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 June 30, 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 July 31, 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................................................. 5-6
Notes to Financial Statements............................................ 7-8
2
DIGITAL RECORDERS, INC.
Balance Sheets
June 30, 1996 December 31,
Assets (unaudited) 1995
-------------- --------------
Current Assets:
Cash and cash equivalents $ 428,976 1,175,775
Investments 1,977,156 2,113,030
Trade accounts receivable 1,659,375 1,828,726
Other receivables 208,706 118,173
Inventories 1,290,413 1,087,503
Prepaids and other current assets 73,302 78,151
-------------- --------------
Total current assets 5,637,928 6,401,358
Property and equipment, net 331,557 311,120
Goodwill, net 1,746,765 1,666,944
Intangible assets, net 369,984 252,227
Other assets 7,099 6,901
============== ==============
$ 8,093,333 8,638,550
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 233,231 340,778
Accrued expenses 151,787 135,282
Accrued commissions 121,740 97,340
Accrued warranty reserve 109,195 111,462
Current portion of long-term debt - 709,000
Dividends payable 81,900 54,900
-------------- --------------
Total current liabilities 697,853 1,448,762
-------------- --------------
Total liabilities 697,853 1,448,762
-------------- --------------
Stockholders' equity:
Series AAA Redeemable, Nonvoting Preferred Stock, $.10 par value
20,000 shares authorized; 354 shares issued and outstanding at
June 30, 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 June 30, 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)
Translation adjustment (366) -
Accumulated deficit (4,874,304) (5,080,362)
-------------- --------------
Net stockholders' equity 7,395,480 7,189,788
============== ==============
$ 8,093,333 8,638,550
============== ==============
See accompanying notes to financial statements.
3
DIGITAL RECORDERS, INC.
Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
Net sales $ 2,173,448 1,554,510 3,924,016 2,311,517
Cost of sales 1,032,685 700,429 1,796,472 1,154,123
-------------- ------------- ------------- --------------
Gross profit 1,140,763 854,081 2,127,544 1,157,394
Selling, general and administrative expenses 906,029 737,604 1,652,578 1,282,806
Research and development expenses 162,356 119,716 250,088 177,399
-------------- ------------- ------------- --------------
Operating profit (loss) 72,378 (3,239) 224,878 (302,811)
Other income (expense):
Interest income 36,581 77,080 84,573 165,198
Interest expense (1,113) (39,597) (3,743) (48,657)
-------------- ------------- ------------- --------------
Total other income (expense) 35,468 37,483 80,830 116,541
Income (loss) before income taxes 107,846 34,244 305,708 (186,270)
Income tax expense 10,000 - 20,000 -
-------------- ------------- ------------- --------------
Net income (loss) $ 97,846 34,244 285,708 (186,270)
============== ============= ============= ==============
Net income (loss) per common and common equivalent share $ 0.02 0.00 0.08 (0.09)
============== ============= ============= ==============
Weighted average number of common and common
equivalent shares outstanding 2,674,075 2,660,773 2,674,075 2,641,742
============== ============= ============= ==============
See accompanying notes to the financial statements
4
DIGITAL RECORDERS, INC.
Statements of Cash Flows (unaudited)
For the six month periods ended June 30, 1996 and 1995
1996 1995
Cash flows from operating activities
Net income (loss) $285,708 (186,270)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization of
property and equipment 49,607 16,800
Amortization of goodwill and intangible assets 94,517 57,390
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 169,351 (258,715)
Increase in other receivables (88,797) (270,010)
Increase in inventories (202,910) (407,721)
Decrease in prepaids and other current assets 4,849 108,157
Increase in intangible assets (148,660) -
Increase in other assets (198) (62,497)
Decrease in accounts payable (111,504) (99,485)
Increase in accrued expenses 38,638 22,653
Decrease in other liabilities - (4,961)
----------------- -----------------
Net cash provided (used) by operating activities 90,601 (1,084,659)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (59,521) (155,436)
Purchases of short-term investments (64,126) -
Sales of short-term investments 200,000 955,826
Payment for business acquired, net of cash received (34,560) (1,171,000)
-----------------
-----------------
Net cash provided (used) by investing activities 41,793 (370,610)
----------------- -----------------
Cash flows from financing activities:
Principal payments on long-term debt (709,000) (58,658)
Principal payments on short-term bank borrowings (117,177) -
Principal payments on capital lease obligations - (7,910)
Payment of additional public offering expenses - (30,283)
Payment of dividends on preferred stock (52,650) (52,650)
Proceeds from exercise of warrants - Series AAA - 179,116
----------------- -----------------
Net cash provided (used) by financing activities (878,827) 29,615
----------------- -----------------
----------------- -----------------
Effect of exchange rate changes (366) -
----------------- -----------------
Net decrease in cash and cash equivalents (746,799) (1,425,654)
Cash and cash equivalents at beginning of year 1,175,775 1,589,997
----------------- -----------------
Cash and cash equivalents at end of year $ 428,976 164,343
================= =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 3,743 48,657
================= =================
See accompanying notes to financial statements.
5
DIGITAL RECORDERS, INC.
Statements of Cash Flows, Continued (Unaudited)
For the six month periods ended June 30, 1996 and 1995
Supplemental disclosures of noncash financing and investing activities:
During the six months ended June 30, 1996 and 1995, the Company declared
dividends on Series AAA Preferred Stock in the amount of $79,650 and $70,650,
respectively. The Company paid $52,650 in cash dividends in each of the six
month periods ended June 30, 1996 and 1995.
During 1996, the Company acquired Transit-Media GmbH ("Transit-Media"). The
Company paid $35,000 for all of Transit-Media's stock at closing. The Company
recorded cash (valued at $440), other receivables (valued at $1,736), fixed
assets (valued at $10,523), accounts payable (valued at $3,957), short-term
bank borrowings (valued at $117,177), and certain intangible assets (valued
at $143,435).
During 1995, the Company acquired certain assets, net of 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
June 30, 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 six months ended June 30, 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
incremental 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 $79,650 and $70,650 for the six months ended
June 30, 1996 and 1995, respectively.
(3) Acquisition of Transit-Media Gmbh
On April 30, 1996, the Company acquired Transit-Media Gmbh ("Transit-Media")
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. Transit-Media
assembles and markets proprietary on-board, electronic destination signs for
mass-transit systems in Europe. The Company paid $35,000 for all of
Transit-Media's stock at closing. The Company recorded cash (valued at
$440), other receivables (valued at $1,736), fixed assets (valued at
$10,523), accounts payable (valued at $3,957), short-term bank borrowings
(valued at $117,177), and certain intangible assets (valued at $143,435). In
addition, the Company's results of operations for the six months ended June
30, 1996 include the operations of Transit-Media from May 1, 1996 to June 30,
1996.
The following unaudited proforma results of operations assume the transaction
described above occurred as of January 1, 1996 after giving the effect of
certain adjustments, including the amortization of goodwill.
Six Months Ended
June 30, 1996
Net sales $ 3,924,016
Net income (loss) 212,898
Net income (loss) per common and
common equivalent share $ 0.05
7
DIGITAL RECORDERS, INC.
Notes to Financial Statements,
(4) 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 at closing, recorded an unsecured note payable to the seller
of $709,000 and distributed 33,846 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). In addition, the Company's results of operations for the six
months ended June 30, 1995 include the operations of Digital Audio from March
1, 1995 to June 30, 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.
Six Months Ended
June 30,1995
Net sales $ 2,585,838
Net income (loss) (89,566)
Net income (loss) per common and
common equivalent share $ (0.03)
8
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 and six months ended June 30, 1996, net sales
were $2.173 million and $3.924 million, respectively. For the three months and
six months ended June 30, 1996, the Company recorded net income after taxes of
approximately $98,000 and $286,000, respectively.
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 accounted for 25% and 29%, respectively, of net
sales during the three months and six months ended June 30, 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
and six months ended June 30, 1996, sales to three customers accounted for 55%
and 44%, respectively, 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 three months and six
months ended June 30, 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 carryover 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 Ettlingen, Germany, which assembles
and markets proprietary on-board, electronic destination signs for mass-transit
systems in Europe. Pursuant to the Agreement between the Company and
Transit-Media, the Company purchased all of the issued and outstanding stock of
Transit-Media for $35,000 cash. In connection with the acquisition, a finder's
fee was paid to a consulting firm controlled by David L. Turney. Mr. Turney,
currently a director, was a director nominee at the time of the acquisition.
Upon completing the acquisition, the Company invested $350,000 in Transit-Media
in order to pay off an existing bank credit line and to provide working capital.
9
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:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Net sales .......................................... 100% 100% 100% 100%
Cost of sales ...................................... 48 45 46 50
Gross profit ....................................... 52 55 54 50
Operating expenses :
Selling, general and administrative .......... 42 47 42 55
Research and development ..................... 7 8 6 8
Total operating expenses ........................... 49 55 48 63
Operating profit (loss) ............................ 3 0 6 (13)
Other income (expense), net ........................ 2 2 2 5
Income (loss) before income taxes .................. 5 2 8 (8)
Income tax expense ................................. (1) 0 (1) 0
Net income (loss) .................................. 4 2 7 (8)
Comparison of Three and Six Months Ended June 30, 1996 and 1995.
Net sales for the three months ended June 30, 1996 were $2.173
million, an increase of $618,000, or 40%, compared to $1.555 million for the
comparable three months in 1995. Net sales for the six months ended June 30,
1996 were $3.924 million, an increase of $1.612 million, or 70%, compared to
$2.312 million for the comparable six months in 1995. These increases were
attributable to increases in sales of TCS products and the addition of sales
from DAC and Transit-Media.
During the three months ended June 30, 1996, HAR sales decreased by
$292,000 to $429,000 or by 41% from the corresponding three months in the prior
year of $721,000. During the six months ended June 30, 1996, HAR sales decreased
by $170,000 to $900,000 or by 16% from the corresponding six months in the prior
year of $1.070 million. The decrease in HAR sales is primarily attributable to
reduced sales of the DR1025NW, a digital recorder designed principally for the
National Weather Service. The Company believes that it has completed sales of
the DR1025NW to potential users of the products, and that the Company will
therefore achieve nominal sales of this product in future periods. HAR sales in
future periods will depend largely on sales of other existing products as well
as the Company's ability to design and introduce new products.
During the three months ended June 30, 1996, TCS sales increased by
$876,000 to $1.300 million, or by 207%, from sales during the corresponding
three months in the prior year of $424,000. During the six months ended June 30,
1996, TCS sales increased by $1.470 million to $2.227 million, or by 194%, from
sales during the corresponding six months in the prior year of $757,000. The
increase in TCS sales is primarily attributable to the Company's success in
generating large orders for the DR500C Talking Bus(R) from transit system
customers.
10
During the three months ended June 30, 1996, DAC sales decreased by
$15,000 to $395,000, or by 4%, from sales during the corresponding three months
in the prior year of $410,000. During the six months ended June 30, 1996, DAC
sales increased by $263,000 to $748,000, or by 54%, from sales during the
corresponding six months in the prior year of $485,000. Since DAC was acquired
February 28, 1995, the corresponding six months in the prior year included only
four month sales. During the three months and six months ended June 30, 1995,
Transit-Media sales were $49,000. Since Transit-Media was acquired April 30,
1996, comparison to prior periods are not available.
Cost of sales increased to $1.033 million for the three months
ended June 30, 1996 from $700,000 from the comparable three months in 1995, or
an increase of 48% on a period-to-period basis. For the six months ended June
30, 1996, cost of sales increased to $1.797 million from $1.154 million from the
comparable six months in 1995, or an increase of 56% on a period to period
basis.
Gross profit for the three months ended June 30, 1996 was $1.140
million, an increase of $286,000, or 33%, over gross profit of $854,000 in the
three months ended June 30, 1995. As a percentage of sales, gross profit during
the three months ended June 30, 1996 was 52% of net sales, as compared to 55%
during the corresponding three months in 1995. Gross profit for the six months
ended June 30, 1996 was $2.127 million, an increase of $970,000, or 84%, over
gross profit of $1.157 million in the six months ended June 30, 1995. As a
percentage of sales, gross profit during the six months ended June 30, 1996 was
54% of net sales, as compared to 50% during the corresponding six months in
1995. The fluctuation in gross profit percentages between the periods was caused
mainly by differences in product mixes and improvements in installation costs in
two of the Company's business groups.
Selling, general and administrative expenses during the three
months ended June 30, 1996 were $906,000, an increase of $168,000 or 23%, as
compared to expenses of $738,000 during the three months ended June 30, 1995.
Approximately $75,000 of the increase is attributable to the additional general
and administrative expenses associated with the Transit-Media acquisition on
April 30, 1996. Selling, general and administrative expenses during the six
months ended June 30, 1996 were $1.653 million, an increase of $370,000, or 29%,
as compared to expenses of $1.283 million during the six months ended June 30,
1995. This increase is primarily attributable to a write off of a $115,000
account receivable and to general and administrative expenses related to
Transit-Media, which was acquired on April 30, 1996, and to DAC, which was
acquired on February 28, 1995. This increase is attributable to the expansion of
the Company's sales and marketing activities and to the additional general and
administrative expenses associated with the DAC acquisition on February 28,
1995.
Research and development expe
three months ended June
30, 1996 were $162,000, an increase of $42,000 or 35%, as compared to expenses
of $120,000 during the three months ended June 30, 1995. Research and
development expenses for the six months ended June 30, 1996 were $250,000, an
increase of $73,000 or
compared to expenses of $177,000 during the six
months ended June 30, 199
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.
11
As of June 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $429,000, investments of $1.977 million
(consisting primarily of U.S. Treasury obligations) and accounts receivable of
$1.659 million. The Company's current assets less current liabilities provide a
net working capital of $4.940 million. As of June 30, 1996, the Company had no
long-term debt. On May 24, 1996, the Company closed a $2 million unsecured
credit agreement with a financial institution. The agreement is for short-term
borrowings and import letters of credit, subject to certain loan covenants, and
bears interest at a rate of LIBOR +2.3%, interest payable quarterly. At June 30,
1996, there were no advances outstanding under the credit agreement.
The Company's operating activities provided cash of $91,000 during
the six months ended June 30, 1996 and used cash of $1.085 million during the
six months ended June 30, 1995. For the six months ended June 30, 1996,
decreases in accounts receivable of $169,000, increases in other receivables of
$89,000, increases in inventories of $203,000, increases in intangible assets of
$149,000, and decreases in accounts payable of $112,000, were the primary
components of changes in cash from operating activities. For the six months
ended June 30, 1995, increases in accounts receivable of $259,000, increases in
inventories of $408,000, decreases in prepaids and other current assets of
$108,000, increases in other receivables of $270,000, increases in other assets
of $62,000, and decreases in accounts payable of $99,000, were the primary
components of changes in cash from operating activities. Working capital
requirements increased 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 six months ended June 30, 1996 included
the sale of short term investments of $200,000 and the purchases of short term
investments of $64,000. Investing activities for the six months ended June 30,
1995 consisted primarily of the acquisition of Digital Audio Corporation and
sales of short term investments of $956,000. At June 30, 1996, the Company had
commitments for capital investments of approximately $96,000 for renovation and
improvement of additional office and production space subleased by the Company.
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, anticipated
cash generated from operations, and the $2 million credit agreement 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.
12
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
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.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.9.2 Sublease, dated April 24, 1996, by and between
Family Health International and the Company.
10.21 Note, Commitment Letter, and Continuing Letter
of Credit Agreement, dated May 24, 1996, by
and between Wachovia Bank of North Carolina, N.A.
and the Company.
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K, dated May 15, 1996,
to report the acquisition of Transit-Media Gmbh.
The Company filed a report on Form 8-K/A-1, dated July 15,
1996, in order to amend the Form 8-K described above.
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: August 14, 1996 By: /s/ J. PHILLIPS L. JOHNSTON
----------------------------
J. Phillips L. Johnston, Chairman of the Board,
Chief Executive Officer, and Acting Principal
Financial Officer
14