $731,682 during the six months ended June 30, 1999. As a
percent of sales, these expenses were 9.0% in 2000 and 8.1% 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 $93,999 for the six
months ended June 30, 2000 over the same period of a year ago. The operating
loss for the six months ended June 30, 2000 was $302,514 compared to an
operating loss of $396,513 for the six months ended June 30, 1999. The decrease
for the six months ended June 30, 2000 is primarily due to the factors set forth
above.
Total other income (expense) and interest expense for the six months
ended June 30, 2000 was a net expense of $212,234, an increase of $155,269 as
compared to a net expense for the six months ended June 30, 1999 of $56,965.
This increase is primarily the result of higher interest expense due to
increased borrowings and higher interest rates in the six months ended June 30,
2000.
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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
("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 combined
phase in limit of $750,000. 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 June
30, 2000 was $4,662,144 with additional borrowing availability of $337,856. The
revolving credit facility cap was increased from $5.0 million to $5.75 million
on August 3, 2000 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. In addition, any acquisitions will require approval from Finova.
As of June 30, 2000 the Company's principal sources of liquidity
included cash and cash equivalents of $229,311, trade accounts receivable of
$6,949,799, inventory of $5,869,127, short-term bank borrowings of $4,662,144
and trade accounts payable of $4,784,556 providing the Company with net working
capital of $3,319,596.
The Company's operating activities used cash of $1,181,712 and provided
cash of $145,981during the three months ended June 30, 2000 and 1999,
respectively. For the three months ended June 30, 2000, the net operating loss
and increase in inventories was primarily offset by the increase in trade
accounts payable. For the three months ended June 30, 2000, the increase in
trade accounts receivable and inventories arising from the Company's increased
sales 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 $87,271 and $98,314 in
the three months ended June 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 $1,084,271 and
$113,200 during the three month periods ended June 30, 2000 and 1999,
respectively and related to the net increase in the line of credit. 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.
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<PAGE> 14
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.
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.
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. These
deliberations are on going.
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<PAGE> 15
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
(A) The annual meeting of shareholders was held May 1, 2000.
(B) The following were elected directors to hold office for
one-year terms or until their successors are elected and
qualified.
Votes For Withheld
--------- --------
David L. Turney 2,936,597 337,478
J. Phillips L. Johnston 2,934,191 339,884
John D. Higgins, Sr. 2,934,597 339,478
C. James Meese, Jr. 2,934,088 339,987
John K. Pirotte 2,934,597 339,478
John M. Reeves, II 2,935,375 338,700
Juliann Tenney 2,936,347 337,728
Joseph Tang 2,934,034 340,041
(C) To consider and act upon a proposal to approve an amendment to
the Articles of Incorporation to elect directors to hold
office on a staggered term basis, the timing of which is at
the discretion of the Board of Directors any time prior to the
next Annual Meeting of Shareholders.
For 1,669,866
Against 925
Abstain 753
Not voted 1,602,531
(D) To consider and act upon a proposal to approve an amendment to
the Company's 1993 Incentive Stock Option Plan to permit the
issuance of an additional 160,000 shares of Common Stock
pursuant to the Plan.
For 2,902,265
Against 42,124
Abstain 5,803
Not voted 323,883
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<PAGE> 16
(E) To ratify the appointment of McGladrey & Pullen, LLP as the
independent certified public accountants of the Company.
For 2,916,298
Against 2,147
Abstain 1,747
Not voted 353,883
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 on Form 8-K for the quarter ended
June 30, 2000
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this Form 10-QSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: August 10, 2000 By: /s/ DAVID L. TURNEY
-------------------------------------------------
David L. Turney, Chairman of the Board and
Chief Executive Officer
Dated: August 10, 2000 By: /s/ LAWRENCE A. TAYLOR
-------------------------------------------------
Lawrence A. Taylor, Chief Financial Officer
16
