The Company's net working capital as of December 31, 2002 was $2,321,954 compared to $7,751,898 as of December 31, 2001. Our principal sources of liquidity from current assets included cash and cash equivalents of $504,758, trade and other receivables of $10,389,409, inventories of $8,830,522 and prepaids and other current assets of $452,882. Liquidity derived from current liabilities included short-term bank and asset based borrowings of $7,503,791, accounts payable of $7,198,962, accrued expenses of $2,162,309, and current maturities of long-term debt, deferred tax liabilities and dividends payable of $763,360, $138,695 and $88,500 respectively. The decline in net working capital is substantially attributed to the credit line being reclassified as a current liability due to the expiration date of the agreement being less than one year from the balance sheet date. The Company anticipates either renewing the existing line which expires in
|
|
| 19 |
|
|
|
|
|
August 2003 or securing a new facility by the expiration date however, there can be no assurance that this will occur (See "Our Financing Activities in 2003" below). Substantially all of our assets are pledged as security for various elements of long- and short-term debt described below. |
|
|
|
Our operating activities used cash of $903,660 for the year ended December 31, 2002. Primary uses of cash included a net loss of $189,503 combined with increases in trade and other receivables, prepaids and a decrease in our related party accounts payable of $2,032,600, $123,358 and $369,361, respectively. Primary sources of cash included a decrease in inventories of $551,225 and increases in accounts payable and accrued expenses of $402,128 and $53,527, respectively. The increase in trade accounts receivable and payables is a direct result of record sales in the fourth quarter with a significant portion of both sales and purchases occurring late in the quarter. The balance of cash provided by operating activities of $434,891 resulted from non-cash expenses for deferred taxes, depreciation, intangible amortization, bad debt and minority interest. The Company's working capital requirements will continue to increase with growth in our sales, primarily due t o the timing between when we must pay our suppliers and the time we receive payment from our customers. |
|
|
|
Our investing activities used cash of $988,638 for the year ended December 31, 2002. The primary use of cash was for expenditures relating to internally developed software; purchases of computer, test and office equipment and the reclassification of a trade account receivable to a note receivable. Cash flows from investing activities were a result of equipment asset sales. We do not anticipate any significant expenditures for or sales of capital equipment in the near future. |
|
|
|
Our financing activities generated net cash of $1,760,311 for the year ended December 31, 2002. Our primary sources of cash were from net short- and long-term bank borrowings of $493,061 and from the issuance of long-term debt in the amount of $1,400,000. Our primary uses of cash for financing activities were payment of dividends. Net cash from financing activities were used to fund working capital requirements and for the purchase of fixed assets. |
|
|
|
On August 23, 1999, we and our subsidiaries signed a four year Revolving and Term Lines of Credit Agreement with Fremont Financial Corporation, a subsidiary of Finova Group, Inc. On January 31, 2001, Finova Group, Inc. sold certain loan portfolio assets to Guaranty Business Credit Corporation, the asset-based financial services subsidiary of Guaranty Bank, a wholly owned subsidiary of Temple-Inland, Inc., which included our loan and Credit Agreement. Our Credit Agreement provides up to $11.75 million in borrowing to be used for acquisitions, working capital and general corporate purposes. The working capital (accounts receivable and inventory) borrowing portion of the agreement was limited at December 31, 2002 to a combined maximum limit of $6.75 million. The interest rate on the revolving credit portion of the agreement is the published prime lending rate (4.25% at December 31, 2002) plus 1.75 percent. Credit extended for acquisitions bears an interest rate of prime (4.25% at December 31, 2002) plus 2 percent. At December 31, 2002, available collateral based on the value of eligible trade accounts receivable and inventories was $7,504,062, which, given the outstanding debt balance under this agreement of $6,489,729, resulted in a potential additional borrowing availability of $1,014,333. However, due to the working capital limit of $6,750,000 imposed by Guaranty Business Credit Corporation, the additional borrowing availability was limited to $260,271. The outstanding debt under this agreement is secured by substantially all U.S.-based assets including the assets of the Company's subsidiaries. The Company expects to renew or replace this credit agreement with a long-term agreement substantially similar in terms and conditions. |
|
|
|
As amended, the Credit Agreement includes customary covenants and conditions relating to the conduct and operation of the Company's business. Specifically, as amended, the Credit Agreement limits the payment of dividends on any class of stock to $177,000 annually, subjects the Company to a 1:1 Earnings Before Interest, Taxes, Depreciation and Amortization to interest coverage ratio to be calculated upon a quarterly and year to date basis and limits capital expenditures to $25,000 for individual transactions and $250,000 in aggregate. In addition, overadvances are permitted under the agreement up to $400,000 and acquisitions require approval from the lender. The Company was in compliance with all agreement covenants except the capital expenditure covenant for the year ended December 31, 2002, but received a waiver from Guarantee Business Credit Corporation on March 28, 2003. The Company was in compliance with all covenants at December 31, 2001 and December 31, 2 000. |
|
|
|
Mobitec AB, the Company's wholly owned Swedish subsidiary, has an agreement with its bank in Sweden from which it may currently borrow up to a maximum of 10,000,000 krona (SEK) or $1,144,000. At December 31, 2002, 7,535,924 krona (SEK), or $862,110, was outstanding, resulting in additional borrowing availability of 2,464,076 krona (SEK), or $281,890. The maximum borrowing in the amount of 10,000,000 krona (SEK) is secured by cash on deposit with the bank in the amount of 2,200,000 krona (SEK), or $251,680. The terms of this agreement require payment of an unused credit line fee equal to 0.5 percent of the unused portion and interest at 5 percent of the outstanding balance. This agreement is secured by substantially all assets of Mobitec AB. The line of credit agreement has an expiration date of December 31, 2003. |
|
|
|
Mobitec AB also has an agreement with the same bank from which it may borrow up to 6,000,000 krona (SEK), or $686,400. Based upon the availability formula under this agreement, 1,328,251 krona (SEK), or $151,952, was |
|
|
| 20 |
|
|
|
|
|
outstanding at December 31, 2002, resulting in additional borrowing availability of 4,671,749 krona (SEK), or $534,448. The line of credit bears interest at 5.1 percent and is collateralized by accounts receivable. The agreement has an expiration date of December 31, 2003. |
|
|
|
An unsecured note and obligation in the amount of $2,471,235 are due a shareholder. The unsecured note in the amount of $2,111,235 is payable in full June 28, 2004 with an annual interest of 9% paid quarterly. The obligation balance of $360,000 at December 31, 2002 is due in six remaining non-interest bearing quarterly payments. |
|
|
|
A term loan from the Company's Swedish bank dated June 28, 2001 having a balance of 15,400,000 krona (SEK), or $1,763,050, at December 31, 2002 is payable in 14 remaining quarterly payments of 1,100,000 krona (SEK), or $125,840, at an annual interest rate of 5.35% and is secured by stock of the Swedish holding company and the consolidated subsidiary. |
|
|
|
Two convertible subordinated debentures in the amount of $3,000,000 dated June 22, 2001 and $1,150,000 dated July 31, 2002 are payable to Renaissance Capital Group. The president of Renaissance Capital Group, Russell C. Cleveland, is a member of the Company's Board of Directors. The $3,000,000 debenture is payable in full on June 28, 2008, if not sooner redeemed or converted, with annual interest at 8% paid monthly. It also provides for monthly principal redemption installments commencing June 27, 2004, each of such installments to be in the dollar amount of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount. The $1,150,000 debenture is payable in full on June 27, 2009, if not sooner redeemed or converted, with annual interest at 8% paid monthly. It also provides for monthly principal redemption installments commencing July 31, 2005, each of such installments to be in the dollar amount of ten dollars ($10) per tho usand dollars ($1,000) of the then remaining principal amount. The loan agreement subjects the Company to a 1:1 Earnings Before Interest, Depreciation and Amortization to interest coverage ratio to be calculated quarterly on a rolling four quarter basis and a 1.3:1 current ratio to be calculated at each quarter end. The Company was not in compliance with the current ratio covenant as of December 31, 2002, but received an appropriate waiver from Renaissance Capital Group on March 21, 2003. |
|
|
|
A convertible subordinated debenture in the amount of $250,000 dated August 26, 2002, is payable to John D. Higgins, a stockholder and member of the Board of Directors, and is due in full August 26, 2009, if not sooner redeemed or converted, with annual interest at 8% paid monthly. It also provides for monthly principal redemption installments commencing August 26, 2005, each of such installments to be in the dollar amount of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount. The loan agreement subjects the Company to a 1:1 Earnings Before Interest, Depreciation and Amortization to interest coverage ratio to be calculated quarterly on a rolling four quarter basis and a 1.3:1 current ratio to be calculated at each quarter end. The Company was not in compliance with the current ratio covenant as of December 31, 2002, but received an appropriate waiver from Mr. Higgins on March 21, 2003. |
|
|
|
Our net interest expense for all our debt and obligations was $1,150,962, $814,207 and $510,598 for the years ended December 31, 2002, 2001 and 2000, respectively. The increase was due to an increase in the weighted average outstanding balance of long-term debt which was partially offset by lower interest rates. |
|
|
|
The senior lender line of credit expires in August 2003. We have been pursuing new lines of credit, and/or extensions of the present line, for several months. Based upon term sheets received to date and our experience on these matters, we believe new and/or extended lines of credit will be secured on a timely basis and on terms no less favorable than at present. |
|
|
|
Our Financing Activities in 2003 |
|
|
|
|
(a) |
The Board of Directors of the Company has approved, subject to shareholder approval at its 2003 Annual Meeting, a proposal authorizing the Company to issue an undetermined number of shares of convertible Preferred Stock and warrants that would convert into an aggregate of up to 2,000,000 shares of Common Stock in connection with a potential private equity financing. |
|
|
|
|
|
If the shareholders approve the Board's recommendation to approve the issuance of preferred shares, the Company is also contemplating entering into a transaction to raise up to $5,000,000 in new capital through the issuance of shares of a new series of preferred stock convertible into Common Stock ("New Convertible Preferred Stock") and warrants to purchase Common Stock. The Company will issue New Convertible Preferred Stock, warrants, or some combination of the two to the purchasers in the potential financing. The issuance would be made in a private placement to one or more accredited investors, as defined in Rule 501 of |
|
|
| 21 |
|
|
|
|
|
|
|
Regulation D pursuant to the Securities Act of 1933, as amended. The terms of the financing have not been determined. |
|
|
|
|
|
The Company anticipates that the aggregate number of shares of Common Stock into which any New Convertible Preferred Stock and warrants will be convertible may be in excess of 20 percent of the Company's Common Stock and 20 percent of the voting power of the Company outstanding before the issuance for. In addition, the conversion rate of any New Convertible Preferred Stock and the applicable exercise price of any warrants may be set beneath the market price of the Company's Common Stock at the closing of the sale which is less than the greater of book or market value of the stock as of the date of the transaction. The Company, therefore has submitted this Proposal for Shareholder approval in accordance with NASDAQ Marketplace Rule 4350(i)(1)(D)(ii). Please consult the Company's proxy filing on Form DEF 14A for further information. While we anticipate that this matter will be favorably received by our stockholders, there can be no assurance that the proposal relating to the Common Stock issuable upon the conversion of the New Convertible Preferred Stock will receive the required approval of our stockholders or that the investment banking firm will be successful in its efforts to identify purchasers for the anticipated amount, or any amount, of capital. |
|
|
|
|
|
On February 20, 2003, the Company entered into a Placement Agency Agreement with a Dallas-based investment banking firm, under which the investment banking firm will identify purchasers to participate in the potential equity financing. Because the potential equity financing is in the early stages it is not possible to describe the transaction. As part of the agreement, the investment banking firm will act on a best efforts basis to identify prospective purchasers of equity securities of the Company. Such equity securities are intended to be sold under an exemption from the registration requirements of the Securities Act of 1933. The agreement with the investment banking firm is non-exclusive and is terminable upon 30 days notice. The investment banking firm is entitled to compensation based upon the gross proceeds from the sale of equity securities of the Company sold. The investment banking firm is entitled to 8 percent of the first $5 million in s uch gross proceeds, 7 percent of the next $5 million, and 6 percent of the gross proceeds over $10 million. The Company will pay the investment banking firm the relevant compensation upon closing of the sale generating the compensation. The Company will also issue to the investment banking firm a warrant to purchase 10 percent of the total number of equity securities sold, exercisable for a period of five years at the price at which the equity securities were sold. The Company also paid the investment banking firm a $25,000 nonrefundable expense allowance and will reimburse the investment banking firm for all reasonable out-of-pocket expenses in providing services to the Company. |
|
|
|
|
|
The Company's management believes it to be in the Company's best interest to reduce the level of the Company's indebtedness, and expects to use substantially all of the net proceeds of the proposed financing to repay outstanding debt. Reducing the Company's indebtedness should improve the Company's balance sheet and permit the Company additional financial flexibility. |
|
|
|
|
(b) |
On March 6, 2003, the Company announced that at a special meeting of the AAA Preferred Stock shareholders, the holders of the Series AAA Preferred Stock approved an amendment to the preferred shareholders' Articles of Incorporation to remove the mandatory redemption date, which would have been in December 2003. The Company may now redeem the Series AAA Preferred Stock at its Stock at its sole discretion upon providing preferred shareholders with appropriate written notice. Had the holders of the Series AAA Preferred Stock not approved the amendment, the Company would have to pay the redemption price, which is equal to the liquidation preference, in December 2003. The liquidation preference equals $5,000 per share, plus all accrued and unpaid dividends, which at December 31, 2002 was $1,858,500. |
|
|
|
|
(c) |
Our senior lender line of credit expires in August 2003. We have been pursuing new lines of credit, and/or extensions of the present line, for several months. Based upon term sheets received to date and our experience on these matters, we believe new and/or extended lines of credit will be secured on a timely basis and on terms no less favorable than at present.. |
|
|
|
RELATED PARTY TRANSACTIONS |
|
|
|
The Company purchases electronic components supporting the transportation communications segment from a major stockholder, Lite Vision Corporation ("Lite Vision"), a Taiwan-based company. Lite Vision holds 13.1 percent (500,000) of the outstanding shares of common stock of the Company. The components consist primarily of Light Emitting Diodes (LED) printed circuit boards. The Company purchased from Lite Vision approximately $3.5 million, $4.4 million and $6.7 million during 2002, 2001 and 2000, respectively. The accounts payable balance due to Lite Vision was $859,425, $1,528,786 and $2,224,555 at December 31, 2002, 2001 and 2000, respectively. Mr. Joseph Tang, previously President of Lite Vision and currently affiliated with Lite Vision while also pursuing other private business interests, serves on the Company's Board of Directors. During 2002 the Company issued 100,000 shares of restricted, unregistered common stock to Lite Vision at $3.00 per share in exchange for an e quivalent reduction in accounts payable. |
|
|
| 22 |
|
|
|
|
|
John D. Higgins, a director of the Company, was an employee of Investec Ernst & Co., a securities and investment banking firm that was engaged in December 2000 to provide a fairness opinion from a financial point of view with respect to the Mobitec acquisition. Investec Ernst & Co. received a fee of $120,000, plus reasonable actual expenses, for furnishing the fairness opinion. In addition, also as part of the Mobitec acquisition, Mr. Higgins received a fee of $17,500 for the successful completion of certain convertible debenture financing. On August 26, 2002, the Company completed a privately negotiated sale of a $250,000 convertible subordinated debenture to John D. Higgins, a private investor and a director of the Company. Mr. Higgins received a closing fee of $5,850 related to the $250,000 convertible subordinated debenture and Renaissance Capital Group received a closing fee of $17,250 related to the $1.15 million convertible subordinated debenture s. |
|
|
|
On August 2, 2002, the Company completed a privately negotiated sale of $1.15 million of convertible subordinated debentures through funds managed by Dallas-based Renaissance Capital Group. Russell C. Cleveland, Renaissance Capital Group's President and Chief Executive Officer, serves on the Company's Board of Directors. In June 2001, prior to Mr. Cleveland's involvement as a director of the Company, the Company issued convertible debentures in the amount of $3 million (the "2001 Debentures") to Renaissance Capital Group containing substantially the same terms as the convertible debentures issued in 2002. |
|
|
|
Contractual Obligations |
|
|
|
We lease facilities under various operating and capital lease agreements with various terms and conditions, expiring at various dates through 2008. Our material contractual obligations at December 31, 2002 are as follows: |
|
|
| Payments Due by Period | ||||||||||||||||
|
|
||||||||||||||||
| Contractual Obligations | Total amounts committed |
Less than 1 year |
1-3 years | 4-5 years | After 5 years | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Series AAA preferred stock (1) | $ | 1,770,000 | $ | 1,770,000 | $ | - | $ | - | $ | - | ||||||
| Bank credit facility and other borrowing (2) | 15,940,076 | 8,267,151 | 3,217,955 | 252,970 | 4,202,000 | |||||||||||
| Capital leases | 138,000 | 69,958 | 68,042 | - | - | |||||||||||
| Operating leases | 2,009,076 | 618,318 | 846,154 | 479,783 | 64,821 | |||||||||||
|
|
|
|
|
|
||||||||||||
| Total | $ | 19,857,152 | $ | 10,725,427 | $ | 4,132,151 | $ | 732,753 | $ | 4,266,821 | ||||||
|
|
|
|
|
|
||||||||||||
|
|
|
(1) |
Please see "Series AAA Preferred Stock" above. |
|
(2) |
Please see "Our Liquidity and Capital Resources" above. |
|
|
|
Other than lease commitments, legal contingencies incurred in the normal course of business and employment contracts of key employees, we do not have any off-balance sheet financing arrangements or liabilities. We do not have any majority-owned subsidiaries or any interests in or relationships with any special-purpose entities that are not included in the consolidated financial statements. |
|
|
|
Restructuring Costs |
|
|
|
The Company acquired Mobitec in June 2001. As part of its plan relative to the acquisition, the Company accrued for certain business activities duplicated within the existing and newly acquired international operations. We believe that it is reasonably likely that beginning in 2003 we will save approximately $200,000 per year in reduced employee expense, and that beginning in 2004 we will save approximately $12,000 per year in reduced lease expense. |
|
|
|
The accrued restructuring costs totaled $190,000 at December 31, 2001 and were comprised of staff reduction costs, lease payments and other selling, general and administrative expenses in the amount of $151,925, $3,075 and $35,000, respectively. Upon finalization of the restructuring plan in 2002, the Company reduced the accrual by $76,201 which was credited to the acquisition cost; and adjusted reserve components to $36,066, $33,927 and $43,806 for staff reduction costs, lease payments and other selling, general and administrative expenses, respectively. |
|
|
|
During 2002, $90,799 was credited to the reserve for staff reduction costs, lease payments and other selling, general and administrative expenses in the amount of $36,066, $10,927 and $43,806, respectively. No amounts were credited against the reserve during 2001. All costs to be charged against the accrual, consisting solely of lease payments, are expected to conclude during the first quarter of 2004. Of the remaining reserve amount of $23,000, we can reasonably expect $18,400 to be charged to the reserve during 2003 and $4,600 during 2004. |
|
|
| 23 |
|
|
|
|
|
New Accounting Pronouncements |
|
|
|
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do not have the characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a company to evaluate all existing arrangements to identify situations where a company has a "variable interest" (commonly evidenced by a guarantee arrangement or other commitment to provide financial support) in a "variable interest entity" (commonly a thinly capitalized entity) and further determine when such variable interests require a company to consolidate the variable interest entities' financial statement with its own. Th e Company is required to perform this assessment by September 30, 2003 and consolidate any variable interest entities for which it will absorb a majority of the entities' expected losses or receive a majority of the expected residual gains. Management has not yet performed this assessment, however it is not aware of any material variable interest entity that it may be required to consolidate. |
|
|
|
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal of Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146 is not expected to have a material effect upon the Company's financial position or operating results. |
|
|
|
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for the Company beginning January 1, 2003. Management does not expect that adoption of this standard will have a material impact upon the Company's financial statements. |
|
|
|
Impact of Inflation |
|
|
|
We believe that inflation has not had a material impact upon our results of operations for each of our fiscal years in the three-year period ended December 31, 2002. However, there can be no assurance that future inflation would not have an adverse impact upon our operating results and financial condition. |
|
|
|
|
|
FACTORS AFFECTING OUR BUSINESS AND PROSPECTS |
|
|
|
General Economic Conditions |
|
|
|
Our business partly depends upon general economic and business conditions both domestic and abroad. In this context, about one-third of our sales are outside the USA, primarily in Europe (particularly the Nordic countries), South America, the mid-East and Australia. Our sales are to businesses involved in transportation communications and law enforcement and surveillance. We transact our sales with transportation vehicle equipment customers generally in two broad categories. Those categories are end user customers and Original Equipment Manufacturers ("OEM"). General economic conditions that cause customers in such industries, countries and markets to reduce or delay their investments in products and solutions such as those offered by us could have a material adverse effect upon us. Delays or reductions in technology spending could have a material adverse effect upon demand for our products and services, and consequently upon our business, operating results, fi nancial condition, and prospects. |
|
|
|
Dependence on Suppliers |
|
|
|
Our products and solutions are dependent upon the availability of quality components that are procured from third-party suppliers. Reliance upon suppliers, as well as industry supply conditions, generally involves several risks, including the possibility of defective parts (which can adversely affect the reliability and reputation of the our products), a shortage of components and reduced control over delivery schedules (which can adversely affect our manufacturing efficiencies) and increases in component costs (which can adversely affect our profitability). |
|
|
|
We have several single-sourced supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity or price considerations. If these sources are unable to provide timely and reliable supply, we could experience manufacturing interruptions, delays or inefficiencies, adversely affecting our results of operations. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could affect operating results adversely. We do not believe any material aspect of our supply base involves operating locations in geographic high-risk areas. |
|
|
| 24 |
|
|
|
|
|
International Activities |
|
|
|
Our international operations are a significant part of our business comprising about one-third of our sales. The success and profitability of international operations are subject to numerous risks and uncertainties, such as economic and labor conditions, political instability, tax laws (including U.S. taxes upon foreign subsidiaries) and changes in the value of the U.S. dollar versus the local currency in which products are sold. Any unfavorable change in one or more of these factors could have a material adverse effect upon us. |
|
|
|
Fluctuations in Operating Results |
|
|
|
Our operating results may fluctuate from period to period and period over period depending upon numerous factors, including: customer demand and market acceptance of our products and solutions, new product introductions, varying product mix, delivery due date changes and other factors. We operate in a market characterized by a relatively long sales cycle. From first contact to order delivery may be a time period of one year or longer in certain instances. Delivery schedules, as first established with the customer in this long cycle, may change with little or no advance notice as the original delivery schedule draws near. Our business is sensitive to the spending patterns and funding of our customers, which in turn are subject to prevailing economic conditions and other factors beyond our control. |
|
|
|
Governmental Legislation |
|
|
|
A majority of our sales address end customers having some degree of national, federal, regional, state or local governmental-entity funding. These governmental-entity funding mechanisms are beyond our control and often are difficult to predict. Further, general budgetary authorizations and allocations for state, local, and federal agencies can change for a variety of reasons, including general economic conditions, and have a material adverse effect upon us. For example, the legislation (TEA-21) under which our transportation products business segment domestic sales are derived is subject to reauthorization in 2003. While we believe such reauthorization will occur, and that resulting federal funding will be between the present approximately $8 billion annually and $14 Billion annually, there can be no advance assurance of such. This matter is in early stages of legislative action and top management of the company is involved through the industry trade association the America Publ ic Transportation Association the web site of which (www.APTA.com) regularly posts status information on such legislative matters. Further, in addition to Federal funding to the public transit side of our USA served Market there is state and local funding to be considered. These tend to be affected by general economic conditions. For example, some transit operating authorities are reducing service in 2003 in response to the slow economy; this can have a depressing effect upon sales of our products. It is not possible to precisely quantify this impact. However, it is the opinion of management that new product introductions, new served markets entered, and emphasis upon market sectors not so adversely impacted by economic conditions such as exist in 2003, will allow the company to continue growth in 2003 and beyond. However, any unfavorable change in any of these factors and considerations could have a material adverse effect upon us. |
|
|
|
Technological Changes and Product Transitions |
|
|
|
Our industry is characterized by, and our business strategy is substantially based upon, continuing improvement in technology. This results in frequent introduction of new products, short product life cycles and continual change in product price/performance characteristics. We must develop new technologies in our products and solutions in order to remain competitive. There can be no assurance that we will be able to continue to manage and drive technological transitions. A failure upon our part to effectively manage these transitions of our product lines to new technologies on a timely basis could have a material adverse effect upon us. In addition, our business depends upon technology trends in our customers' businesses. To the extent that we do not address these technological changes, our business may be adversely impacted. |
|
|
|
Product Development Activities |
|
|
|
The strength of our overall business is partially dependent upon our ability to develop products and solutions based upon new or evolving technology and the market's acceptance of those products. There can be no assurance that our product development activities will be successful, that new technologies will be available to us, that we will be able to deliver commercial quantities of new products in a timely manner, that those products will adhere to generally accepted industry standards or that products will achieve market acceptance. Further, it is necessary for our products to adhere to generally accepted and frequently changing industry standards, which are subject to change in ways that are beyond our control. |
|
|
|
|
| 25 |
|
|
|
|
|
Financing |
|
|
|
Our business and operating strategy embraces growth. That includes internal organic as well as external acquisition oriented growth scenarios. This requires that we maintain a high degree of emphasis upon finding and securing financing sources of various types both in equity and debt categories. Success in these financing requirements can be adversely impacted by economic conditions and other factors beyond our control. Recently, we have removed the mandatory redemption date, which would have been in December 2003, from the Series AAA Preferred Stock, which the Company may now redeem at its sole discretion. Additionally, our Board of Directors has approved, subject to shareholder approval, a proposal authorizing the Company to issue an undetermined number of shares of convertible Preferred Stock and warrants that would convert into an aggregate of 2,000,000 shares of Common Stock in connection with a potential private equity financing. Also, our senior lender l ine of credit expires in August 2003. We have been pursuing new lines of credit, and/or extensions of the present line, for several months. Based upon term sheets received to date and our experience on these matters, we believe new and/or extended lines of credit will be secured on a timely basis and on terms no less favorable than at present. |
|
|
|
|
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|
|
|
We are subject to certain risks arising from transactions in the normal course of our business, and from debt instruments. Such risk is principally associated with interest rate and foreign exchange fluctuations, as explained below. |
|
|
|
Interest Rate Risk |
|
|
|
We utilize both long-term fixed rate and short-term variable rate borrowings to finance the working capital and capital requirements of our business. |
|
|
|
We utilize variable rate debt through a revolving credit facility to support working capital needs. Borrowings bear interest at the bank's prime rate plus 1.75%. If the bank's prime rate on December 31, 2002 increased by 100 basis points on that date and then remained constant at the higher rate throughout 2003, our interest costs on our outstanding variable rate borrowings at December 31, 2002 of $6,489,729 would increase by approximately $64,897 for the year ending December 31, 2003. Similarly, if the bank's prime rate on December 31, 2002 decreased by 100 basis points on that date and then remained constant at the lower rate throughout 2003, our interest costs on our outstanding variable rate borrowings at December 31, 2002 of $6,489,729 would decrease by approximately $64,897 for the year ending December 31, 2003. The Company currently does not use derivative instruments to manage its interest rate risk. |
|
|
|
At December 31, 2002, we had outstanding long-term fixed rate borrowings (including current portions) of $8,436,285. We believe the carrying amount of our fixed rate borrowings approximates the estimated fair value for debt with similar terms, interest rates and remaining maturities currently available to companies with similar credit ratings at December 31, 2002. We do not expect changes in the fair value of our long-term fixed rate borrowings to have a significant effect upon our operations, cash flow or financial position. |
|
|
|
The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates, consisting solely of debt obligations. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency. The instrument's actual cash flows are denominated in both U.S. dollars ($US) and Swedish Krona (SEK), as indicated in parentheses. |
|
|
|
|
|
|
|
|
Expected Maturity Date |
|
|
|
| ||
|
|
|
| |||||||
|
Liabilities |
2003 |
2004 |
2005 |
2006 |
2007 |
Thereafter |
Total | ||
|
|
|
|
|
|
|
|
| ||
|
Long-term debt: |
|
|
|
|
|
|
| ||
|
Fixed rate ($US) |
$ 260,000 |
$ 2,211,235 |
$ - |
$ - |
$ - |
$ 4,202,000 |
$ 6,673,235 | ||
|
Average interest rate |
0.00% |
8.59% |
-% |
-% |
-% |
8.00% |
| ||
|
Fixed rate (SEK) |
503,360 |
503,360 |
503,360 |
252,970 |
- |
- |
1,763,050 | ||
|
Average interest rate |
5.35% |
5.35% |
5.35% |
5.35% |
-% |
-% |
|||
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
$8,436,285 | ||
|
|
|
|
|
|
|
|
| ||
|
|
| 26 |
|
|
|
|
|
Foreign Currency Risk |
|
|
|
Our international subsidiaries operate in Europe (particularly the Nordic countries), South America, the mid-East and Australia and use local currencies as the functional currency and the U.S. dollar as the reporting currency. Transactions between the Company and the international subsidiaries are generally denominated in U.S. dollars. Approximately one-third of our revenues are denominated in international currencies. As a result, we have certain exposures to foreign currency risk. However, management believes that such exposure does not present a significant risk due to the relative stability of the European and Nordic countries and Australia. Risk in the mid-East and South America is mitigated due to those revenues representing only approximately (4%) of our consolidated revenues. |
|
|
|
Our international operations represent a substantial portion of our overall operating results and asset base. Our identifiable foreign exchange rate exposures result primarily from accounts receivable from customer sales, anticipated purchases of product from third-party suppliers and the repayment of intercompany loans with foreign subsidiaries denominated in foreign currencies. The company primarily manages its foreign currency risk by making use of naturally offsetting positions. These natural hedges include the using local manufacturing facilities that conduct business in local currency and the use of borrowings denominated in local currencies. |
|
|
|
Transaction gains and losses on U.S. dollar denominated transactions are recorded within other income and expense in the consolidated statements of operations and the net gain totaled $ 379,984 in 2002 primarily due to the decrease in the Swedish krona (SEK) from a December 31, 2001 rate of 10.571 (SEK per U.S. dollar to a December 31, 2002 rate of 8.746 (SEK per U.S. dollar). In 2001 and 2000, the foreign currency exposure was minimal due to lower foreign asset base, fewer transactions and little change in foreign exchange rates between period end balance sheet dates. The Company currently does not use derivative instruments to manage its foreign currency risk. |
|
|
|
The table below provides information about our financial instruments and firmly committed sales transactions by functional currency and presents such information in U.S. dollar equivalents. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates, consisting solely of (SEK) denominated debt obligations. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. |
|
|
| Expected Maturity Date | |||||||||||||||||||||
| On-Balance Sheet |
|
||||||||||||||||||||
| Financial Instruments | 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
| Long-term debt: | |||||||||||||||||||||
| Fixed rate (SEK) | $ | 503,360 | $ | 503,360 | 503,360 | $ | 252,970 | $ | - | $ | - | ||||||||||
| Average interest rate | 5.35 | % | 5.35 | % | 5.35 | % | 5.35 | % | - | % | - | % | |||||||||
|
|
|
|
|
ITEM 7B. TAX AND REPATRIATION MATTERS |
|
|
|
The Company and its subsidiaries are subject to income tax laws in each of the countries in which they do business. The Company makes a comprehensive review of the income tax requirements of each of its operations, files appropriate returns and makes appropriate income tax provisions. These are determined upon an individual subsidiary level and at the corporate level on both an interim and annual basis. The Company provides valuation allowances on deferred tax assets for its subsidiaries that have a history of losses. |
|
|
|
Management cannot assert that there will likely be sufficient profits generated by certain of these subsidiaries in the near future to offset these losses. We follow these processes using an appropriate combination of internal staff at both the subsidiary and corporate levels as well as independent outside advisors in review of the various tax laws and in compliance reporting for the various operations. |
|
|
|
The undistributed earnings of certain foreign subsidiaries are not subject to additional foreign income taxes nor considered to be subject to U.S. income taxes unless remitted as dividends. The Company intends to reinvest such undistributed earnings indefinitely; accordingly, no provision has been made for U.S. taxes on those earnings. The Company regularly reviews the status of the accumulated earnings of each of its U.S. and foreign subsidiaries as part of its overall financing plans. |
|
|
| 27 |
|
|
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|
|
|
Consolidated Financial Statements follow this page. |
|
|
| 28 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES |
|
|
|
|
|
SECTION |
PAGE | |
|
|
| |
|
Independent Auditor's Report |
30 | |
|
|
| |
|
Consolidated Balance Sheets - December 31, 2002 and 2001 |
31 | |
|
|
| |
|
Consolidated Statements of Operations - Years Ended December 31, 2002, 2001 and 2000 |
32 | |
|
|
| |
|
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2002, 2001 and 2000 |
33 | |
|
|
| |
|
Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001 and 2000 |
34-35 | |
|
|
| |
|
Notes to Consolidated Financial Statements |
36-59 | |
|
|
| |
|
Financial Statement Schedule: |
| |
|
|
| |
|
Schedule II - Valuation and Qualifying Accounts |
68 | |
|
|
| 29 |
|
|
|
|
|
|
|
|
|
|
|
Independent Auditor's Report |
|
|
|
|
|
|
|
To the Board of Directors |
|
Digital Recorders, Inc. |
|
Durham, North Carolina |
|
|
|
We have audited the accompanying consolidated balance sheets of Digital Recorders, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. |
|
|
|
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. |
|
|
|
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Digital Recorders, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. |
|
|
|
As described in Note 3 to the financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." |
|
|
|
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. |
|
|
|
|
/s/ MCGLADREY & PULLEN, LLP |
|
|
|
|
|
Raleigh, North Carolina |
|
March 6, 2003, except for certain portions |
|
of Notes 7 and 21, as to which the dates are |
|
|
| 30 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
|
|
CONSOLIDATED BALANCE SHEETS |
|
|
|
DECEMBER 31, 2002 AND 2001 |
|
|
| ASSETS | 2002 | 2001 | ||||||||
|
|
|
|||||||||
| Current Assets | ||||||||||
| Cash and cash equivalents (Note 7) | $ | 504,758 | $ | 510,719 | ||||||
| Trade accounts receivable, less allowance for doubtful accounts of $146,066 | ||||||||||
| and $115,158 at December 31, 2002 and 2001, respectively (Notes 7 and 13) | 10,137,955 | 7,979,713 | ||||||||
| Other receivables | 251,454 | 225,355 | ||||||||
| Inventories (Notes 5 and 7) | 8,830,522 | 8,923,705 | ||||||||
| Prepaids and other current assets | 452,882 | 361,263 | ||||||||
|
|
|
|||||||||
| Total current assets | 20,177,571 | 18,000,755 | ||||||||
|
|
|
|||||||||
| Property and equipment, less accumulated depreciation of $1,459,953 | ||||||||||
| and $1,015,925 at December 31, 2002 and 2001, respectively (Notes 4 and 6) | 1,572,259 | 1,012,677 | ||||||||
| Goodwill, less accumulated amortization of $1,066,643 and $1,044,400 | ||||||||||
| at December 31, 2002 and 2001, respectively (Note 3) | 8,960,396 | 7,556,655 | ||||||||
| Intangible assets, less accumulated amortization of $362,922 and $188,656 | ||||||||||
| at December 31, 2002 and 2001, respectively (Note 3) | 1,392,533 | 1,258,567 | ||||||||
| Deferred tax assets (Note 11) | 865,663 | 847,149 | ||||||||
| Other assets | 414,764 | 134,346 | ||||||||
|
|
|
|||||||||
| TOTAL ASSETS | $ | 33,383,186 | $ | 28,810,149 | ||||||
|
|
|
|||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
| Current Liabilities | ||||||||||
| Lines of credit (Note 7) | $ | 7,503,791 | $ | 911,694 | ||||||
| Current maturities of long-term debt (Note 7) | 763,360 | 541,233 | ||||||||
| Accounts payable | 6,339,537 | 5,366,826 | ||||||||
| Accounts payable, related party (Note 14) | 859,425 | 1,528,786 | ||||||||
| Accrued expenses (Note 18) | 2,162,309 | 1,824,227 | ||||||||
| Deferred tax liabilities (Note 11) | 138,695 | 31,841 | ||||||||
| Preferred stock dividends payable | 88,500 | 44,250 | ||||||||
|
|
|
|||||||||
| Total current liabilities | 17,855,617 | 10,248,857 | ||||||||
|
|
|
|||||||||
| Long-term debt and other obligations, less current maturities (Note 7) | 7,737,940 | 11,601,020 | ||||||||
|
|
|
|||||||||
| Series AAA Redeemable, Convertible, Nonvoting Preferred Stock, $.10 par value, | ||||||||||
| Liquidation Preference of $5,000 per share; 20,000 shares | ||||||||||
| authorized; 354 shares issued and outstanding | ||||||||||
| at December 31, 2002 and 2001 (Notes 8 and 21) | 1,770,000 | 1,770,000 | ||||||||
|
|
|
|||||||||
| Minority interest in consolidated subsidiary | 267,566 | 208,659 | ||||||||
|
|
|
|||||||||
| Commitments and contingencies (Notes 6, 7 and 17) | ||||||||||
| Stockholders' Equity (Note 2) | ||||||||||
| Common Stock, $.10 par value, 10,000,000 shares authorized; 3,804,475 and 3,704,475 | ||||||||||
| shares issued and outstanding at December 31, 2002 and 2001, respectively | 380,447 | 370,447 | ||||||||
| Additional paid-in capital | 12,349,726 | 12,236,726 | ||||||||
| Accumulated other comprehensive income (loss) - foreign currency translation | 421,175 | (415,778 | ) | |||||||
| Accumulated deficit | (7,399,285 | ) | (7,209,782 | ) | ||||||
|
|
|
|||||||||
| Total stockholders' equity | 5,752,063 | 4,981,613 | ||||||||
|
|
|
|||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 33,383,186 | $ | 28,810,149 | ||||||
|
|
|
|||||||||
| See accompanying notes to consolidated financial statements. | ||||||||||
| 31 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS |
|
|
|
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 |
|
|
| 2002 | 2001 | 2000 | ||||||||||||
|
|
|
|
||||||||||||
| Net sales (Note 13) | $ | 45,137,986 | $ | 37,215,352 | $ | 29,886,168 | ||||||||
| Cost of sales (Note 14) | 28,862,992 | 23,389,566 | 18,980,569 | |||||||||||
|
|
|
|
||||||||||||
| Gross profit | 16,274,994 | 13,825,786 | 10,905,599 | |||||||||||
|
|
|
|
||||||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative | 13,058,348 | 10,758,433 | 8,378,225 | |||||||||||
| Research and development | 2,492,428 | 2,648,510 | 2,294,620 | |||||||||||
|
|
|
|
||||||||||||
| Total operating expenses | 15,550,776 | 13,406,943 | 10,672,845 | |||||||||||
|
|
|
|
||||||||||||
| Operating income | 724,218 | 418,843 | 232,754 | |||||||||||
|
|
|
|
||||||||||||
| Other income (expense) | 28,840 | 3,546 | (1,619 | ) | ||||||||||
| Foreign currency translation gain | 309,456 | - | - | |||||||||||
| Interest expense, net (Note 7) | (1,150,962 | ) | (814,207 | ) | (510,598 | ) | ||||||||
|
|
|
|
||||||||||||
| Total other expense and interest expense | (812,666 | ) | (810,661 | ) | (512,217 | ) | ||||||||
|
|
|
|
||||||||||||
| Loss before income tax benefit (expense) | (88,448 | ) | (391,818 | ) | (279,463 | ) | ||||||||
| Income tax benefit (expense) (Note 11) | (42,148 | ) | 533,135 | - | ||||||||||
|
|
|
|
||||||||||||
| Income (loss) before minority interest in income of consolidated subsidiary | (130,596 | ) | 141,317 | (279,463 | ) | |||||||||
| Minority interest in income of consolidated subsidiary | (58,907 | ) | (26,052 | ) | - | |||||||||
|
|
|
|
||||||||||||
| Net income (loss) | (189,503 | ) | 115,265 | (279,463 | ) | |||||||||
| Preferred stock dividend requirements (Note 8) | (177,000 | ) | (177,000 | ) | (177,000 | ) | ||||||||
|
|
|
|
||||||||||||
| Net loss applicable to common shareholders | $ | (366,503 | ) | $ | (61,735 | ) | $ | (456,463 | ) | |||||
|
|
|
|
||||||||||||
| Earnings per share: | ||||||||||||||
| Net loss per share: | ||||||||||||||
| Basic | $ | (0.10 | ) | $ | (0.02 | ) | $ | (0.14 | ) | |||||
|
|
|
|
||||||||||||
| Diluted | $ | (0.10 | ) | $ | (0.02 | ) | $ | (0.14 | ) | |||||
|
|
|
|
||||||||||||
| Weighted average number of common shares and common | ||||||||||||||
| equivalent shares outstanding: | ||||||||||||||
| Basic | 3,746,119 | 3,495,954 | 3,274,108 | |||||||||||
|
|
|
|
||||||||||||
| Diluted | 3,746,119 | 3,495,954 | 3,274,108 | |||||||||||
|
|
|
|
||||||||||||
| See accompanying notes to consolidated financial statements. | ||||||||||||||
|
|
| 32 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |
|
|
|
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 |
|
|
| Common Stock | ||||||||||
|
|
Accumulated | |||||||||
| Number | Additional | Other | Total | |||||||
| of shares | Par | Paid-in | Accumulated | Comprehensive | Comprehensive | Stockholders' | ||||
| issued | Value | Capital | Deficit | Income (loss) | Income (loss) | Equity | ||||
|
|
| |||||||||
| Balance as of January 1, 2000 | 3,274,075 | $ 327,407 | $ 11,335,090 | $ (7,045,584) | $ (237,278) | $ 4,379,635 | ||||
| Comprehensive income (loss): | ||||||||||
| Net loss | (279,463) | $ (279,463) | (279,463) | |||||||
| Translation adjustment | (91,444) | (91,444) | (91,444) | |||||||
|
|
||||||||||
| Total comprehensive loss | $ (370,907) | |||||||||
|
|
||||||||||
| Issuance of common stock | 400 | 40 | 736 | 776 | ||||||
| Preferrred stock dividends | (177,000) | (177,000) | ||||||||
|
|
|
|
|
|
| |||||
| Balance as of December 31, 2000 | 3,274,475 | 327,447 | 11,158,826 | (7,325,047) | (328,722) | 3,832,504 | ||||
| Comprehensive income (loss): | ||||||||||
| Net income | 115,265 | $ 115,265 | 115,265 | |||||||
| Translation adjustment | (87,056) | (87,056) | (87,056) | |||||||
|
|
||||||||||
| Total comprehensive income | $ 28,209 | --- | ||||||||
|
|
||||||||||
| Issuance of common stock | 430,000 | 43,000 | 872,900 | 915,900 | ||||||
| Issuance of warrants | 382,000 | 382,000 | ||||||||
| Preferrred stock dividends | (177,000) | (177,000) | ||||||||
|
|
|
|
|
|
| |||||
| Balance as of December 31, 2001 | 3,704,475 | 370,447 | 12,236,726 | (7,209,782) | (415,778) | 4,981,613 | ||||
| Comprehensive income (loss): | ||||||||||
| Net income | (189,503) | $ (189,503) | (189,503) | |||||||
| Translation adjustment | 836,953 | 836,953 | 836,953 | |||||||
|
|
||||||||||
| Total comprehensive income | $ 647,450 | |||||||||
|
|
||||||||||
| Issuance of common stock | 100,000 | 10,000 | 290,000 | 300,000 | ||||||
| Preferrred stock dividends | (177,000) | (177,000) | ||||||||
|
|
|
|
|
|
| |||||
| Balance as of December 31, 2002 | 3,804,475 | $ 380,447 | $ 12,349,726 | $ (7,399,285) | $ 421,175 | $ 5,752,063 | ||||
|
|
|
|
|
|
| |||||
|
|
|
See accompanying notes to consolidated financial statements. |
|
|
| 33 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 |
|
|
| 2002 | 2001 | 2000 | ||||||||||
|
|
|
|
||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income (loss) | $ | (189,503 | ) | $ | 115,265 | $ | (279,463 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash | ||||||||||||
| provided by (used in) operating activities: | ||||||||||||
| Deferred income taxes | (141,061 | ) | (622,276 | ) | - | |||||||
| Depreciation of property and equipment | 359,795 | 269,921 | 215,492 | |||||||||
| Amortization of intangible assets | 126,342 | 95,679 | 61,258 | |||||||||
| Amortization of goodwill | - | 334,714 | 117,667 | |||||||||
| Bad debt expense | 30,908 | 54,736 | - | |||||||||
| Other non-cash expenses | - | 53,000 | - | |||||||||
| Minority interest | 58,907 | 26,052 | - | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| (Increase) decrease in trade accounts receivable | (2,027,646 | ) | 3,192,746 | (3,946,471 | ) | |||||||
| (Increase) decrease in other receivables | (4,954 | ) | 396,450 | 161,530 | ||||||||
| (Increase) decrease in inventories | 551,255 | (1,591,369 | ) | (1,140,612 | ) | |||||||
| (Increase) decrease in prepaids and other current assets | (123,358 | ) | 57,519 | 263,123 | ||||||||
| Increase in accounts payable | 771,489 | 594,247 | 870,323 | |||||||||
| Increase (decrease) in accounts payable, related party | (369,361 | ) | (695,769 | ) | 1,572,236 | |||||||
| Increase (decrease) in accrued expenses | 53,527 | (373,240 | ) | 429,627 | ||||||||
|
|
|
|
||||||||||
| Net cash provided by (used in) operating activities | (903,660 | ) | 1,907,675 | (1,675,290 | ) | |||||||
|
|
|
|
||||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of property and equipment | (723,472 | ) | (432,704 | ) | (246,335 | ) | ||||||
| Proceeds from sale of assets | 38,618 | - | - | |||||||||
| Purchase of intangible assets | (19,790 | ) | (45,071 | ) | (38,461 | ) | ||||||
| Reduction (Purchase) of other assets | (268,964 | ) | 258,972 | (153,663 | ) | |||||||
| Purchase of Mobitec, net of cash and cash equivalents acquired | (15,030 | ) | (5,104,788 | ) | - | |||||||
|
|
|
|
||||||||||
| Net cash used in investing activities | (988,638 | ) | (5,323,591 | ) | (438,459 | ) | ||||||
|
|
|
|
||||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of common stock | - | - | 776 | |||||||||
| Proceeds from bank borrowings and lines of credit | 38,704,333 | 35,964,873 | 25,671,950 | |||||||||
| Principal payments on bank borrowings and lines of credit | (36,811,272 | ) | (31,500,633 | ) | (23,409,491 | ) | ||||||
| Payment of dividends on preferred stock | (132,750 | ) | (177,000 | ) | (177,000 | ) | ||||||
|
|
|
|
||||||||||
| Net cash provided by financing activities | 1,760,311 | 3,887,840 | 2,086,235 | |||||||||
|
|
|
|
||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 126,026 | (85,067 | ) | (91,444 | ) | |||||||
|
|
|
|
||||||||||
| Net increase (decrease) in cash and cash equivalents | (5,961 | ) | 386,857 | (118,958 | ) | |||||||
| Cash and cash equivalents at beginning of year | 510,719 | 123,862 | 242,820 | |||||||||
|
|
|
|
||||||||||
| Cash and cash equivalents at end of year | $ | 504,758 | $ | 510,719 | $ | 123,862 | ||||||
|
|
|
|
||||||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||||||
| Cash paid during the year for interest | $ | 1,079,776 | $ | 776,510 | $ | 490,294 | ||||||
|
|
|
|
||||||||||
| Cash paid during the year for income taxes | $ | 115,306 | $ | 31,690 | $ | - | ||||||
|
|
|
|
||||||||||
|
|
|
See accompanying notes to consolidated financial statements. |
| 34 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED |
|
|
|
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 |
|
|
| 2002 | 2001 | 2000 | ||||||||||
|
|
|
|
||||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||||||
| Equipment acquired through issuance of capital lease | $ | 125,578 | $ | - | $ | - | ||||||
|
|
|
|
||||||||||
| Exchange of common stock for reduction in accounts | ||||||||||||
| payable-related party | $ | 300,000 | $ | - | $ | - | ||||||
|
|
|
|
||||||||||
| Reduction of goodwill from adjustment of | ||||||||||||
| restructuring reserve | $ | 76,201 | $ | - | $ | - | ||||||
|
|
|
|
||||||||||
| Acquisition of Mobitec (Note 2): | ||||||||||||
| Cash purchase price | $ | 15,030 | $ | 5,104,788 | $ | - | ||||||
|
|
|
|
||||||||||
| Working capital acquired, net of cash and cash equivalents | ||||||||||||
| acquired of $347,477 | $ | - | $ | 1,065,485 | $ | - | ||||||
| Fair value of other tangible assets acquired, principally | ||||||||||||
| property and equipment | - | 263,556 | - | |||||||||
| Cost in excess of net assets acquired | 15,030 | 6,836,055 | - | |||||||||
| Customer lists acquired | - | 1,165,917 | - | |||||||||
| Minority interest assumed | - | (113,627 | ) | - | ||||||||
| Promissory note and obligation issued to seller | - | (2,591,235 | ) | - | ||||||||
| Fair value of warrants issued to seller | - | (95,000 | ) | - | ||||||||
| Fair value of stock issued to seller | - | (915,900 | ) | - | ||||||||
| Acquisition costs included in liabilities | - | (510,463 | ) | - | ||||||||
|
|
|
|
||||||||||
| $ | 15,030 | $ | 5,104,788 | $ | - | |||||||
|
|
|
|
||||||||||
| Fair value of warrants issued to investment funds company | ||||||||||||
| as part of acquisition financing | $ | - | $ | 252,000 | $ | - | ||||||
|
|
|
|
||||||||||
| See accompanying notes to consolidated financial statements. | ||||||||||||
|
|
| 35 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements |
|
|
|
(1) |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
|
(a) |
Organization |
|
|
|
|
|
Digital Recorders, Inc. (the "Company") was incorporated in 1983 and became a public company through an initial public offering in November 1994. The Company itself, or through contractors, designs, manufactures, sells, and services information technology and audio surveillance technology products through the transportation communications segment and the law enforcement and surveillance segment. Customers include municipalities, regional transportation districts, federal, state and local departments of transportation, bus manufacturers, and law enforcement agencies and organizations. The Company markets primarily to customers located in North and South America, Far and Middle East, Asia, Australia and Europe. |
|
|
|
|
(b) |
Principles of Consolidation |
|
|
|
|
|
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. |
|
|
|
|
(c) |
Use of Estimates |
|
|
|
|
|
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. |
|
|
|
|
|
The Company's operations are affected by numerous factors, including changes in laws and governmental regulations and technological advances. The Company cannot predict if any of these factors might have a significant impact upon the transportation communications and the law enforcement and surveillance industries in the future, nor can it predict what impact, if any, the occurrence of these or other events might have upon the Company's operations and cash flows. Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts, the allowance for slow moving inventory, the estimated useful lives of long-lived and intangible assets, the recoverability of such assets by their estimated future undiscounted cash flows, the fair value of reporting units and indefinite life intangible assets, the allowance for warranty claim reserves and the purchase price allocations used in the Company's acquisitions. |
|
|
|
|
(d) |
Cash Equivalents |
|
|
|
|
|
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At times, the Company places temporary cash investments with high credit quality financial institutions in amounts that may be in excess of FDIC insurance limits. |
|
|
|
|
(e) |
Revenue Recognition |
|
|
|
|
|
Revenue from product sales is recognized upon shipment to customers based upon the defined shipping terms. Even though the Company receives customer sales orders that may require scheduled product deliveries over several months, sales revenues are only recognized upon physical shipment of the product to the customer. Service revenues are recognized upon completing the service. Service revenues include product repair not under a warranty agreement, city route mapping, product installation, training, consulting to transit authorities and funded research and development projects. Service revenues were not a significant source of revenue for 2002, 2001 and 2000. Product sales and service revenues for 2002, 2001 and 2000 are detailed below: |
|
|
| 36 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
| Years Ended December 31, | ||||||||||||||||||||
|
| ||||||||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||
|
|
|
| ||||||||||||||||||
| Product sales, net | $ | 44,602,462 | 98.8 | % | $ | 36,663,102 | 98.5 | % | $ | 29,202,570 | 97.7 | % | ||||||||
| Service revenues | 535,524 | 1.2 | 552,250 | 1.5 | 683,598 | 2.3 | ||||||||||||||
|
|
|
| ||||||||||||||||||
| Total | $ | 45,137,986 | 100.0 | % | $ | 37,215,352 | 100.0 | % | $ | 29,886,168 | 100.0 | % | ||||||||
|
|
|
| ||||||||||||||||||
|
|
|
|
|
The Company's customer sales agreements do not provide any post-sales service, support, subsequent upgrade rights or right of return. |
|
|
|
|
(f) |
Trade Accounts Receivable |
|
|
|
|
|
The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade receivable credit risk exposure is limited. Trade receivables are carried at original invoice amount less an estimate provided for doubtful receivables, based upon a review of all outstanding amounts on a monthly basis. A valuation allowance is provided for known and anticipated credit losses, as determined by management in the course of regularly evaluating individual customer receivables. This evaluation takes into consideration a customer's financial condition and credit history, as well as current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. No interest is charged on customer accounts. |
|
|
|
|
(g) |
Inventories |
|
|
|
|
|
Inventories are valued at the lower of cost or market, with cost determined by the first-in, first-out method. |
|
|
|
|
(h) |
Property and Equipment |
|
|
|
|
|
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets ranging from three to ten years. The Company periodically evaluates the recoverability of its property and equipment. If facts and circumstances suggest that the property and equipment will not be recoverable, as determined based upon the undiscounted cash flows over the remaining depreciable period, the carrying value of property and equipment will be reduced to its fair value using prices for similar assets. To date, management has determined that no impairment of property and equipment exists. |
|
|
|
|
(i) |
Goodwill and Indefinite Life Intangible Assets |
|
|
|
|
|
Beginning January 1, 2002, goodwill and indefinite life intangible assets are not amortized but are tested annually for impairment, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Management has determined the Company does not have indefinite life intangible assets. In assessing the recoverability of goodwill, the Company must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. |
|
|
|
|
|
Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy, the fluctuation of actual revenue and the timing of expenses. The Company's management develops future revenue estimates based upon customer commitments and other available data. Estimates of future cash flows assume that expenses will grow at rates consistent with historical rates. If the expected cash flows are not realized or if market conditions result in lower valuation multiples, impairment losses may be recorded in the future. |
| 37 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
|
For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit (including goodwill) to that reporting unit's fair value. If the reporting unit's estimated fair value exceeds the reporting unit's carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed the unit's carrying value, then an additional analysis is performed to allocate the fair value of the reporting unit to all of the assets and liabilities of that unit as if that unit had been acquired in a business combination and the fair value of the unit was the purchase price. If the excess of the fair value of the reporting unit over the fair value of the identifiable assets and liabilities is less than the carrying value of the unit's goodwill, an impairment charge is recorded for the difference. To date, management has determined that no impairment of goodwill exists. |
|
|
|
|
(j) |
Intangible Assets |
|
|
|
|
|
Intangible assets recorded as part of the acquisitions of Transit-Media and Digital Audio consist of certain deferred costs, tooling and related costs, and costs incurred to apply for and obtain patents on internally developed technology. Intangible assets also consist of customer list relationships recorded as part of the acquisition of Mobitec. Intangible assets are amortized using a straight-line method over 3-15 years. The Company periodically evaluates the recoverability of its intangible assets. If facts and circumstances suggest that the intangible assets will not be recoverable, as determined based upon the undiscounted cash flows of the entity acquired and the patented products over the remaining amortization period, the carrying value of the intangible assets will be reduced to its fair value (estimated discounted future cash flows). To date, management has determined that no impairment of intangible assets exists. |
|
|
|
|
(k) |
Research and Development Costs |
|
|
|
|
|
Research and development costs are charged to operations as incurred. Research and development expenses were $2,492,428, $2,648,510 and $2,294,620 in 2002, 2001 and 2000, respectively. |
|
|
|
|
(l) |
Advertising Costs |
|
|
|
|
|
Advertising costs are charged to operations as incurred. Advertising expenses were $72,728, $128,843 and $171,335 in 2002, 2001 and 2000, respectively. |
|
|
|
|
(m) |
Shipping and Handling Fees and Costs |
|
|
|
|
|
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound and outbound freight are included in cost of sales and totaled $1,041,658, $1,023,862 and $734,640 in 2002, 2001 and 2000, respectively. |
|
|
|
|
(n) |
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 has been computed based upon the weighted average of 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 convertible preferred stock and debt and outstanding stock options and warrants represent the only dilutive potential common stock outstanding. The amounts of income (loss) used in the calculations of diluted and basic income (loss) per common share were the same for all the years presented. Diluted net income (loss) per common share is equal to the basic net income (loss) per common share for the years ended December 31, 2002, 2001 and 2000 as common equivalent shares from stock options, stock warrants and convertible debentures would not have a dilutive effect beca use of the loss from continuing operations. |
|
|
|
|
(o) |
Stock-Based Compensation |
|
|
|
|
|
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock option plans. As allowed by SFAS No. 123, the Company has chosen to continue to account for stock-based |
| 38 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
|
compensation using the intrinsic value method prescribed in Accounting Principles Board No. 25, "Accounting for Stock Issued To Employees," and related interpretations, which does not require compensation to be recorded if the consideration to be received is at least equal to the fair value of the common stock to be received at the measurement date. Under the requirements of SFAS No. 123, non-employee stock-based transactions require compensation to be recorded based on the fair value of the securities issued or the services received, whichever is more reliably measurable. |
|
|
|
|
|
Had compensation cost for the stock option plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the pro forma basic and diluted net loss per common share would have been as follows: |
|
|
| 2002 | 2001 | 2000 | |||||||||||||
|
|
|
|
|||||||||||||
| Net loss applicable to common shareholders | $ | (366,503 | ) | $ | (61,735 | ) | $ | (456,463 | ) | ||||||
| Pro forma net loss applicable to common shareholders | $ | (409,916 | ) | $ | (289,125 | ) | $ | (613,548 | ) | ||||||
| Basic and diluted net loss: | |||||||||||||||
| As reported | $ | (0.10 | ) | $ | (0.02 | ) | $ | (0.14 | ) | ||||||
| Pro forma | $ | (0.11 | ) | $ | (0.08 | ) | $ | (0.19 | ) | ||||||
|
|
|
|
(p) |
Translation of Foreign Currency |
|
|
|
|
|
The local currency of each of the countries of the operating foreign subsidiaries is considered to be the functional currency. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the year. 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 included in accumulated comprehensive income (loss) in stockholders' equity. Realized gains and losses on foreign currency transactions, if any, are included in operations for the year. |
|
|
|
|
(q) |
Income Taxes |
|
|
|
|
|
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. |
|
|
|
|
(r) |
Fair Value of Financial Instruments |
|
|
|
|
|
The following summarizes the major methods and assumptions used in estimating the fair values of financial instruments: |
|
|
|
|
|
- |
Cash and Cash Equivalents - The carrying amount approximates fair value due to the relatively short- term period to maturity of these instruments. |
|
|
|
- |
Short- and Long-Term Borrowings - The carrying amount approximates the estimated fair value for debt with similar terms, interest rates and remaining maturities currently available to companies with similar credit ratings. |
|
|
|
|
(s) |
Product Warranties |
|
|
|
The Company provides a limited warranty for its products. The Company’s standard warranties require the Company to repair or replace defective products during such warranty period at no cost to the customer. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company utilizes historical trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels. |
| 39 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
(2) |
BUSINESS COMBINATION | |
|
|
|
|
On June 28, 2001, the Company and its wholly owned subsidiary, DRI Europa AB, acquired all of the outstanding stock of Mobitec, a Swedish manufacturer. The acquisition of the Mobitec shares was made pursuant to an Amended Option Agreement, dated March 13, 2001, and a Stock Purchase Agreement, dated June 27, 2001. Both agreements were between the Company and DRI Europa AB as the purchasers and the individual Mobitec shareholders as the sellers. |
|
|
|
|
The purchase price for the Mobitec shares consisted of a combination of cash, notes, stock and warrants to purchase stock. The total purchase price was $7,977,361 consisting of (i) $4,375,226 in cash, (ii) promissory notes and obligation issued by DRI Europa to the sellers aggregating $2,591,235 (iii) 430,000 restricted shares of our common stock (valued at $915,900 or $2.13 per share) issued to two of the sellers, and (iv) warrants to purchase the aggregate of 100,000 shares of common stock at an exercise price of $4.00 per share for a period of five years (valued at a total of $95,000) issued to one of the sellers. Capitalized acquisition costs were $1,602,532 of which $510,463 were accrued as liabilities. The purchase price has been allocated as follows: $263,556 to property and equipment, $1,412,961 to working capital, $113,627 to minority interest, $6,851,085 to goodwill and $1,165,917 to intangible assets. Goodwill and intangible assets were amortized over 15 years b y the straight-line method from the date of acquisition until December 31, 2001. At that time, goodwill amortization ceased in accordance with provisions of Statement of Financial Accounting Standards No. 142 (see Note 3). |
|
|
|
|
The acquisition has been accounted for as a purchase and the results of the Mobitec operations since the date of acquisition are included in the consolidated financial statements. |
|
|
|
|
Unaudited pro forma consolidated results of operations for the years ended December 31, 2001 and 2000 as though Mobitec had been acquired as of January 1, 2000 follow: |
|
|
| 2001 | 2000 | |||||||||
|
|
|
|||||||||
| Sales | $ | 45,317,783 | $ | 42,324,168 | ||||||
| Net loss applicable to common shareholders | $ | (166,600 | ) | $ | (1,401,418 | ) | ||||
| Loss per common share | $ | (0.05 | ) | $ | (0.42 | ) | ||||
|
|
|
|
The above amounts reflect adjustments for amortization of goodwill and intangible assets, as well as imputed interest on borrowed funds. The proforma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each fiscal year presented, nor are they necessarily indicative of future consolidated results. |
|
|
|
(3) |
GOODWILL AND OTHER INTANGIBLE ASSETS-ADOPTION OF STATEMENTS 141 AND 142 |
|
|
|
|
In June 2001, the Financial Accounting Standards Board issued SFAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible Assets." Under the new rules, goodwill and other intangible assets deemed to have indefinite useful lives are no longer amortized but are subject to impairment tests at least annually, or more frequently if circumstances occur that indicate impairment may have occurred. Management has determined that the Company does not currently have any indefinite life intangible assets. Other intangible assets continue to be amortized over their useful lives. Amortization of certain of these intangible assets continues to be deductible for income tax purposes. |
|
|
|
|
For acquisitions completed prior to June 30, 2001, the Company has applied the new rules on accounting for business combinations and goodwill and other intangible assets beginning on January 1, 2002. Effective upon the adoption of SFAS No. 142 on January 1, 2002, the Company identified its two operating segments each to be separate reporting units. The carrying values of the reporting units are determined by allocating all applicable assets (including goodwill) and liabilities based upon the unit in which the assets are employed and to which the liabilities relate, considering the methodologies utilized to determine the fair value of the reporting units. |
| 40 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
In connection with the adoption of SFAS No. 142, the Company was required to carry out a transitional goodwill impairment evaluation, which required an assessment of whether there was an indication that goodwill was impaired at the date of adoption. The Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities (including goodwill) to those reporting units as of the date of adoption. All existing goodwill at the date of adoption was assigned to one or more reporting units in a reasonable and supportable manner as prescribed in the standard. The Company assessed the fair value of each reporting unit and compared it to the unit's carrying value. |
|
|
|
|
The Company has completed its goodwill impairment evaluation in connection with the adoption of the new standard and determined that there is no impairment of goodwill as of the date of adoption. As a result of these impairment evaluations, no impairment charges were recorded during the year ended December 31, 2002. Management is not aware of any events, through the date of the Company's Annual Report on Form 10-K, which indicates that an impairment has been experienced. Under the new standard, goodwill will be required, at a minimum, to be evaluated annually for impairment. |
|
|
|
|
The following table reflects the impact of the new standards and reconciles the reported net loss applicable to common shareholders to net loss applicable to common shareholders adjusted for amortization of goodwill, net of the associated tax effects, and the related per share amounts: |
|
|
| Years Ended December 31, | |||||||||||||
|
|
|||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
|
|
|
|||||||||||
| Net loss applicable to common shareholders | $ | (366,503 | ) | $ | (61,735 | ) | $ | (456,463 | ) | ||||
| Add back amortization, net of taxes*: | |||||||||||||
| Goodwill | - | 334,714 | 117,667 | ||||||||||
|
|
|
|
|||||||||||
| Adjusted net income (loss) applicable to | |||||||||||||
| common shareholders | $ | (366,503 | ) | $ | 272,979 | $ | (338,796 | ) | |||||
|
|
|
|
|||||||||||
| Reported net loss per share, basic and diluted | $ | (0.10 | ) | $ | (0.02 | ) | $ | (0.14 | ) | ||||
| Add back amortization, net of taxes: | |||||||||||||
| Goodwill | - | 0.10 | 0.04 | ||||||||||
|
|
|
|
|||||||||||
| Adjusted net income (loss) per share: | |||||||||||||
| Baisic | $ | (0.10 | ) | $ | 0.08 | $ | (0.10 | ) | |||||
|
|
|
|
|||||||||||
| Diluted | $ | (0.10 | ) | $ | 0.07 | $ | (0.10 | ) | |||||
|
|
|
|
|||||||||||
|
|
|
|
* The Company's goodwill amortization expense has not been deductible for tax purposes. |
|
|
| 41 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
The change in the carrying amount of goodwill for each of the Company's operating segments for the years ended December 31, 2002 and 2001 is as follows: |
|
|
| Transportation | Law enforcement | ||||||||||
| communications | and surveillance | Total | |||||||||
|
|
|
|
|||||||||
| Balance as of January 1, 2001 | $ | - | $ | 1,078,611 | $ | 1,078,611 | |||||
| Acquisitions | 6,836,055 | - | 6,836,055 | ||||||||
| Amortization | (217,047 | ) | (117,667 | ) | (334,714 | ) | |||||
| Effect of exchange rates | (23,297 | ) | - | (23,297 | ) | ||||||
|
|
|
|
|||||||||
| Balance as of December 31, 2001 | 6,595,711 | 960,944 | 7,556,655 | ||||||||
| Acquisitions | 15,030 | - | 15,030 | ||||||||
| Adjustment of restructuring reserve | (76,201 | ) | - | (76,201 | ) | ||||||
| Effect of exchange rates | 1,464,912 | - | 1,464,912 | ||||||||
|
|
|
|
|||||||||
| Balance as of December 31, 2002 | $ | 7,999,452 | $ | 960,944 | $ | 8,960,396 | |||||
|
|
|
|
|||||||||
|
|
|
|
The composition of the Company's acquired intangible assets and the associated accumulated amortization as of December 31, 2002 and 2001 is as of follows: |
|
|
| December 31, 2002 | December 31, 2001 | |||||||||||||||||||||
|
|
|
|||||||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
| Intangible assets subject to | ||||||||||||||||||||||
| amortization: | ||||||||||||||||||||||
| Patents and devlopment | ||||||||||||||||||||||
| costs | $ | 367,959 | $ | 229,224 | $ | 138,735 | $ | 281,305 | $ | 154,229 | $ | 127,076 | ||||||||||
| Customer lists | 1,387,496 | 133,698 | 1,253,798 | 1,165,918 | 34,427 | 1,131,491 | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
| $ | 1,755,455 | $ | 362,922 | $ | 1,392,533 | $ | 1,447,223 | $ | 188,656 | $ | 1,258,567 | |||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
|
|
|
(4) |
PROPERTY AND EQUIPMENT |
|
|
|
|
Property and equipment consists of the following: |
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
|
|
|
|||||||||
| Leashold improvements | $ | 58,461 | $ | 58,461 | ||||||
| Automobiles | 2,541 | 2,541 | ||||||||
| Computer and telecommunications equipment | 1,601,624 | 947,315 | ||||||||
| Test equipment | 197,665 | 180,561 | ||||||||
| Furniture and fixtures | 1,171,921 | 839,724 | ||||||||
|
|
|
|||||||||
| 3,032,212 | 2,028,602 | |||||||||
| Less accumulated depreciation and amortization | 1,459,953 | 1,015,925 | ||||||||
|
|
|
|||||||||
| $ | 1,572,259 | $ | 1,012,677 | |||||||
|
|
|
|||||||||
| 42 |
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
(5) |
INVENTORIES |
|
|
|
|
Inventories consist of the following: |
|
|
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
|
|
|
|||||||||
| Raw materials and system components | $ | 7,237,385 | $ | 7,156,163 | ||||||
| Work in process | 148,105 | 61,893 | ||||||||
| Finished goods | 1,445,032 | 1,705,649 | ||||||||
|
|
|
|||||||||
| $ | 8,830,522 | $ | 8,923,705 | |||||||
|
|
|
|||||||||
|
|
|
(6) |
LEASES |
|
|
|
|
The Company leases its premises and certain office equipment under various operating leases that expire at various times through 2008. Rent and lease expense under these operating leases was $741,220, $629,229 and $532,327 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company records rent on a straight-line basis. |
|
|
|
|
The Company also has a lease commitment under a capital lease obligation for a tradeshow booth that expires in 2004. |
|
|
|
|
At December 31, 2002, future minimum lease payments under the non-cancelable operating leases and the future minimum lease payments and the present value of the capital lease are as follows: |
|
|
| Capital | Operating | |||||||||||
| Year Ending December 31, | Leases | Leases | ||||||||||
|
|
|
|||||||||||
| 2003 | $ | 69,958 | $ | 618,318 | ||||||||
| 2004 | 68,042 | 490,334 | ||||||||||
| 2005 | - | 355,820 | ||||||||||
| 2006 | - | 260,667 | ||||||||||
| 2007 | - | 219,116 | ||||||||||
| Thereafter | - | 64,821 | ||||||||||
|
|
|
|||||||||||
| Total future minimum lease payments | 138,000 | $ | 2,009,076 | |||||||||
|
|
||||||||||||
| Less amount representing interest (8.6% interest) | 12,363 | |||||||||||
|
|
||||||||||||
| Present value of future minimum capital lease payments | 125,637 | |||||||||||
| Less current portion | 60,622 | |||||||||||
|
|
||||||||||||
| Long-term portion (see Note 7) | $ | 65,015 | ||||||||||
|
|
||||||||||||
|
|
| 43 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
(7) |
LINES OF CREDIT AND LONG-TERM DEBT |
|
|
|
|
a) Lines of Credit |
|
|
|
|
The Company has an asset-based lending agreement (the "Credit Agreement") with Guaranty Business Credit Corporation that expires August 22, 2003. At December 31, 2002, the Credit Agreement provided up to $11.75 million in borrowing to be used for acquisitions, working capital and general corporate purposes. The working capital (accounts receivable and inventory) borrowing portion of the agreement was limited at December 31, 2002 to a combined maximum limit of $6.75 million. The interest rate on the revolving credit portion of the agreement is the published prime lending rate (4.25% at December 31, 2002) plus 1.75 percent. Credit extended for acquisitions bears an interest rate of prime (4.25% at December 31, 2002) plus 2 percent. At December 31, 2002, available collateral based on the value of eligible trade accounts receivable and inventories was $7,504,062, which, given the outstanding debt balance under this agreement of $6,489,729, resulted in a poten tial additional borrowing availability of $1,014,333. However, due to the working capital limit of $6,750,000 imposed by Guaranty Business Credit Corporation, the additional borrowing availability was limited to $260,271. The outstanding debt under this agreement is secured by substantially all U.S.-based assets including the assets of the Company's subsidiaries. The Company expects to renew or replace this credit agreement with a long-term agreement substantially similar in terms and conditions. |
|
|
|
|
As amended, the Credit Agreement includes customary covenants and conditions relating to the conduct and operation of the Company's business. Specifically, as amended, the Credit Agreement limits the payment of dividends upon any class of stock to $177,000 annually, subjects the Company to a 1:1 Earnings Before Interest, Taxes, Depreciation and Amortization to interest coverage ratio to be calculated upon a quarterly and year to date basis and limits capital expenditures to $25,000 for individual transactions and $250,000 in aggregate. In addition, overadvances are permitted under the agreement up to $400,000 and acquisitions require approval from the lender. The Company was in compliance with all agreement covenants except the capital expenditure covenant for the year ended December 31, 2002, but received a waiver from Guarantee Business Credit Corporation on March 28, 2003. The Company was in compliance with all covenants at December 31, 2001 and December 31, 2000. |
|
|
|
|
Mobitec AB, the Company's wholly owned Swedish subsidiary, has an agreement with its bank in Sweden from which it may currently borrow up to a maximum of 10,000,000 krona (SEK) or $1,144,000. At December 31, 2002, 7,535,924 krona (SEK), or $862,110, was outstanding, resulting in additional borrowing availability of 2,464,076 krona (SEK), or $281,890. The maximum borrowing in the amount of 10,000,000 krona (SEK) is secured by cash on deposit with the bank in the amount of 2,200,000 krona (SEK), or $251,680. The terms of this agreement require payment of an unused credit line fee equal to 0.5 percent of the unused portion and interest at 5 percent of the outstanding balance. This agreement is secured by substantially all assets of Mobitec AB. The line of credit agreement has an expiration date of December 31, 2003. |
|
|
| 44 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
Mobitec AB also has an agreement with the same bank from which it may borrow up to 6,000,000 krona (SEK), or $686,400. Based upon the availability formula under this agreement, 1,328,251 krona (SEK), or $151,952, was outstanding at December 31, 2002, resulting in additional borrowing availability of 4,671,749 krona (SEK), or $534,448. The line of credit bears interest at 5.1 percent and is collateralized by accounts receivable. The agreement has an expiration date of December 31, 2003. |
|
|
Lines of credit at December 31, 2002 and 2001 consists of the following: |
| December 31, | |||||||||||
| 2002 | 2001 | ||||||||||
|
|
|
||||||||||
| Credit line with Guaranty Business Credit Corporation, dated August 23, 1999, payable in full August 23, 2003, secured by accounts receivable, inventory and all assets of the U.S. based domestic entities of the Company. | $ | 6,489,729 * | $ | - | |||||||
| Line of credit with Swedish bank dated December 31, 2002, secured by assets of the Swedish subsidiary, Mobitec AB, and a cash deposit, with interest at 5%. | 862,110 | 760,092 | |||||||||
| Line of credit with Swedish bank dated December 31, 2002 secured by accounts receivable of the Swedish subsidiary, Mobitec AB, with interest at 5.1%. | 151,952 | 151,602 | |||||||||
|
|
|
||||||||||
| Total lines of credit | $ | 7,503,791 | $ | 911,694 | |||||||
|
|
|
||||||||||
|
|
|
|
* Reclassified during 2002 as a current liability due to the expiration date of the agreement being less than one year from the balance sheet date. |
|
|
|
|
b) Long-Term Debt |
|
|
|
|
Long-term debt consists of the following notes and obligations, the proceeds of which were used to finance the Mobitec acquisition and for working capital requirements. |
|
|
|
|
An unsecured note and obligation in the amount of $2,471,235 are due to a shareholder. The unsecured note in the amount of $2,111,235 is payable in full June 28, 2004 with an annual interest of 9% paid quarterly. The obligation balance of $360,000 at December 31, 2002 is due in six remaining non-interest bearing quarterly payments. |
|
|
|
|
A term loan from the Company's Swedish bank dated June 28, 2001 having a balance of 15,400,000 krona (SEK), or $1,763,050, at December 31, 2002 is payable in 14 remaining quarterly payments of 1,100,000 krona (SEK), or $125,840, at an annual interest rate of 5.35% and is secured by stock of the Swedish holding company and the consolidated subsidiary. |
|
|
|
|
Two convertible subordinated debentures in the amount of $3,000,000 dated June 22, 2001 and $1,150,000 dated July 31, 2002 are payable to Renaissance Capital Group. The president of Renaissance Capital Group, Russell C. Cleveland, is a member of the Company's Board of Directors. The $3,000,000 debenture is payable in full on June 28, 2008, if not sooner redeemed or converted, with annual interest at 8% paid monthly. It also provides for monthly principal redemption installments commencing June 27, 2004, each of such installments to be in the dollar amount of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount. The $1,150,000 debenture is payable in full on June 27, 2009, if not sooner redeemed or converted, with annual interest at 8% paid monthly. It also provides for monthly principal redemption installments commencing July 31, 2005, each of such installments to be in the dollar amount of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount. The loan agreement under which the convertible debenture was issued subjects the Company to a 1:1 Earnings Before Interest, Depreciation and Amortization to interest coverage ratio to be calculated quarterly on a rolling four quarter basis and a 1.3:1 current ratio to be calculated at each quarter end. The Company was not in compliance with the current ratio covenant as of December 31, 2002, but received an appropriate waiver from Renaissance Capital Group on March 21, 2003. |
|
|
| 45 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
A convertible subordinated debenture in the amount of $250,000 dated August 26, 2002, is payable to John D. Higgins, a stockholder and member of the Board of Directors, and is due in full August 26, 2009, if not sooner redeemed or converted, with annual interest at 8% paid monthly. It also provides for monthly principal redemption installments commencing August 26, 2005, each of such installments to be in the dollar amount of ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal amount. The loan agreement under which the convertible debenture was issued subjects the Company to a 1:1 Earnings Before Interest, Depreciation and Amortization to interest coverage ratio to be calculated quarterly on a rolling four quarter basis and a 1.3:1 current ratio to be calculated at each quarter end. The Company was not in compliance with the current ratio covenant as of December 31, 2002, but received an appropriate waiver from Mr. Higgins on March 21, 200 3. |
|
|
|
|
Long-term debt at December 31, 2002 and 2001 consists of the following: |
|
|
|
|
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
|
|
||||||||
| Credit line with Guaranty Business Credit Corporation, dated August 23, 1999, payable in full August 23, 2003, secured by accounts receivable, inventory and all assets of the U.S. based domestic entities of the Company. | $ | - | $ | 4,882,842 | * | ||||
| Unsecured note to a stockholder, dated June 28, 2001, payable in full June 28, 2004, with interest at 9%. | 2,111,235 | 2,111,235 | |||||||
| Unsecured obligation to a stockholder dated June 28, 2001, payable in 12 quarterly installments, with zero interest. | 360,000 | 405,000 | |||||||
| Note payable to a Swedish bank, dated June 28, 2001, payable in 20 quarterly installments of $125,840 including interest at 5.35%. Note collateralized by stock of Swedish holding company and consolidated subsidiary. | 1,763,050 | 1,977,176 | |||||||
| Convertible debentures dated June 22, 2001, payable in full June 22, 2008, with interest at 8%. | 2,802,000 | ** | 2,766,000 | *** | |||||
| Convertible debentures dated July 31, 2002, payable in full June 27, 2009, with interest at 8%. | 1,150,000 | - | |||||||
| Convertible debenture dated August 26, 2002, payable in full August 26, 2009, with interest at 8%. | 250,000 | - | |||||||
|
|
|
||||||||
| Total long-term debt | 8,436,285 | 12,142,253 | |||||||
| Less current maturities | 763,360 | 541,233 | |||||||
|
|
|
||||||||
| 7,672,925 | 11,601,020 | ||||||||
| Long-term portion of capital lease (See Note 6) | 65,015 | - | |||||||
|
|
|
||||||||
| $ | 7,737,940 | $ | 11,601,020 | ||||||
|
|
|
||||||||
|
|
|
|
* |
Reclassified during 2002 as a current liability due to the expiration date of the agreement being less than one year from the balance sheet date. |
|
|
** |
Amounts are net of the value of warrants issued of $198,000. |
|
|
*** |
Amounts are net of the value of warrants issued of $234,000. |
| 46 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
Net interest expense was $1,150,962, $814,207 and $510,598 for the years ended December 31, 2002, 2001 and 2000, respectively. |
|
|
|
|
The repayment amounts of long-term debt are due as follows: |
|
|
|
Year ending December 31, |
|
|
|
2003 |
$ |
763,360 |
|
2004 |
|
2,714,595 |
|
2005 |
|
503,360 |
|
2006 |
|
252,970 |
|
2007 |
|
- |
|
Thereafter |
|
4,202,000 |
|
| ||
|
|
$ |
8,436,285 |
|
| ||
|
|
|
(8) |
PREFERRED STOCK |
|
|
|
|
The Company has the authority to issue 1,000,000 shares of preferred stock of which 700,000 shares have been designated Series A Convertible Preferred Stock and 10,000, 7,500, 10,020 and 20,000 shares have been designated Series B, Series C, Series AA and Series AAA Redeemable Nonvoting Preferred Stock, respectively. In addition, 252,480 shares of undesignated preferred stock are authorized. Three hundred fifty four shares of Series AAA Redeemable Nonvoting Preferred Stock are issued and outstanding. |
|
|
|
|
On December 13, 1999, the Board of Directors authorized the creation of 10,000 shares of a class of preferred stock designated as "Series D Junior Participating Preferred Stock" having a par value of $0.10. See Stockholders' Rights - Note 16. |
|
|
|
|
Series AAA Preferred shares are cumulative, nonvoting, fully participating, convertible and redeemable at our discretion with the redemption price equal to the liquidation preference. The liquidation preference equals $5,000 per share, plus all accrued and unpaid dividends. |
|
|
|
|
On April 6, 1998, the holders of the Series AAA Preferred Stock approved an amendment to the Articles of Incorporation to: (i) extend the mandatory redemption date of the Series AAA Preferred Stock (the "Preferred Shares") to December 31, 2003, (ii) permit the earlier redemption of the Preferred Shares at our option at any time upon 30 days' written notice, (iii) increase the amount of the quarterly dividend payable with respect to each Preferred Share from $112.50 to $125.00 beginning in 1999, and (iv) increase the number of shares of Common Stock of the Company issuable upon conversion of each Preferred Share from 500 shares of Common Stock to 625 shares of Common Stock. Such amendment was presented to a vote of the holders of Common Stock during the 1998 stockholders meeting and was adopted. On March 6, 2003, the holders of the Series AAA Preferred Stock approved an amendment which eliminated the mandatory redemption date. See Subsequent Events - Note 21. |
|
|
|
|
|
(9) |
COMMON STOCK WARRANTS |
|
|
|
|
In 2001, the Company granted 350,000 warrants that allow the holder to purchase one share of Common Stock. Of these warrants, 300,000 were granted as part of the Mobitec acquisition and financing. Of that amount, 100,000 warrants are exercisable at $4 per share, valued at approximately $95,000 on the date of acquisition. 200,000 are exercisable at $2.05 per share, valued at approximately $252,000 on the date of acquisition. These amounts were capitalized as part of the acquisition financing. The remaining 50,000 warrants were issued to an individual and are exercisable at $2.15 per share. The value of such warrants was approximately $35,000 and was charged to selling, general and administrative expenses. These warrants are fully vested and expire in 2006. |
|
|
| 47 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
During 2000, the Company issued 121,000 warrants that allow the holder to purchase one share of Common Stock. Of that amount, 111,000 are exercisable at $3.75 per share, and 10,000 are exercisable at $3 per share. These warrants have five-year terms and expire in 2005. |
|
|
|
|
During 1997, 75,000 five-year warrants were granted that allow the holder to purchase one share of Common Stock. Of these warrants, 37,500 are exercisable at $3.00 per share; 18,750 are exercisable at $5.00 per share and 18,750 are exercisable at $7.50 per share. At December 31, 2000 these warrants had vested and then were outstanding. These warrants were never exercised and expired in June 2002. |
|
|
|
|
|
(10) |
COMMON STOCK OPTIONS |
|
|
|
|
(a) |
Incentive Stock Option Plan |
|
|
|
|
|
The Company has an incentive stock option plan for employees whereby options to purchase Common Stock are granted at no less than the stock's estimated fair market value at the date of the grant and may be exercised during specified future periods. |
|
|
| 2002 | 2001 | 2000 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||
| Exercise | Exercise | Exercise | |||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Outstanding at beginning of year | 674,300 | $ | 2.42 | 587,800 | $ | 2.42 | 478,200 | $ | 2.53 | ||||||||||||
| Granted | 50,000 | 2.55 | 88,000 | 2.48 | 131,500 | 1.96 | |||||||||||||||
| Exercised | - | - | - | - | (400 | ) | 1.94 | ||||||||||||||
| Canceled | (9,500 | ) | 1.97 | (1,500 | ) | 2.15 | (21,500 | ) | 2.28 | ||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Outstanding at end of year | 714,800 | $ | 2.44 | 674,300 | $ | 2.42 | 587,800 | $ | 2.42 | ||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Weighted-average fair value of | |||||||||||||||||||||
| options granted during the year | $ | 0.72 | $ | 1.72 | $ | 1.19 | |||||||||||||||
|
|
|
|
Options Outstanding |
Options Exercisable | |||||
|
|
|
| |||||
|
|
Number |
Weighted-Average |
|
Number |
| ||
|
Range of |
Outstanding |
Remaining |
Weighted- Average |
Exercisable |
Weighted- Average | ||
|
Exercise Price |
at 12/31/02 |
Contractual Life |
Exercise Price |
at 12/31/02 |
Exercise Price | ||
|
| |||||||
|
$1.65 - 2.03 |
307,888 |
6.53 |
years |
$1.96 |
271,723 |
$1.96 | |
|
2.31 -3.00 |
406,912 |
5.45 |
years |
2.80 |
300,411 |
2.82 | |
|
|
|
|
|
|
|
| |
|
|
714,800 |
|
|
|
572,134 |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
(b) |
Non-Qualified Stock Options |
|
|
|
|
|
The Company has issued options to purchase Common Stock primarily to non-employee members of the Board of Directors or committees of the Board of Directors which are exercisable at times and in increments as specified by the individual agreements. |
|
|
| 2002 | 2001 | 2000 | ||||||||||||||||||||
|
|
|
|
||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
| Outstanding at beginning of year | 259,987 | $ | 2.25 | 215,987 | $ | 2.20 | 137,987 | $ | 2.23 | |||||||||||||
| Granted | 6,000 | 2.50 | 44,000 | 2.50 | 80,000 | 2.13 | ||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||
| Canceled | (6,000 | ) | 2.38 | - | - | (2,000 | ) | 1.94 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
| Outstanding at end of year | 259,987 | $ | 2.25 | 259,987 | $ | 2.25 | 215,987 | $ | 2.20 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||
| Weighted-average fair value of | ||||||||||||||||||||||
| options granted during the year | $ | 1.19 | $ | 1.72 | $ | 1.18 | ||||||||||||||||
|
|
| 48 |
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
Options Outstanding |
Options Exercisable | |||||
|
|
|
| |||||
|
|
Number |
Weighted-Average |
|
Number |
| ||
|
Range of |
Outstanding |
Remaining |
Weighted- Average |
Exercisable |
Weighted- Average | ||
|
Exercise Price |
at 12/31/02 |
Contractual Life |
Exercise Price |
at 12/31/02 |
Exercise Price | ||
|
| |||||||
| $1.63 - 2.00 |
136,000 |
6.91 |
years |
$1.93 |
136,000 |
$1.93 | |
|
2.38 -2.00 |
123,987 |
6.28 |
years |
2.60 |
123,987 |
2.60 | |
|
|
|
|
|
|
|
| |
|
|
259,987 |
|
|
|
259,987 |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
(c) |
Stock-Based Compensation |
|
|
|
|
|
The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and, accordingly, no compensation cost has been recognized for stock options issued under the stock option plans. As disclosed in Note 1, SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models. These models require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated value. Significant assumptions used by the Company for the pro forma calculations disclosed in Note 1 are as follows: |
|
|
|
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
Risk-free interest rate |
3.83% |
|
5.0% |
|
6.5% |
|
Expected life |
1 to 10 Years |
|
10 Years |
|
10 Years |
|
Expected volatility |
54.37% |
|
57.50% |
|
66.33% |
|
Expected dividends |
None |
|
None |
|
None |
|
|
|
|
|
|
|
|
|
|
(11) |
INCOME TAXES |
|
|
|
|
The pretax income (loss) for the years ended December 31, 2002, 2001 and 2000 was taxed by the following jurisdictions: |
|
|
| 2002 | 2001 | 2000 | |||||||||
|
|
|
|
|||||||||
| Domestic | $ | (303,517 | ) | $ | 733,338 | $ | 474,198 | ||||
| Foreign | 215,069 | (1,125,156 | ) | (753,661 | ) | ||||||
|
|
|
|
|||||||||
| $ | (88,448 | ) | $ | (391,818 | ) | $ | (279,463 | ) | |||
|
|
|
|
|||||||||
|
|
| 49 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
The income tax provision charged (benefit credited) for the years ended December 31, 2002, 2001 and 2000 were as follows: |
|
|
| 2002 | 2001 | 2000 | |||||||||||
|
|
|
|
|||||||||||
| Current: | |||||||||||||
| U.S. federal | $ | - | $ | - | $ | - | |||||||
| State | (32,405 | ) | 18,353 | - | |||||||||
| Foreign | 215,614 | 70,788 | - | ||||||||||
|
|
|
|
|||||||||||
| 183,209 | 89,141 | - | |||||||||||
|
|
|
|
|||||||||||
| Deferred: | |||||||||||||
| U.S. federal | (86,714 | ) | (605,119 | ) | - | ||||||||
| State | (116,589 | ) | (39,642 | ) | - | ||||||||
| Foreign | 62,242 | 22,485 | - | ||||||||||
|
|
|
|
|||||||||||
| (141,061 | ) | (622,276 | ) | - | |||||||||
|
|
|
|
|||||||||||
| $ | 42,148 | $ | (533,135 | ) | $ | - | |||||||
|
|
|
|
|||||||||||
|
|
|
|
The income tax benefit differs from the expected amount of income tax benefit determined by applying the U.S. federal income tax rates to the pretax income (loss) for the years ended December 31, 2002, 2001 and 2000 due to the following: |
|
|
| 2002 | 2001 | 2000 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||
| Percentage | Percentage | Percentage | |||||||||||||||||||
| of pretax | of pretax | of pretax | |||||||||||||||||||
| Amount | earnings (loss) | Amount | earnings (loss) | Amount | earnings (loss) | ||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Computed "expected" tax benefit | $ | (30,957 | ) | (35.0 | )% | $ | (137,137 | ) | (35.0 | )% | $ | (97,812 | ) | (35.0 | ) | ||||||
| Increase (decrease) in income taxes | |||||||||||||||||||||
| resulting from: | |||||||||||||||||||||
| Nondeductible expenses | 309,062 | 349.4 | 318,066 | 81.2 | - | - | |||||||||||||||
| Nontaxable income | (122,724 | ) | (138.8 | ) | (64,345 | ) | (16.4 | ) | - | - | |||||||||||
| Foreign subsidiary losses | 244,232 | 276.1 | 193,992 | 49.5 | 263,781 | 94.4 | |||||||||||||||
| Lower rates on earnings of foreign operations | (154,588 | ) | (174.8 | ) | (10,350 | ) | (2.6 | ) | - | - | |||||||||||
| State taxes, net of federal benefit | (110,877 | ) | (123.7 | ) | 8,740 | 2.2 | - | - | |||||||||||||
| Realization of loss carryforwards and other | |||||||||||||||||||||
| changes in valuation allowance | (92,000 | ) | (104.0 | ) | (842,101 | ) | (214.9 | ) | (165,969 | ) | (59.4 | ) | |||||||||
|
|
|
|
|
|
|
||||||||||||||||
| $ | 42,148 | 49.2 | % | $ | (533,135 | ) | (136.0 | )% | $ | - | - | % | |||||||||
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
Net deferred tax assets consist of the following components as of December 31, 2002 and 2001: |
|
|
| 2002 | 2001 | ||||||||||
|
|
|
||||||||||
| Deferred tax assets: | |||||||||||
| Federal and state loss carryforwards | $ | 427,285 | $ | 344,366 | |||||||
| Federal tax credits | 87,908 | 87,908 | |||||||||
| Foreign loss carryforwards | 905,000 | 861,795 | |||||||||
| Foreign currency translation benefits | 17,599 | 215,593 | |||||||||
| Inventory reserve and capitalization | 135,761 | 90,634 | |||||||||
| Other accruals and reserves | 205,110 | 146,853 | |||||||||
|
|
|
||||||||||
| Total gross deferred tax assets | 1,778,663 | 1,747,149 | |||||||||
| Less valuation allowance | (913,000 | ) | (900,000 | ) | |||||||
|
|
|
||||||||||
| 865,663 | 847,149 | ||||||||||
| Deferred tax liabilities: | |||||||||||
| Untaxed foreign reserves | (138,695 | ) | (31,841 | ) | |||||||
|
|
|
||||||||||
| Net deferred tax assets | $ | 726,968 | $ | 815,308 | |||||||
|
|
|
||||||||||
|
|
| 50 |
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
The Company reduces its deferred tax assets by a valuation allowance when, based upon the available evidence, it is more likely than not that a significant portion of the deferred tax assets will not be realized. At December 31, 2002 and 2001, substantially all of the Company's deferred tax valuation allowance is attributable to operating loss carryforwards at one of its foreign subsidiaries. |
|
|
|
|
The components giving rise to the net deferred tax assets described above have been included in the accompanying consolidated balance sheets as of December 31, 2002 and 2001 as follows: |
|
|
| 2002 | 2001 | ||||||||
|
|
|
||||||||
| Noncurrent assets | $ | 865,663 | $ | 847,149 | |||||
| Current liabilities | (138,695 | ) | (31,841 | ) | |||||
|
|
|
||||||||
| $ | 726,968 | $ | 815,308 | ||||||
|
|
|
||||||||
|
|
|
|
|
|
At December 31, 2002, the Company has net operating loss carryforwards for federal income tax purposes of $758,806, which are available to offset future federal taxable income, if any, through 2009 to 2022. In addition, one of the Company's domestic subsidiaries has net economic loss carryforwards for state income tax purposes of $1,296,757, which are available to offset future state taxable income, if any, through 2012 and 2013. Further, one of the Company's foreign subsidiaries also has loss carryforwards for German tax purposes of $3,231,726 which are available to offset future foreign taxable income. |
|
|
|
|
The Tax Reform Act of 1986 contains provisions that limit the ability to utilize net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the net operating loss carryforwards are limited, and the Company has taxable income which exceeds the permissible yearly net operating loss, the Company would incur a federal income tax liability even though net operating losses would be available in future years. |
|
|
|
|
The Company also has research and development tax credits for federal income tax purposes of $87,908 at December 31, 2002 that expire in various years from 2007 through 2011. |
|
|
|
|
|
(12) |
OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
The following is a summary of the tax effects of the components of other comprehensive income (loss), consisting solely of foreign currency translation adjustments, reported in the statements of stockholders' equity for the years ended December 31, 2002, 2001 and 2000: |
|
|
| Tax (Expense) | Net of tax | ||||||||||
| Pre-tax Amount | Benefit | Amount | |||||||||
|
|
|
|
|||||||||
| Year ended December 31, 2002: | |||||||||||
| Foreign currency translation adjustment | $ | 1,052,546 | $ | (215,593 | ) | $ | 836,953 | ||||
|
|
|
|
|||||||||
| Year ended December 31, 2001: | |||||||||||
| Foreign currency translation adjustment | $ | (133,307 | ) | $ | 46,251 | $ | (87,056 | ) | |||
|
|
|
|
|||||||||
| Year ended December 31, 2000: | |||||||||||
| Foreign currency translation adjustment | $ | (141,584 | ) | $ | 50,140 | $ | (91,444 | ) | |||
|
|
|
|
|||||||||
|
|
| 51 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
(13) |
MAJOR CUSTOMERS |
|
|
|
|
Because of the nature of the Company's business, the major customers may vary between years. Net sales for the years ended December 31, 2002, 2001 and 2000 include sales in the transportation communications segment to the following major customers: |
|
|
| Years Ended December 31, | |||||||||||
|
|
|||||||||||
| Customer | 2002 | 2001 | 2000 | ||||||||
|
|
|
|
|
||||||||
| Customer A* | $ | 5,208,182 | $ | 4,797,440 | $ | 3,545,922 | |||||
| Customer B | 4,670,503 | 4,611,774 | 3,315,953 | ||||||||
| Customer C | ** | 4,125,710 | 4,565,738 | ||||||||
| Customer D | ** | ** | 4,588,449 | ||||||||
|
|
|
|
|||||||||
| $ | 9,878,685 | $ | 13,534,924 | $ | 16,016,062 | ||||||
|
|
|
|
|||||||||
|
|
* |
Sales of $1,993,235 (38.2% of the total 2002 net sales) for Customer A were realized late in the fourth quarter of 2002. |
|
|
** |
The net sales to these customers were not significant for the years indicated. |
|
|
|
|
Accounts receivable balances for the customers listed above were as follows at December 31, 2002 and 2001: |
|
|
| December 31, | ||||||||
|
|
||||||||
| 2002 | 2001 | |||||||
|
|
|
|||||||
| Customer A* | $ | 2,253,332 | $ | 1,351,162 | ||||
| Customer B | 354,684 | 1,137,496 | ||||||
| Customer C | ** | 327,049 | ||||||
| Customer D | ** | ** | ||||||
|
|
|
|||||||
| $ | 2,608,016 | $ | 2,815,707 | |||||
|
|
|
|||||||
|
|
* |
Total cash payments from Customer A received subsequent to year-end were $1,342,818. |
|
|
** |
Balances for these customers are not presented for years in which their net sales were not significant. |
|
|
|
(14) |
RELATED PARTY TRANSACTIONS |
|
|
|
|
The Company purchases electronic components supporting the transportation communications segment from a major stockholder, Lite Vision Corporation ("Lite Vision"), a Taiwan-based company. Lite Vision holds 13.1 percent (500,000) of the outstanding shares of common stock of the Company. The components consist primarily of Light Emitting Diodes (LED) printed circuit boards. The Company purchased from Lite Vision approximately $3.5 million, $4.4 million and $6.7 million during 2002, 2001 and 2000, respectively. The accounts payable balance due to Lite Vision was $859,425, $1,528,786 and $2,224,555 at December 31, 2002, 2001 and 2000, respectively. Mr. Joseph Tang, previously President of Lite Vision and currently affiliated with Lite Vision while also pursuing other private business interests, serves on the Company's Board of Directors. During 2002 the Company issued 100,000 shares of restricted, unregistered common stock to Lite Vision at $3.00 per share in exchange for an equivalent reduction in accounts payable. |
|
|
|
|
John D. Higgins, a director of the Company, was an employee of Investec Ernst & Co., a securities and investment banking firm that was engaged in December 2000 to provide a fairness opinion from a financial point of view with respect to the Mobitec acquisition. Investec Ernst & Co. received a fee of $120,000, plus reasonable actual expenses, for furnishing the fairness opinion. In addition, also as part of the Mobitec acquisition, Mr. Higgins received a fee of $17,500 for the successful completion of certain convertible debenture financing. On August 26, 2002, the Company completed a privately negotiated sale of a $250,000 |
| 52 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
convertible subordinated debenture to John D. Higgins, a private investor and a director of the Company. Mr. Higgins received a closing fee of $5,850 related to the $250,000 convertible subordinated debenture and Renaissance Capital Group received a closing fee of $17,250 related to the $1.15 million convertible subordinated debentures. |
|
|
|
|
On August 2, 2002, the Company completed a privately negotiated sale of $1.15 million of convertible subordinated debentures through funds managed by Dallas-based Renaissance Capital Group. Russell C. Cleveland, Renaissance Capital Group's President and Chief Executive Officer, serves on the Company's Board of Directors. In June 2001, prior to Mr. Cleveland's involvement as a director of the Company, the Company issued convertible debentures in the amount of $3 million (the "2001 Debentures") to Renaissance Capital Group containing substantially the same terms as the convertible debentures issued in 2002. |
|
|
|
|
|
(15) |
SEGMENT INFORMATION |
|
|
|
|
The Company has two principal business segments, which are based upon differences in products and technology: (1) transportation communications segment and (2) law enforcement and surveillance segment. The transportation communications segment produces automated announcement and passenger information systems and electronic destination sign products for municipalities, regional transportation districts, and departments of transportation and bus vehicle 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, capital expenditures, long-lived assets, depreciation and amortization, and geographic information for the operating segments are as follows: |
|
|
| 2002 | 2001 | 2000 | |||||||||||
|
|
|
|
|||||||||||
| Net sales | |||||||||||||
| Transportation communications | $ | 43,550,637 | $ | 35,546,489 | $ | 28,986,453 | |||||||
| Law enforcement and surveillance | 1,587,349 | 1,668,863 | 899,715 | ||||||||||
|
|
|
|
|||||||||||
| $ | 45,137,986 | $ | 37,215,352 | $ | 29,886,168 | ||||||||
|
|
|
|
|||||||||||
| Income (loss) from operations | |||||||||||||
| Transportation communications | $ | 4,641,059 | $ | 3,974,677 | $ | 3,936,346 | |||||||
| Law enforcement and surveillance | 151,596 | (99,471 | ) | (578,413 | ) | ||||||||
| Parent entities | (4,068,437 | ) | (4,267,024 | ) | (3,637,396 | ) | |||||||
|
|
|
|
|||||||||||
| $ | 724,218 | $ | (391,818 | ) | $ | (279,463 | ) | ||||||
|
|
|
|
|||||||||||
| Depreciation and amortization | |||||||||||||
| Transportation communications | $ | 361,019 | $ | 460,469 | $ | 130,768 | |||||||
| Law enforcement and surveillance | 37,867 | 140,822 | 159,788 | ||||||||||
| Parent entities | 87,251 | 99,023 | 103,861 | ||||||||||
|
|
|
|
|||||||||||
| $ | 486,137 | $ | 700,314 | $ | 394,417 | ||||||||
|
|
|
|
|||||||||||
| Capital expenditures | |||||||||||||
| Transportation communications | $ | 356,257 | $ | 379,916 | $ | 161,059 | |||||||
| Law enforcement and surveillance | 205,742 | 16,649 | 24,667 | ||||||||||
| Parent entities | 161,473 | 36,139 | 60,609 | ||||||||||
|
|
|
|
|||||||||||
| $ | 723,472 | $ | 432,704 | $ | 246,335 | ||||||||
|
|
|
|
|||||||||||
| 53 | |||||||||||||
|
| |||||||||||||
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES | |||||||||||||
|
Notes to Consolidated Financial Statements-Continued | |||||||||||||
| Identifiable assets | |||||||||||||
| Transportation communications | $ | 29,440,853 | $ | 25,528,403 | $ | 15,386,409 | |||||||
| Law enforcement and surveillance | 2,144,347 | 1,763,182 | 1,647,497 | ||||||||||
| Parent entities | 1,797,986 | 1,518,564 | 786,319 | ||||||||||
|
|
|
|
|||||||||||
| $ | 33,383,186 | $ | 28,810,149 | $ | 17,820,225 | ||||||||
|
|
|
|
|||||||||||
| Long-lived assets | |||||||||||||
| Transportation communications | $ | 10,748,888 | $ | 8,698,249 | $ | 522,151 | |||||||
| Law enforcement and surveillance | 1,224,509 | 1,003,167 | 1,127,340 | ||||||||||
| Parent entities | 366,555 | 260,829 | 484,905 | ||||||||||
|
|
|
|
|||||||||||
| $ | 12,339,952 | $ | 9,962,245 | $ | 2,134,396 | ||||||||
|
|
|
|
|||||||||||
| Geographic information - net sales | |||||||||||||
| NAFTA | $ | 30,260,834 | $ | 28,974,134 | $ | 27,462,076 | |||||||
| Europe | 11,615,851 | 6,152,232 | 2,332,812 | ||||||||||
| Pacific and other | 3,261,301 | 2,088,986 | 91,280 | ||||||||||
|
|
|
|
|||||||||||
| $ | 45,137,986 | $ | 37,215,352 | $ | 29,886,168 | ||||||||
|
|
|
|
|||||||||||
|
|
|
|
|
(16) |
STOCKHOLDER RIGHTS |
|
|
|
|
Effective December 13, 1999, the Board of Directors adopted a stockholder rights agreement designed to prevent any potential acquirer from gaining control of the Company without fairly compensating the stockholders and to protect the Company from any unfair or coercive takeover attempts. The plan was not adopted in response to any specific effort to acquire the Company. |
|
|
|
|
The Board of Directors approved the declaration of a dividend of one right for each outstanding share of our common stock on the record date of December 27, 1999. Each of the rights, which are not currently exercisable, entitles the holder to purchase 1/1000th of a share of our newly designated Series D Junior Participating Preferred Stock at an exercise price of $20.00. Until exercisable, the rights are represented by and traded with our common stock and no separate certificates for the rights will be issued. |
|
|
|
|
In general, the rights will become exercisable only if any person or group of affiliated persons makes a public announcement that it has acquired 15 percent or more of our stock or that it intends to make or makes a tender offer or exchange offer for 15 percent or more of our stock. Under certain circumstances, each holder of a right (other than the person or group who acquired 15 percent or more of our stock) is entitled to purchase shares of our common stock having a market value equal to two times the exercise price. If, after a person has acquired 15 percent or more of our common stock, the Company is acquired in a merger or other business combination transaction or there is a sales or transfer of a majority of our assets or earning power, each holder of a right is entitled to purchase shares of the acquiring company's common stock having a fair market value equal to two times the exercise price. |
|
|
|
|
The Company may redeem the rights for $.001 per right prior to the acquisition or ownership of 15 percent or more of our common stock and the rights will expire in ten years. The rights distribution is not taxable to the shareholders. |
|
|
|
|
|
(17) |
LEGAL PROCEEDINGS |
|
|
|
|
The Company, in the normal course of its operations, is involved in several legal actions incidental to the business. In management's opinion, the ultimate resolution of these matters will not have a material adverse effect upon the current financial position of the Company or future results of operations. |
| 54 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
On February 7, 2001, NextBus Information Systems, Inc, ("NextBus") a California Corporation, filed suit in the United States District Court for the Northern District of California accusing the Company of infringing U.S. Patent 6,006,159 ("the 159 patent"). NextBus based the case on a Company news release and not on an allegedly infringing act. In response, a complaint for declaratory relief was filed on June 25, 2001, in the United States District Court, Northern District of Texas, Dallas Division, asking the court to interpret the scope of the 159 patent. The NextBus action in the United States District Court for the Northern District of California proceeded to hearing on July 3, 2002. The findings of the Court were substantially consistent with the arguments of the Company's Intellectual Property Counsel. In response to the findings of the courts, the Company and NextBus settled the action subsequent to year end. See Subsequent Events - Note 21. | ||||||||||||||||||||
|
|
|
|
|
(18) |
RESTRUCTURING COSTS |
|
|
|
|
The Company acquired Mobitec in June 2001. As part of its plan relative to the acquisition, the Company accrued for certain business activities duplicated within the existing and newly acquired international operations. |
|
|
|
|
The accrued restructuring costs totaled $190,000 at December 31, 2001 and were comprised of staff reduction costs, lease payments and other selling, general and administrative expenses in the amount of $151,925, $3,075 and $35,000, respectively. Upon finalization of the restructuring plan in 2002, the Company reduced the accrual by $76,201 which was credited to the acquisition cost; and adjusted reserve components to $36,066, $33,927 and $43,806 for staff reduction costs, lease payments and other selling, general and administrative expenses, respectively. |
|
|
|
|
During 2002, $90,799 was credited to the reserve for staff reduction costs, lease payments and other selling, general and administrative expenses in the amount of $36,066, $10,927 and $43,806, respectively. No amounts were credited against the reserve during 2001. All costs to be charged against the accrual, consisting solely of lease payments, are expected to conclude during the first quarter of 2004. Of the remaining reserve amount of $23,000, the Company expects $18,400 to be charged to the reserve during 2003 and $4,600 during 2004. |
|
|
|
|
|
(19) |
RECENT PRONOUNCEMENTS |
|
|
|
|
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do not have the characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a company to evaluate all existing arrangements to identify situations where a company has a "variable interest" (commonly evidenced by a guarantee arrangement or other commitment to provide financial support) in a "variable interest entity" (commonly a thinly capitalized entity) and further determine when such variable interests require a company to consolidate the variable interest entities' financial statement with its own. Th e Company is required to perform this assessment by September 30, 2003 and consolidate any variable interest entities for which it will absorb a majority of the entities' expected losses or receive a majority of the expected residual gains. Management has not yet performed this assessment, however it is not aware of any material variable interest entity that it may be required to consolidate. |
|
|
|
|
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal of Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146 is not expected to have a material effect upon the Company's financial position or operating results. |
|
|
|
|
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for the Company beginning January 1, 2003. Management does not expect that adoption of this standard will have a material impact upon the Company's financial statements. |
|
|
| 55 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
(20) |
QUARTERLY FINANCIAL DATA (UNAUDITED) |
|
|
|
|
Subsequent to the issuance of the Company's September 30, 2002 consolidated unaudited financial statements filed on Form 10-Q, management recorded certain adjustments to capitalized software costs and foreign currency translation gains. As a result of the adjustments, the Company's unaudited interim financial information for each of the first three 2002 calendar quarters and the associated year-to-date amounts in those periods have been retroactively restated (1) to record certain project development costs to a capitalized software asset in the pre-tax amount of $166,551 and (2) to adjust pre-tax foreign currency translation gains of $267,344. The change had no impact upon cash flows provided by operations. |
|
|
|
|
The effect of the restatements from the adjustments of the capitalized software asset and foreign currency translation gains on the Company's unaudited interim consolidated quarterly financial statements and a summary of the quarterly results of operations for the year ended December 31, 2002 is as follows: |
|
|
| Balance Sheet Data: | March 31, 2002 | June 30, 2002 | September 30, 2002 | ||||||||||||||||
|
|
|
|
|||||||||||||||||
| As Reported | As Restated | As Reported | As Restated | As Reported | As Restated | ||||||||||||||
|
|
|
|
|
|
|
||||||||||||||
| Current assets | $ | 17,766,242 | $ | 17,766,242 | $ | 19,258,085 | $ | 19,258,085 | $ | 18,798,577 | $ | 18,798,577 | |||||||
| Property and equipment, net | 1,092,211 | 1,153,186 | 1,097,766 | 1,222,309 | 1,078,641 | 1,245,192 | |||||||||||||
| Other long-term assets | 9,906,620 | 9,906,620 | 10,823,359 | 10,823,359 | 10,774,878 | 10,774,878 | |||||||||||||
| Total liabilities | 24,333,711 | 24,364,625 | 25,835,783 | 25,927,306 | 25,558,351 | 25,567,398 | |||||||||||||
| Stockholders' equity | 4,431,362 | 4,461,423 | 5,343,427 | 5,376,447 | 5,093,745 | 5,251,249 | |||||||||||||
|
|
|
|
| Statements of Operations Data: | Three Month Period | Three Month Period | Six Month Period | ||||||||||||||||||
| Ended March 31, 2002 | Ended June 30, 2002 | Ended June 30, 2002 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||
| As Reported | As Restated | As Reported | As Restated | As Reported | As Restated | ||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Operating income (loss) | $ | (424,087 | ) | $ | (363,112 | ) | $ | 706,414 | $ | 769,982 | $ | 282,327 | $ | 406,870 | |||||||
| Other expense and interest expense | (286,362 | ) | (249,996 | ) | (302,697 | ) | (53,019 | ) | (589,059 | ) | (303,015 | ) | |||||||||
| Income tax benefit (expense) | (15,705 | ) | (46,619 | ) | 53,843 | (37,680 | ) | 38,138 | (84,299 | ) | |||||||||||
| Net income (loss) applicable | |||||||||||||||||||||
| to common shareholders | (770,235 | ) | (703,808 | ) | 396,857 | 618,580 | (373,378 | ) | (85,228 | ) | |||||||||||
| Earnings per share: | |||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||
| Basic | $ | (0.21 | ) | $ | (0.19 | ) | $ | 0.11 | $ | 0.17 | $ | (0.10 | ) | $ | (0.02 | ) | |||||
| Diluted | (0.21 | ) | (0.19 | ) | 0.07 | 0.11 | (0.10 | ) | (0.02 | ) | |||||||||||
| Weighted average number of common | |||||||||||||||||||||
| shares and common shares equivalent | |||||||||||||||||||||
| shares outstanding: | |||||||||||||||||||||
| Basic | 3,704,475 | 3,704,475 | 3,704,475 | 3,704,475 | 3,704,475 | 3,704,475 | |||||||||||||||
| Diluted | 3,704,475 | 3,704,475 | 5,473,740 | 5,473,740 | 3,704,475 | 3,704,475 | |||||||||||||||
|
|
| 56 |
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
| Statements of Operations Data: | Three Month Period | Nine Month Period | |||||||||||||||||||
| Ended September 30, 2002 | Ended September 30, 2002 | Three-Month | |||||||||||||||||||
|
|
|
Period Ended | 2002 | ||||||||||||||||||
| As Reported | As Restated | As Reported | As Restated | December 31, 2002 | Total | ||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Operating income (loss) | $ | 40,333 | $ | 82,341 | $ | 322,660 | $ | 489,211 | $ | 235,007 | $ | 724,218 | |||||||||
| Other expense and interest expense | (330,378 | ) | (349,078 | ) | (919,437 | ) | (652,093 | ) | (160,573 | ) | (812,666 | ) | |||||||||
| Income tax benefit (expense) | 38,857 | 29,810 | 76,995 | (54,489 | ) | 12,341 | (42,148 | ) | |||||||||||||
| Net income (loss) applicable | |||||||||||||||||||||
| to common shareholders | (333,314 | ) | (319,053 | ) | (706,692 | ) | (404,281 | ) | 37,778 | (366,503 | ) | ||||||||||
| Earnings per share: | |||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||
| Basic | $ | (0.09 | ) | $ | (0.08 | ) | $ | (0.19 | ) | $ | (0.11 | ) | $ | 0.01 | $ | (0.10 | ) | ||||
| Diluted | (0.09 | ) | (0.08 | ) | (0.19 | ) | (0.11 | ) | 0.01 | (0.10 | ) | ||||||||||
| Weighted average number of common | |||||||||||||||||||||
| shares and common shares equivalent | |||||||||||||||||||||
| shares outstanding: | |||||||||||||||||||||
| Basic | 3,769,692 | 3,769,692 | 3,726,453 | 3,726,453 | 3,804,475 | 3,746,119 | |||||||||||||||
| Diluted | 3,769,692 | 3,769,692 | 3,726,453 | 3,726,453 | 3,804,475 | 3,746,119 | |||||||||||||||
|
|
|
|
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2002 (as restated) and 2001, respectively: |
|
|
| YEAR ENDED DECEMBER 31, 2002 | |||||||||||||||||||||
|
|
|||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
| Net sales | $ | 8,623,648 | $ | 12,434,455 | $ | 11,044,010 | $ | 13,035,873 | $ | 45,137,986 | |||||||||||
| Gross profit | 3,089,231 | 4,661,101 | 3,748,898 | 4,775,764 | 16,274,994 | ||||||||||||||||
| Operating income (loss) | (363,112 | ) | 769,982 | 82,341 | 235,007 | 724,218 | |||||||||||||||
| Net income (loss) applicable to common | |||||||||||||||||||||
| shareholders | (703,808 | ) | 618,580 | (319,053 | ) | 37,778 | (366,503 | ) | |||||||||||||
| Net income (loss) applicable to common | |||||||||||||||||||||
| shareholders per common share: | |||||||||||||||||||||
| Basic | $ | (0.19 | ) | $ | 0.17 | $ | (0.08 | ) | $ | 0.01 | $ | (0.10 | ) | ||||||||
| Diluted | $ | (0.19 | ) | $ | 0.11 | $ | (0.08 | ) | $ | 0.01 | $ | (0.10 | ) | ||||||||
| Weighted average number of common shares | |||||||||||||||||||||
| and common equivalent shares outstanding: | |||||||||||||||||||||
| Basic | 3,704,475 | 3,704,475 | 3,769,692 | 3,804,475 | 3,746,119 | ||||||||||||||||
| Diluted | 3,704,475 | 5,473,740 | 3,769,692 | 3,804,475 | 3,746,119 | ||||||||||||||||
|
|
| 57 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
| YEAR ENDED DECEMBER 31, 2001 | |||||||||||||||||||||
|
|
|||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
| Net sales | $ | 6,980,974 | $ | 8,469,339 | $ | 10,699,377 | $ | 11,065,662 | $ | 37,215,352 | |||||||||||
| Gross profit | 2,561,414 | 3,230,798 | 4,036,624 | 3,996,950 | 13,825,786 | ||||||||||||||||
| Operating income | 89,852 | 383,983 | 345,630 | (400,622 | ) | 418,843 | |||||||||||||||
| Net income (loss) applicable to common | |||||||||||||||||||||
| shareholders | (93,084 | ) | 157,945 | 1,516 | (128,112 | ) | (61,735 | ) | |||||||||||||
| Net income (loss) applicable to common | |||||||||||||||||||||
| shareholders per common share: | |||||||||||||||||||||
| Basic | $ | (0.03 | ) | $ | 0.05 | $ | 0.00 | $ | (0.04 | ) | $ | (0.02 | ) | ||||||||
| Diluted | $ | (0.03 | ) | $ | 0.05 | $ | 0.00 | $ | (0.04 | ) | $ | (0.02 | ) | ||||||||
| Weighted average number of common shares | |||||||||||||||||||||
| and common equivalent shares outstanding: | |||||||||||||||||||||
| Basic | 3,274,475 | 3,293,376 | 3,704,475 | 3,704,475 | 3,495,954 | ||||||||||||||||
| Diluted | 3,274,475 | 3,293,376 | 3,704,475 | 3,704,475 | 3,495,954 | ||||||||||||||||
|
|
|
|
During the fourth quarter of 2001, the Company completed its final allocation of the Mobitec purchase price to the specific assets acquired. As a result of the final allocation and other adjustments, an additional amount of $75,751 was charged to selling, general and administrative expenses. |
|
|
|
|
|
(21) |
SUBSEQUENT EVENTS |
|
|
|
|
On January 21, 2003, the Company settled its pending legal action with NextBus. Under the terms of the settlement, no consideration was paid and each organization paid their own litigation expenses. |
|
|
|
|
On February 20, 2003, the Company entered into a Placement Agency Agreement with a Dallas-based investment banking firm, under which the investment banking firm will identify purchasers to participate in the potential equity financing. As part of the agreement, the investment banking firm will act on a best efforts basis to identify prospective purchasers of equity securities of the Company. Such equity securities are intended to be sold under an exemption from the registration requirements of the Securities Act of 1933. The agreement with the investment banking firm is non-exclusive and is terminable upon 30 days notice. The investment banking firm is entitled to compensation based upon the gross proceeds from the sale of equity securities of the Company sold. The investment banking firm is entitled to 8 percent of the first $5 million in such gross proceeds, 7 percent of the next $5 million, and 6 percent of the gross proceeds over $10 million.&nb sp; The Company will pay the investment banking firm the relevant compensation upon closing of the sale generating the compensation. The Company will also issue to the investment banking firm a warrant to purchase 10 percent of the total number of equity securities sold, exercisable for a period of five years at the price at which the equity securities were sold. The Company also paid the investment banking firm a $25,000 nonrefundable expense allowance and will reimburse the investment banking firm for all reasonable out-of-pocket expenses in providing services to the Company. |
|
|
|
|
On March 6, 2003, the Company announced that at a special meeting of the AAA Preferred Stock shareholders, the holders of the Series AAA Preferred Stock approved an amendment to the preferred shareholders' Articles of Incorporation to remove the mandatory redemption date, which would have been December 31, 2003. The Company may now redeem the Series AAA Preferred Stock at its sole discretion upon providing preferred shareholders with 30 days' written notice. All other terms of the AAA Preferred Stock remained the same. |
|
|
|
|
On March 21, 2003, the Board of Directors of the Company approved, subject to shareholder approval, a proposal authorizing the Company to issue an undetermined number of shares of convertible Preferred Stock and warrants that would convert into an aggregate of 2,000,000 shares of Common Stock in connection with a potential private equity financing. The sale of the convertible Preferred Stock and warrants contemplated by this proposal shall only be consummated if an additional proposal is approved by the Shareholders. The |
|
|
| 58 |
|
|
|
|
|
DIGITAL RECORDERS, INC. AND SUBSIDIARIES |
|
Notes to Consolidated Financial Statements-Continued |
|
|
|
|
additional proposal relates to the amendment to the Company's Articles of Incorporation to increase the number of shares of Common Stock authorized for issuance from 10,000,000 to 25,000,000 and to increase the number of shares of Preferred Stock authorized for issuance from 1,000,000 to 5,000,000. |
|
|
|
|
On March 28, 2003, the Company amended its Loan And Security Agreement with Guaranty Business Credit Corporation. The agreement as amended provides for overadvances in aggregate up to $400,000 to be reduced in six weekly installments. |
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|
|
|
None. |
|
|
| 59 |
|
|
|
|
|
PART III |
|
|
|
|
|
Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement) not later than 120 days after the end of the fiscal year covered by this report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically addresses the items set forth herein are incorporated by reference. |
|
|
|
|
|
ITEM 10. EXECUTIVE OFFICERS, DIRECTORS AND AND KEY EMPLOYEES |
|
|
|
The response to this Item regarding our directors and executive officers and compliance with Section 16(a) of the Exchange Act by our officers and directors will be contained in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the captions "Proposal One", "Other Pertinent Information" and "Section 16(A) Beneficial Ownership Reporting Compliance" and is incorporated by reference herein. |
|
|
|
|
|
ITEM 11. EXECUTIVE COMPENSATION |
|
|
|
The response to this Item will be contained in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption "Other Pertinent Information -- Executive Compensation" and is incorporated by reference herein. |
|
|
|
|
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|
|
|
The response to this Item will be contained in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption "Other Pertinent Information - Security Ownership of Certain Beneficial Owners and Key Management" and is incorporated by reference herein. |
|
|
|
|
|
ITEM 13. CERTAIN TRANSACTIONS |
|
|
|
The response to this Item will be contained in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption "Other Pertinent Information -- Certain Relationships and Related Transactions" and is incorporated by reference herein. |
|
|
|
|
|
ITEM 14. CONTROLS AND PROCEDURES |
|
|
|
Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic SEC reports. There have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date we carried out this evaluation. |
|
|
|
|
|
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
|
|
|
Audit Fees |
|
|
|
The aggregate fees billed by McGladrey for professional fees rendered for the audit of the Company's fiscal year 2002 financial statements and the reviews of the financial statements included in the Company's Forms 10-Q for that fiscal year was $302,073. This compares to the $242,992 in aggregate fees billed for audit of the Company's annual financial statements for fiscal year 2001 and the reviews of the financial statements included in the Company's Forms 10-QSB for that fiscal year. |
|
|
| 60 |
|
|
|
|
|
Audit Related Fees |
|
|
|
The Company did not engage McGladrey for any assurance and related services that are reasonably related to the audit that are not disclosed under the caption "Audit Fees" above. |
|
|
|
Tax Fees |
|
|
|
The aggregate fees billed by McGladrey for professional fees rendered for tax compliance, tax advice or tax planning services for the fiscal year 2002 was $80,161. This compares to the $36,871 for professional fees rendered for tax compliance, tax advice or tax planning services for the fiscal year fiscal year 2001. |
|
|
|
All Other Fees |
|
|
|
There were no other fees billed by McGladrey during fiscal year 2002. This compares to an aggregate of $165,829 for all other fees billed by McGladrey in fiscal year 2001, the majority of which was for due diligence in connection with our acquisition of Mobitec and Proxy Statement procedures, as well as assistance in preparing tax returns. The Audit Committee considers the nature of this work to be compatible with maintaining McGladrey's independence. |
|
|
| 61 |
|
|
|
PART IV |
|
|
|
|
|
ITEM 16. |
|
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K |
|
|
|
|
|
(a)(1)(2) Financial Statements |
|
|
|
|
|
|
See the Index to Consolidated Financial Statements and Financial Statements Schedules in Part II, Item 8. |
|
|
|
|
|
|
(3) Exhibits |
|
|
|
|
|
|
The following documents are filed herewith or have been included as exhibits to previous filings with the Securities and Exchange Commission and are incorporated herein by this reference: |
|
|
|
|
|
|
|
Exhibit No . |
|
Document |
|
|
|
|
|
3.1 |
Articles of Incorporation of the Company (1) | |
|
3.2 |
Articles of Amendment to the articles of Incorporation of the Company (filed herewith) | |
|
3.32 |
Bylaws of the Company, as amended through December 31, 2001 (3) | |
|
4.1 |
Form of specimen certificate for Common Stock of the Company (1) | |
|
4.2 |
Form of specimen certificate for Warrants of the Company (1) | |
|
4.3 |
Form of Underwriter's warrants to be issued by the Company to the Underwriter (1) | |
|
4.4 |
Warrant Agreement between the Company and Continental Stock Transfer & Trust Company (1) | |
|
10.1 |
Incentive Stock Option Plan, adopted April 27, 1993 as amended (1) | |
|
10.2 |
Common Stock Warrant Agreement by and between Robinson Turney International, Inc. and the Company (2) | |
|
10.3 |
Form of Bodin Warrant Agreement between the Company and Bengt Bodin (3) | |
|
10.4 |
Form of Registration Rights Agreement between the Company and Bengt Bodin et al. (3) | |
|
10.5 |
Form of Promissory Note from DRI Europa AB (3) | |
|
10.6 |
Form of Consulting Agreement between the Company and Bengt Bodin (3) | |
|
10.7 |
Services Agreement, dated April 19, 1996, by and between the Company and Robinson Turney International, Inc. (2) | |
|
10.8 |
Amendment to April 19, 1996, Services Agreement, dated July 29, 1996, by and between the Company and Robinson Turney International, Inc. (2) | |
|
10.9 |
Exclusive Distribution and Sublicense Agreement, dated June 1, 1996, by and between Robinson Turney International, Inc. and TwinVision Corp. of North America, Inc. (2) | |
|
10.10 |
Form of Amendment & Supplement to Exclusive Distribution and Sublicense Agreement dated June 1, 1996, by and between Robison Turney International, Inc. and TwinVision Corp. of North America, Inc. (2) | |
|
10.11 |
Form of Amendment to 01 June 1996 Exclusive Distribution and Sublicense Agreement, dated June 1, 1996, by and between Robinson Turney International, Inc and TwinVision Corp. of North America, Inc. (2) | |
|
10.12 |
Employment Agreement, dated April 20, 1998, between the Company and David Turney (3) | |
|
10.13 |
Executive Employment Agreement dated January 1, 1999 between the Company and Larry Hagemann (3) | |
|
10.14 |
Executive Employment Agreement dated January 1, 1999 between the Company and Larry Taylor (3) | |
|
10.15 |
Form of Office Lease, between the Company and Sterling Plaza Limited Partnership (4) | |
|
|
|
|
|
|
|
|
|
62 | ||
|
| ||
|
|
|
|
|
Exhibit No . |
|
Document |
|
10.16 |
Lease Agreement, between the Company and The Prudential Savings Bank, F.S.B., dated December 18, 1998 (4) | |
|
10.17 |
Technology License Agreement, between the Company and The University of Washington (4) | |
|
10.18 |
Dominick & Dominick, LLC Warrant Agreement dated September 21, 2000 (4) | |
|
10.19 |
Secured Revolving Credit Agreement and Credit Facility between the Company, TwinVision, Digital Audio and Fremont Financial Corporation, dated August 23, 1999 (5) | |
|
10.20 |
Extended Employment Agreement, dated December 17, 2001, between the Company and David Turney (6) | |
|
10.21 |
Convertible Loan Agreement dated as of June 22, 2001, by and among Digital Recorders, Inc., Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC, and the Renaissance Capital Group, Inc., as agents for the Lenders. (7) | |
|
10.22 |
Form of First Amendment to Convertible Loan Agreement dated as of June 22, 2001, by and among Digital Recorders, Inc., Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC, and Renaissance Capital Group, In., as agent for the Lenders. (7) | |
|
10.23 |
Form of Digital Recorders, Inc., 8% Convertible Debenture dates July 31, 2002, issued to Frost National Bank, Custodian FBO Renaissance US Growth & Income Trust PLC, Trust No. W00740100. (7) | |
|
10.24 |
Form of Acknowledgment, Agreement and Reaffirmation of Guarantors dated as of June 27, 2001, by TwinVision of North America, Inc. and Digital Audio Corporation in favor of Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC. (7) | |
|
10.25 |
Form of Share Purchase Agreement by and between Lite Vision Corporation and Digital Recorders, Inc. (7) | |
|
10.26 |
Form of Loan Agreement dated as of August 26, 2002, by and among Digital Recorders, Inc. and John D. Higgins. (8) | |
|
10.27 |
Form of Digital Recorders, Inc., Convertible Debenture dated August 26, 2002, issued to John D. Higgins. (8) | |
|
10.28 |
Form of Security Agreement dated as of August 26, 2002, among Digital Recorders, Inc. and John D. Higgins. (8) | |
|
10.29 |
Form of Pledge Agreement dated as of August 26, 2002, between Digital Recorders, Inc. and John D. Higgins. (8) | |
|
10.30 |
Form of Subsidiary Guarantee dated as of August 26, 2002, by Subsidiaries of Digital Recorders, Inc. in favor of John D. Higgins. (8) | |
|
10.31 |
Form of Subsidiary Security Agreement dated as of August 26, 2002, among TwinVision of North America, Inc., Digital Audio Corporation, and John D. Higgins. (8) | |
|
21 |
Listing of Subsidiaries of the Company (filed herewith) | |
|
99.1 |
Section 906 Certification of David L. Turney (filed herewith) | |
|
99.2 |
Section 906 Certification of Lawrence A. Taylor (filed herewith) | |
|
|
|
|
| 63 |
|
|
|
|
|
|
|
Legend |
|
|
|
(1) |
|
Incorporated by reference from Exhibit to our Registration on Form SB-2 (SEC File No. 33-82870-A) |
|
(2) |
|
Incorporated by reference from our Form 10-KSB dated March 31, 1997. |
|
(3) |
|
Incorporated by reference from our Proxy Statement for its annual meeting for fiscal 2000, filed on June 6, 2001. |
|
(4) |
|
Incorporated by reference from the Company's Form 10-KSB/A filed on June 6, 2001. |
|
(5) |
|
Incorporated by reference to the Company's Form 8-K, filed on September 8, 1999 |
|
(6) |
|
Incorporated by reference from the Company's Form 10-KSB filed on March 27, 2002. |
|
(7) |
|
Incorporated by reference to the Company's Form 8-K filed on August 8, 2002 |
|
(8) |
|
Incorporated by reference to the Company's Form 8-K filed on August 30, 2002 |
|
|
|
(b) Reports on Form 8-K |
|
|
|
No current reports on Form 8-K were filed during the fourth quarter of 2002. |
|
|
|
|
|
SIGNATURES |
|
|
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
|
|
|
DIGITAL RECORDERS, INC. |
|
|
|
Signature: |
/S/ DAVID L. TURNEY |
|
By: |
David L. Turney |
|
Title: |
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) |
|
Date: |
March 31, 2003 |
|
|
| 64 |
|
|
|
|
|
SIGNATURES - CONTINUED |
|
|
|
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
|
|
|
Signature: |
/S/ DAVID L. TURNEY |
|
By: |
David L. Turney |
|
Title: |
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ LAWRENCE A. TAYLOR |
|
By: |
Lawrence A. Taylor |
|
Title: |
Chief Financial Officer, Secretary, and Principal Financial and Accounting Officer |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ RUSSELL CLEVELAND |
|
By: |
Russell Cleveland |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ JOHN D. HIGGINS |
|
By: |
John D. Higgins |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ C. JAMES MEESE JR. |
|
By: |
C. James Meese Jr. |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ J. PHILLIPS L. JOHNSTON |
|
By: |
J. Phillips L. Johnston |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ STEPHANIE L. PINSON |
|
By: |
Stephanie L. Pinson |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ JOHN K. PIROTTE |
|
By: |
John K. Pirotte |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ JOSEPH TANG |
|
By: |
Joseph Tang |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
Signature: |
/S/ JULIANN TENNEY |
|
By: |
Juliann Tenney |
|
Title: |
Director |
|
Date: |
March 31, 2003 |
|
|
|
|
| 65 |
|
|
|
I, David L. Turney, certify that: |
|
|
|
1. I have reviewed this annual report on Form 10-K of Digital Recorders, Inc.; |
|
|
|
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|
|
|
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|
|
|
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
|
|
|
|
(a) |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
|
|
|
|
(b) |
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and |
|
|
|
|
(c) |
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
|
|
|
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
|
|
|
|
(a) |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
|
|
|
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
|
|
|
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
|
|
|
March 31, 2003 |
|
|
|
/s/ David L. Turney |
|
David L. Turney |
|
|
|
Chief Executive Officer |
|
|
| 66 |
|
|
|
I, Lawrence A. Taylor, certify that: |
|
|
|
1. I have reviewed this annual report on Form 10-K of Digital Recorders, Inc.; |
|
|
|
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|
|
|
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|
|
|
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
|
|
|
|
(d) |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
|
|
|
|
(e) |
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and |
|
|
|
|
(f) |
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
|
|
|
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
|
|
|
|
(c) |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
|
|
|
|
(d) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
|
|
|
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
|
|
|
March 31, 2003 |
|
|
|
|
|
/s/ Lawrence A. Taylor |
|
|
Lawrence A. Taylor Chief Financial Officer |
|
|
|
| 67 |
|
|
|
|
|
SCHEDULE II |
|
|
|
DIGITAL RECORDERS, INC. |
|
|
|
VALUATION AND QUALIFYING ACCOUNTS |
|
|
|
Years Ended December 31, 2002, 2001 and 2000 |
|
|
| Balance at | Additions | |||||||||||||||
| beginning of | charged to costs | Deductions | Balance at end | |||||||||||||
| of year | and expenses | (a) (b) (c) | end of year | |||||||||||||
|
|
|
|
|
|||||||||||||
| Allowance for Doubtful Accounts | ||||||||||||||||
| Year ended December 31, 2002 | 115,158 | 87,746 | (56,838 | ) | (a) | 146,066 | ||||||||||
| Year ended December 31, 2001 | 55,000 | 60,158 | - | 115,158 | ||||||||||||
| Year ended December 31, 2000 | 77,250 | 12,500 | (34,750 | ) | (a) | 55,000 | ||||||||||
| Warranty Reserve | ||||||||||||||||
| Year ended December 31, 2002 | 143,189 | - | (2,534 | ) | (b) | 140,655 | ||||||||||
| Year ended December 31, 2001 | 89,958 | 58,067 | (4,836 | ) | 143,189 | |||||||||||
| Year ended December 31, 2000 | 60,000 | 54,139 | (24,181 | ) | 89,958 | |||||||||||
| Inventory Reserve | ||||||||||||||||
| Year ended December 31, 2002 | 631,299 | 161,478 | (55,982 | ) | (c) | 736,795 | ||||||||||
| Year ended December 31, 2001 | 349,995 | 302,488 | (21,184 | ) | (c) | 631,299 | ||||||||||
| Year ended December 31, 2000 | 366,734 | 47,823 | (64,562 | ) | (c) | 349,995 | ||||||||||
|
|
|
(a) Write-off of uncollectible accounts. |
|
|
|
(b) Write-off of warranty claims |
|
|
|
(c) Write-off of obsolete inventory |
|
|
| 68 |
|
|
|
|
|
Exhibit 21.1 |
|
|
|
|
|
Digital Recorders, Inc. |
|
Wholly-Owned Subsidiaries |
|
Unless Otherwise Noted |
|
|
|
|
|
Subsidiary |
Jurisdiction of Incorporation |
|
RTI, Inc. |
Texas |
|
Transit-Media Mobitec GmbH |
Germany |
|
TwinVision of North America, Inc. |
North Carolina |
|
Mobitec Holding AB |
Sweden |
|
DRI-Europa AB |
Sweden |
|
|
| 69 |
|
|
|
|
|
Exhibit 99.1 |
|
CERTIFICATION PURSUANT TO |
|
In connection with the Annual Report of Digital Recorders, Inc. (the Company) on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (the Report), I, David L. Turney, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: |
|
|
|
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
|
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
|
|
|
|
/s/ David L. Turney |
|
__________________________________ |
|
David L. Turney |
|
Chief Executive Officer |
|
|
| 70 |
|
|
|
|
|
Exhibit 99.2 |
|
CERTIFICATION PURSUANT TO |
|
|
|
In connection with the Annual Report of Digital Recorders, Inc. (the Company) on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on March 31, 2003 (the Report), I, Lawrence A. Taylor, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: |
|
|
|
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
|
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
|
|
|
|
/s/ Lawrence A. Taylor |
|
__________________________________ |
|
Lawrence A. Taylor |
|
Chief Financial Officer |
| 71 |
|
|