Mail Stop 0407
January 28, 2005
Mr. David L. Turney
President and Chief Executive Officer
Digital Recorders, Inc.
5949 Sherry Lane, Suite 1050
Dallas, TX 75225
RE: Digital Recorders, Inc.
Registration Statement on Form S-1
Filed January 4, 2005
File No. 333-121834
Form 8-K filed September 10, 2004
File No. 33-82870-A
Dear Mr. Turney:
We have limited our review to the discussion of your
internal
control over financial reporting and certain reportable conditions
in
your Form S-1 and the related information in your Form 8-K filed
September 10, 2004. We have also reviewed your response to our
comment letter of September 24, 2004, regarding the Form 8-K.
Where
indicated, we think you should revise your periodic reports in
response to this comment. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a future
revision is unnecessary. Please be as detailed as necessary in
your
explanation. We may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may or may not raise additional
comments. We welcome any questions you may have about our comment
or
on any other aspect of our review. Feel free to call us at the
telephone numbers listed at the end of this letter.
1. We note your statement in your response letter dated October
29,
2004, that despite the identification of a material weakness in
your
internal controls over financial reporting by your former
auditors,
you still believe that your disclosure controls and procedures are
effective. However, in light of the documentation that you
submitted
to us, it does not appear that your disclosure controls and
procedures are effective. In particular, we note the following
deficiencies in your response letter and in the management report
by
McGladrey & Pullen:
* lack of sufficient internal control policies and procedures over
financial reporting to ensure that financial statements and
schedules
are reliable and accurate, as reported on page 12 of McGladrey &
Pullen Management Report;
* approximately 140 audit adjustments made to the original trial
balance as well as the nature of the adjustments as reported on
page
6 of McGladrey & Pullen Management Report;
* evidence of unreasonable delays on the part of your management
in
the conduct of the audit, as reported on page 3 of McGladrey &
Pullen
Management Report;
* restatement of unaudited interim financial information for each
of
the first three quarters of that year and the associated year-to-
date
periods included in the Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 (page 2 of response letter); and
* lack of educational processes to communicate fully the support
and
documentation requirements to unit operating managers and support
staff (page 6 of response letter).
Please note that the fact that a material weakness in your control
over financial reporting did not result in material misstatements
does not necessarily lead to the conclusion that disclosure
controls
and procedures are effective. Materiality of the misstatement is
a
quantitative measure, while effectiveness of the controls should
be
assessed from both qualitative and quantitative factors. In
addition, the material weaknesses and significant deficiencies in
the
company`s internal controls should be viewed in the aggregate.
Accordingly, tell us in detail why you still believe that your
disclosure controls and procedures are effective. To the extent
that
you believe that they are not effective, revise your periodic
reports
as appropriate.
* * * *
Please respond to this comment within 10 business days or
tell
us when you will provide us with a response. Please furnish a
letter
that keys your response to our comment and provides any requested
supplemental information. Please file your response letter on
EDGAR.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures that
they have made.
Notwithstanding our comments, in the event the company requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they may relate to the proposed public
offering of the securities specified in the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact O. Nicole Holden, Staff Accountant, at (202)
824-5265 or Kyle Moffatt, Accountant Branch Chief, at (202) 942-
1990
if you have questions regarding comments on the financial
statements
and related matters. Please contact Joshua Englard, Staff
Attorney,
at (202) 942-2832, or me at (202) 942-1990 with any other
questions.
Sincerely,
Michele M. Anderson
Legal Branch Chief
cc: Quentin Faust, Esq.
Fax: 214-659-4828
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Mr. David L. Turney
Digital Recorders, Inc.
January 28, 2005
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