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 March 31, 1996
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)
4900 Prospectus Drive, Suite 1000
Research Triangle Park, North Carolina 27709-4068
(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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock: 2,674,075 shares outstanding
as of April 30, 1996
Transitional Small Business Disclosure Format (check one);
Yes No X
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Financial Statements
Item Page
Financial Statements:
Balance Sheets ................................................... 3
Statements of Operations........................................... 4
Statements of Cash Flows........................................... 5
Notes to Financial Statements...................................... 7
2
DIGITAL RECORDERS, INC.
Balance Sheets
March 31, 1996 December 31,
Assets (unaudited) 1995
Current assets:
Cash and cash equivalents $ 909,170 1,175,775
Investments 1,957,307 2,113,030
Trade accounts receivable 1,752,327 1,828,726
Other receivables 120,368 118,173
Inventories 1,180,442 1,087,503
Prepaids and other current assets 49,491 78,151
---------- ---------
Total current assets 5,969,105 6,401,358
---------- ---------
Property and equipment, net 303,594 311,120
Goodwill, net 1,637,528 1,666,944
Intangible Assets, net 238,882 252,227
Other assets 7,100 6,901
---------- ---------
$ 8,156,209 8,638,550
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 334,880 340,778
Accrued expenses 210,896 135,282
Accrued commissions 101,438 97,340
Accrued warranty reserve 102,770 111,462
Current portion of long-term debt - 709,000
Dividends payable 68,400 54,900
---------- ---------
Total current liabilities 818,384 1,448,762
---------- ---------
Total liabilities 818,384 1,448,762
---------- ---------
Stockholders' equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value, 20,000 shares
authorized; 354 shares issued and outstanding
at March 31, 1996 and December 31, 1995 35 35
Common stock, $.10 par value, 10,000,000 shares authorized;
2,674,075 shares issued and outstanding at March 31, 1996
and December 31, 1995. 267,407 267,407
Additional paid-in capital 12,552,708 12,552,708
Property held for resale (550,000) (550,000)
Accumulated deficit (4,932,325) (5,080,362)
----------- ----------
Net stockholders' equity 7,337,825 7,189,788
----------- ----------
$ 8,156,209 8,638,550
=========== ===========
See accompanying notes to financial statements.
3
DIGITAL RECORDERS, INC.
Statements of Operations
(Unaudited)
Three Months Ended
March 31,
1996 1995
----------- --------
Net sales $ 1,750,568 757,007
Cost of sales 763,787 453,694
----------- --------
Gross profit 986,781 303,313
Selling, general and administrative expenses 746,549 545,202
Research and development expenses 87,732 57,683
----------- --------
Operating profit (loss) 152,500 (299,572)
Other income (expense):
Interest income 47,992 88,118
Interest expense (2,630) (9,060)
---------- -------
Total other income (expense) 45,362 79,058
---------- --------
Income (loss) before income taxes 197,862 (220,514)
Income tax expense 10,000 -
----------- --------
Net income (loss) $ 187,862 (220,514)
============ =========
Net income (loss) per common and common
equivalent share $ 0.06 (0.09)
============ =========
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,622,499
------------ ----------
See accompanying notes to the financial statements.
4
DIGITAL RECORDERS, INC.
Statements of Cash Flows (Unaudited)
For the three month periods ended March 31, 1996 and 1995
1996 1995
Cash flows from operating activities:
Net income (loss) $ 187,862 (220,514)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization of
property and equipment 24,853 8,400
Amortization of goodwill and intangible assets 42,761 14,238
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 76,399 189,826
Increase in other receivables (2,195) (176,491)
Increase in inventories (92,939) (307,485)
Decrease in prepaids and other current assets 28,660 122,507
Increase in other assets (199) (54,026)
Decrease in accounts payable (5,898) (64,446)
Increase (decrease) in accrued expenses 71,020 (21,875)
Decrease in other liabilities - (6,199)
-------- ----------
Net cash provided (used) by operating activities 330,324 (516,065)
-------- ----------
Cash flows from investing activities:
Purchases of property and equipment (17,327) (46,246)
Purchases of short-term investments (44,277) -
Sales of short-term investments 200,000 469,513
Payment for business acquired - (1,171,000)
------- -----------
Net cash provided (used) by investing activities 138,396 (747,733)
------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (709,000) (58,658)
Payment of additional public offering expenses - (30,283)
Payment of dividends on preferred stock (26,325) (26,325)
Proceeds from exercise of warrants - Series AAA - 179,116
---------- -----------
Net cash provided (used) by financing activities (735,325) 63,850
---------- -----------
Net decrease in cash and cash equivalents (266,605) (1,199,948)
Cash and cash equivalents at beginning of period 1,175,775 1,589,997
---------- ----------
Cash and cash equivalents at end of period $ 909,170 390,049
============= ==========
See accompanying notes to the financial statements.
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 2,630 9,060
============= ==========
5
DIGITAL RECORDERS, INC.
Statements of Cash Flows, Continued (Unaudited)
For the three month periods ended March 31, 1996 and 1995
Supplemental disclosures of noncash financing and investing activities:
During the three months ended March 31, 1996 and 1995, the Company declared
dividends on Series AAA Preferred Stock in the amount of $39,825 and $35,325,
respectively. The Company paid $26,325 in cash dividends in each of the three
month periods ended March 31, 1996 and 1995.
During 1995, the Company acquired certain assets and liabilities of Digital
Audio Corporation, Inc. The Company acquired inventory (valued at $100,000),
fixed assets (valued at $10,000) and certain intangible assets (valued at
$1,990,000) in exchange for cash of $1,171,000, a note payable for $709,000, and
common stock of $220,000.
6
DIGITAL RECORDERS, INC.
Notes to Financial Statements
March 31, 1996 and 1995
(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 1995 audited financial
statements included in its Annual Report on Form 10-KSB dated March 28, 1996.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full calendar
year.
(2) Per Share Amounts
Net income (loss) per common and common equivalent share is based upon
the weighted average number of common and common equivalent shares
outstanding from convertible preferred stock and the exercise of stock
options and warrants. Stock, options and warrants issued in the twelve month
period preceding the initial filing of the Registration Statement for the
Company's initial public offering have been treated as outstanding for all
reported periods. A treasury stock approach has been used in determining the
common stock equivalent shares outstanding. For 1996 and 1995, the common
stock equivalent shares had no impact on the per share amounts. Cash
dividends declared on the preferred stock during the period are deducted from
net income or added to net loss to determine the net income (loss) per share.
Cash dividends declared were $39,825 and $35,325 for the three months ended
March 31, 1996 and 1995, respectively.
(3) Acquisition of Digital Audio Corporation
On February 28, 1995, the Company purchased certain assets and
liabilities of Digital Audio Corporation ("Digital Audio") in a transaction
accounted for using the purchase method of accounting and accordingly, the
assets and liabilities of the acquired entity were recorded at their fair
market value at the date of acquisition. Digital Audio designs, manufactures
and markets digital signal processing equipment to commercial and
governmental organizations. The purchase price was $2,100,000 with an earnout
payment to be made over two years if certain performance criteria are met.
The Company paid $1,171,000 cash, executed unsecured note payable to the
seller in the amount of $709,000 and issued 33,846 restricted shares of
the Company's Common Stock to the seller in exchange for inventory (valued at
$100,000), fixed assets (valued at $10,000) and goodwill and intangible
assets (valued at $1,900,000). The Company's results of operations for the
three months ended March 31, 1995 include the operations of Digital Audio
from March 1, 1995 to March 31, 1995. The following unaudited proforma
results of operations assume the transaction described above occurred as of
January 1, 1995 after giving the effect of certain adjustments, including
the amortization of the excess cost over the fair value of the net assets
acquired.
Three Months Ended
March 31,1995
Net sales $ 1,031,328
Net income (loss) (109,325)
Net income (loss) per common and
common equivalent share $ (0.04)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company designs, manufactures and sells information technology for
use in various applications in individual vehicle transportation and the public
transit industry. Formed in 1983, the Company's activities through 1986
consisted primarily of organizational and development activities. Since 1987,
when the Company generated net sales of $348,000, net sales have increased each
year, reaching $6.362 million in 1995. The Company achieved its first year of
profitability in 1995 during which it earned a profit after income taxes of
$145,000. For the three months ended March 31, 1996, net sales were $1.751
million and the Company recorded a net income after taxes of approximately
$188,000.
The Company attributes its growth in sales to the introduction of
new products, increased market penetration, growing markets for its products and
the acquisition of Digital Audio in 1995. Sales to governmental and
quasi-governmental entities have exceeded 50% of total net sales during each
year since 1991, and such sales accounted for 65% of net sales during 1995.
Sales to governmental entities accounting for 38% of net sales during the three
months ended March 31, 1996. A significant portion of the Company's sales have
historically been attributable to a small number of customers. During 1995,
sales to three customers accounted for 35% of net sales, during 1994, sales to
three customers accounted for 44% of net sales, and during 1993, sales to three
customers accounted for 43% of net sales. A single customer, the New Jersey
Turnpike Authority, accounted for 11% of net sales made in 1995, 1994 and 1993
on a combined basis. During the three months ended March 31, 1996, sales to
three customers accounted for 43% of net sales.
The Company typically recognizes revenue from sales upon shipment of
products to customers. Because the Company's operations are characterized by
research and development expenses preceding a product introduction, net sales
and their related expenses may not be recorded in the same period, thereby
producing fluctuations in operating results. The Company's dependence on a
small number of relatively large customers or projects may increase the
magnitude of fluctuations in operating results.
The Company's financial statements contain a provision for income tax
expense for the year ended December 31, 1995 and for the quarter ended March 31,
1996 due to alternative minimum tax. However, as a result of the accumulated
losses incurred in past years, the Company utilized approximately $564,000
of its net operating loss carryovers and had a net operating loss carryover as
of December 31, 1995 of approximately $4.087 million which management expects
will be available to offset federal taxable income, if any, through 2009. Also
as of December 31, 1995, the Company had a net economic loss carryforward for
state income tax purposes of approximately $1.915 million, which is expected
to be available to offset future state income taxes, if any, through 1999.
Following utilization of the existing state and federal tax losses, the
Company's future operations, if profitable, will be subject to income tax
expense.
On April 30, 1996, the Company acquired Transit-Media, GmbH,
(Transit-Media), a company headquartered in Baden-Baden, Germany which
assembles and markets on-board electronic destination signs for mass-transit
systems in Europe under the Twin Vision trademark. Pursuant to the agreement
between the Company and Transit-Media, the Company obtained all of the stock
of Trans-Media for $385,000 in cash and the assumption of Transit-Media's
obligations of approximately $140,000 under a bank line of credit. The cash
portion of the purchase price was paid out of working capital of the Company.
In connection with the acquisition, a finder's fee of $100,000 was paid to a
director nominee of the Company. The Company expects to file a Form 8-K
describing this transaction within the time period prescribed by Form 8-K.
8
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
Statements of Operations:
Quarter Ended March 31,
1996 1995
----- -----
Net Sales.................................. 100% 100%
Cost of sales.............................. 44 60
--- ---
Gross profit............................... 56 40
--- ---
Operating Expenses:
Selling, general and administrative..... 43 72
Research and development................ 5 8
--- ---
Total operating expenses................... 48 80
--- ---
Operating profit (loss) ................... 8 (40)
Other income (expense), net................ 3 11
--- ---
Net income (loss) before taxes............. 11 (29)
Income tax expense......................... 1 0
--- ---
Net income (loss).......................... 10% (29)%
=== ===
Comparison of Three Months Ended March 31, 1996 and 1995.
Net sales for the three months ended March 31, 1996 were $1.751
million, an increase of $994,000, or 131%, compared to $757,000 for the
comparable three months in 1995. These increases were attributable to increases
in sales of HAR and TCS products and the addition of sales from DAC. During the
three months ended March 31, 1996, HAR sales increased by $120,000 to $471,000
or by 34% from the corresponding three months in the prior year of $351,000. The
increase in HAR sales is mainly attributable to the installation of a major job
in the first quarter of 1996. During the three months ended March 31, 1996, TCS
sales increased by $596,000 to $927,000, or by 180%, from sales during the
corresponding three months in the prior year of $331,000. The increase in TCS
sales is attributable to increased market acceptance of the DR500C Talking
Bus(R). During the three months ended March 31, 1996, DAC sales were $353,000.
Since DAC was acquired February 28, 1995, the corresponding three months in the
prior year included only one month sales of $75,000.
Cost of sales increased to $764,000 for the three months ended
March 31, 1996 from $454,000 from the comparable three months in 1995, or an
increase of 68% on a period-to-period basis. Even though there was an increase
in the cost of sales dollars, which was princially due to increased sales
volume, the cost of sales as a percent of sales decreased. Gross profit for the
three months ended March 31, 1996 was $987,000, an increase of $684,000, or
226%, over gross profit of $303,000 in the three months ended March 31, 1995.
As a percentage of sales, gross profit during the three months ended March 31,
1996 was 56% of net sales, as compared to 40% during the corresponding three
months in 1995. The increase in gross profit percentage and correspondingly,
the decrease in cost of sales percentage was caused by differences in product
mixes between the two periods and improvements in installation costs in several
of the Company's business groups.
Selling, general and administrative expenses during the three
months ended March 31, 1996 were $747,000, an increase of $202,000, or 37%, as
compared to expenses of $545,000 during the three months ended March 31, 1995.
As of percent of sales, selling, general and administrative expenses during the
three months ended March 31, 1996 were 43% of net sales compared to 72% during
the same period in 1995.
Research and development expenses for the three months ended
March 31, 1996 were $88,000, an increase of $30,000 or 52% compared to
expenses of $58,000 during the three months ended March 31, 1995. The increase
is primarily due to the addition of DAC.
9
Liquidity and Capital Resources
From 1990 and through completion of the Company's public offering in
November 1994, the Company financed its operations primarily through the private
issuance of debt and equity securities. In December of 1994, the Company
completed its initial public offering of 1,265,000 Units (the "Units"), each
Unit consisting of one share of Common Stock and one warrant to purchase one
share of Common Stock. The Company realized gross proceeds of approximately
$7.274 million and net proceeds of approximately $5.562 million after deducting
offering costs of approximately $1.712 million. The Company has also received
proceeds of approximately $465,000 from the exercise of warrants.
As of March 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $909,000, investments of $1.957 million
and accounts receivable of $1.752 million. The Company's current assets
less current liabilities provide a net working capital of $5.151 million. As of
March 31, 1996, the Company had no long-term debt and no present commitments
or agreements which would require that any additional long-term debt be
incurred.
The Company's operating activities provided cash of $330,000 during the
three months ended March 31, 1996. For the three months ended March 31, 1996,
decreases in accounts receivable of $76,000, increases in inventories of
$93,000, decreases in prepaids and other assets of $29,000 and increases in
accrued expenses of $71,000 were the primary components of changes in working
capital. The Company anticipates that its working capital needs will continue to
increase as the Company implements its expansion plans. Working capital
requirements increase with growth in the Company's sales, primarily due to the
time gap between the time the Company must pay its suppliers and the time the
Company receives payment from its customers, particularly its governmental
customers.
Investing activities during the three months ended March 31, 1996
included the sale of short term investments of $200,000 and the purchases of
short term investments of $44,000. Investing activites for the three months
ended March 31, 1995 consisted primarily of the acquisition of Digital Audio
Corporation and sales of short term investments of $470,000. At March 31, 1996,
the Company had no material commitments for capital investments.
Long-term cash requirements, other than normal operating expenses,
are anticipated for development of new products and enhancement of existing
products; financing anticipated growth; and the possible acquisition of products
or technologies complementary to the Company's business. The Company believes
that its existing cash, cash equivalents and marketable securities, and
anticipated cash generated from operations will be sufficient to satisfy its
currently anticipated cash requirements for the 1996 fiscal year.
Forward-Looking Statements
This report contains 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 which are subject to the safe harbors created thereby.
These forward-looking statements include the plans and objectives of management
for future operations, including plans and objectives relating to (i) the
continued expansion of the Company's operations, (ii) the development and
introduction of new products, (iii) the continued successful operation of the
Company, and (iv) the Company's ability to maintain or increase the market share
of its various products.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements were based on assumptions that the Company would
continue to develop and introduce new products on a timely basis, that
competitive conditions within the industry would not change materially or
adversely, that demand for the Company's products would remain strong, and that
there would be no material change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking information will prove to be
accurate. In the light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such
information
10
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
Adoption of Financial Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995,
and requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company has adopted SFAS No. 121 and does not expect its
provisions to have a material effect on the Company's results of operations
in fiscal 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years
beginning after December 15, 1995, and will require that the Company either
recognize in its financial statements costs related to its employee stock-based
compensation plans, such as stock option and stock purchase plans, or make pro
forma disclosures of such costs in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value based method
of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1996, the Company will make the required pro
forma disclosures in a footnote to the financial statements. SFAS No. 123 is not
expected to have a material effect on the Company's results of operations or
financial position.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
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
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-QSB to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIGITAL RECORDERS, INC.
Dated: May 10, 1996 By: /s/ J. PHILLIPS L. JOHNSTON
----------------------------
J. Phillips L. Johnston, Chairman of the Board
and Chief Executive Officer
Dated: May 10, 1996 By: /s/ MICHAEL J. SCHIERBEEK
--------------------------
Michael J. Schierbeek, Chief Financial Officer
12